- The fund manager of the Lazard Global Sustainability Equity Fund, Louis Florentin-Lee, lays out his three-point ESG investment strategy to beat his benchmark.
- Many of the most widely held stocks in ESG portfolios are big names, with similarly big valuations, like electric vehicle maker Tesla. But there are plenty of gems out there that are not pricey, if you know where to look, he says.
- You can get exposure to the major ESG trends, without paying the lofty premiums of a Tesla-like stock, Florentin-Lee explains how.
- Visit Business Insider's homepage for more stories.
Over the past few years, "ESG" has gone from a buzzword to becoming an indispensable part of the risk assessment process in many major firms.
But indispensable doesn't necessarily mean affordable. Some of the world's most famous stocks that meet the environmental, social and corporate governance requirements for entry into green portfolios are trading at eye-watering premiums to the rest of the market, making some investors wary of buying into the likes of electric-vehicle maker Tesla.
"We can see all the wonderful benefits and virtues of electric vehicles, but we can't see how long term Tesla is going to generate a high level of profitability when you consider the auto industry has never, ever, been blessed with high margins," Louis Florentin-Lee, managing director and portfolio manager of Lazard's Global Sustainable Equity Fund.
The fund, which has roughly $32 mln under management, belongs to the global stable of products run by 174-year old Lazard Asset Management, which oversees around £157 billion ($210 billion). In the last three years, it's returned around 12% to investors and outranked roughly 80% of its rivals, according to Bloomberg data.
Florentin-Lee doesn't rely on the stellar outperformance of some of the big-name, big-valuation stocks that seem to be a staple in many ESG portfolios, such as Tesla or Apple, although he does have a stake in Microsoft, according to the Lazard website.
However, there are solid investments that meet ever-tougher ESG criteria across the global equities markets to be snapped up at far more attractive valuations – if you know how to look, he says.
The challenge is how to deliver returns to clients and stick to their sustainability aspirations.
"If I had to put it into a nutshell, what we're trying to do to meet that dual purpose is to invest in companies where the move to a more sustainable world is going to positively impact their ability to generate profits and positively impact their ability to returns on capital, which we think ultimately drives share prices," Florentin-Lee said.
Florentin-Lee, who does not issue stock recommendations, shared these three principles he uses to find stocks that meet the fund's strict criteria and deliver returns:
You need to be better than 'green'
It isn't enough to avoid stocks that aren't obvious ESG candidates, such as those with a high-carbon footprint, or a poor track record with issues such as workers' rights, or that have links to animal cruelty, for example.
Investors have to go beyond merely filtering out companies with negative externalities and poor sustainability, Florentin-Lee said. Focus on the companies that really are doing good for the world and their shareholders and in a responsible way.
"It's got to offer products and services that are helping the world transition to a more sustainable world. By that we talk about a greener, healthier, safer and fairer world – so we don't have a narrow view," he said, adding that he looks "across those four pillars to deploy capital."
A company also has to run itself responsibly, looking after "their human capital… their customers," but also companies that run themselves from a governance perspective, and in terms of looking off the shareholders interests, he said.
Beating the fade
Whatever product or service your stock pick offers must make a "material impact on the financials of the company, and specifically they've got to support the business," Florentin-Lee said. Something that generates high returns, or improves returns on capital will drive a company's share price.
"We take the view that companies that can maintain high returns on capital outperform the market, because we think the market gets them wrong," he said. The law of competition is applied to these companies, predicting that companies making great returns attract competition, and eroding returns down over time, he explained. "We just think that that's simply an economic theory, but in reality – it's not true," he added.
There are plenty of companies "that have got such strong competitive advantages that it's going to allow them to resist that competition – companies that beat the fade, we think beat the market," he added.
"Those are the two alpha sources that's going to drive the investment returns for this portfolio," he said.
An example of a company with a strong competitive advantage is Swedish firm MIPS, he said. The company specializes in helmet technology. MIPS has created an insert for cycle helmets that dramatically reduces damage to the skull and brain from the rotational impact of accidents and crashes. A head rarely hits the ground in one motion, but rather, tends to hit an angle and then roll slightly.
Aside from the obvious upside from the growing numbers of people around the world that have embraced cycling as an alternative to public transport during the pandemic, the product has as-yet relatively small uptake, when taken as a proportion of the global helmet market.
The helmet layer reduces the "rotational impact that tears parts of the brain and where the brain connects to the skull – that's what causes concussion," Florentin-Lee said. "That's a fantastic health saving product from a sustainable perspective, it's a fantastic business for us to be invested in, because the penetration of these rotational impact reduction layers is only 15% of all bicycle helmets. So we can now scale to increase dramatically – easily going to 50% quite quickly," he added.
Ticker: ETR: SY1
Industry: Flavorings & fragrances
Market Cap: $16.67 bln
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