ESG winners: seven companies that show investing for good can be good for investors

In the past, if you wanted to invest with a clear conscience, you usually had to be prepared to sacrifice returns. Unsurprisingly, most held their nose and invested in whatever was going to grow their money as much as possible.

But the world has changed. Pressure from governments and investors means companies can no longer put profit above all else. Growing environmental concerns and fears of a climate catastrophe have seen a rush of investment into renewable energy and energy efficiency. Social issues have become much more prominent and are changing the way companies are run. And companies that don’t measure up are finding it increasingly hard to attract investors' money.

The ascent of so-called ESG investing – focused on environmental, social and governance factors – has not been without its hiccups, though. The various systems used to gauge a company’s ethical credentials have faced criticism as enabling greenwashing – shorthand for companies claiming to be more ESG-friendly than they actually are. And there remains conflicting views of what constitutes an ethical investment, and what aspects of ESG really matter to both investors and those looking to build a better world.

Arguably, the best tool for selecting ESG investments is one’s own conscience and common sense – it makes sense that companies that do good things for their customers, and do so responsibly, are likely to do well for investors, too. And, despite their shortcomings, ESG frameworks do offer investors some assistance in making value judgements.

Definitions

ESG stands for Environmental, Social, and Governance, the three main factors which underpin the majority of ethical and sustainable investing today. They can be loosely defined as covering the following areas: 

Environmental: Climate change, pollution, carbon footprint, recycling, deforestation, waste management, water usage, energy efficiency

Social: Treatment of customers and their data, treatment of employees, salaries, gender/diversity issues, community engagement, human rights, mission

Governance: Board composition, conflicts of interest, executive compensation, administration of shareholder rights, auditing, political influence, lobbying efforts

In summary, ESG investing prioritises ethical, sustainable, or socially responsible factors alongside traditional financial metrics. It differs from more broadly defined "ethical", "impact" or "socially responsible investing" (SRI) in that it aims to define concrete variables on which to base company value rather than simply check practices against a list of requirements.

ESG has seen enormous growth over the past 20 years, covering approximately US$35 trillion in assets today, and around a third of all managed assets in the US, Europe, East Asia and Australia/New Zealand.

Evaluating performance

The main challenge of ESG investing is quantifying a company's performance across ESG variables and determining a causal connection to financial performance.

An argument has been made that companies committed to ESG values perform better and with less volatility as they are grounded in well-defined mission statements, giving them a more predictable growth path. In other words, a strong ESG profile can provide more data points for investors and fund managers to base decisions on, lowering risk.

Moreover, ESG-focused leadership can prepare a company for unforeseen challenges or avert negative PR. For instance, if a company prepares for the effects of climate change, it is less likely to fall victim to natural disasters or volatility in energy prices. Likewise, a socially responsible company is less likely to become embroiled in employee/union lawsuits, customer class action suits, human rights abuses in supply chains, and associated negative media coverage that can affect stock price.

Companies that follow ESG practices also tend to have better, more responsible, and more unified leadership that is focused on long-term goals, which can arguably boost long-term growth and reduce volatility.

The question then remains – do ESG companies outperform the average? The answer is yes insofar as we have data, as ESG only took off in earnest in the 2010s. Morningstar provides data on the relationship between growth and ESG ratings for UK stocks that it covers. The data shows a correlation between lower ESG risk and better returns:

Challenges

Still, the challenge remains of how to define or quantify ESG. Morningstar based the above data on its Sustainalytics ESG scoring system, but there is no universally agreed method and no single authority that has set an ESG standard. It is therefore subjective and open to interpretation what constitutes ethical, sustainable, or responsible practices.

ESG can vary depending on circumstances or whether a means is seen as justifying a desired end, especially in controversial industries such as energy, weapons, or pharma. Is a defence contractor supplying weapons to Ukraine ethical? What about a pharmaceutical company linked to the opioid epidemic in the US that has also developed an effective Covid-19 vaccine?

Moreover, as there are a wide range of ESG criteria, which are not formally listed, differentiated, or weighed by anyone, companies are unlikely to meet or excel in all of them. How should investors weigh a company excelling in environmental policy but lacking in governance? Electric vehicle leader Tesla offers an interesting case in point, recently dropped from the S&P 500 ESG Index as concerns over governance outweighed its environmental credentials.

Naturally, with uncertainty has come abuse and exploitation of the term – indeed Tesla boss Elon Musk called it a scam after Tesla's downgrade. The ESG sticker has been applied to some funds that include questionable choices, also known as "greenwashing". ESG has also fallen victim to politicisation, particularly in the US where conservative politicians have framed it as a boycott on oil and gas companies.

To address this, the industry is attempting to establish consistent standards. Institutions such as the Sustainability Accounting Standards Board (SASB), the Global Reporting Initiative (GRI), and the UN Principles of Responsible Investment (PRI) have formed standards that some companies have chosen to adhere to. There are no mandatory reporting requirements yet, however.

There are also 3rd party sources to validate corporate reports, including MSCI's grading system and Morningstar's Sustainalytics. More broadly, investors can also look for opinion and rankings in popular investment publications.

As it stands, with all of this uncertainty, it falls to investors to formulate their own ESG criteria and make their own decisions, should they choose to prioritise principled investing. At Vox, we often report on small and mid-cap companies that are at the forefront of next-generation technology, whose mission statements and governance practices meet or exceed our standards for principled investing. Here are a few companies we believe ESG-minded investors should follow:

7 Companies ESG investors should follow

Fintel

Fintech specialist Fintel (FNTL Follow | FNTL), focused on helping the UK retail financial services industry operate more effectively, continues to drive strong revenue growth from its core SaaS business. Led by its purpose of Inspiring Better Outcomes, Fintel is also focused on driving positive change in their business, the UK retail financial services industry, and broader communities, as detailed in its inaugural 2021 ESG Report.

Fintel consulted key stakeholders in establishing its 3-year ESG strategy, to be reevaluated in 2025. Its comprehensive strategy covers a wide range of ESG variables, including data security, business ethics, financial inclusion, diversity, workforce development, energy management, emissions, waste management, supplier relations, charity support, and volunteering.

The company aligned its reporting to widely recognised frameworks, including SASB and Streamlined Energy and Carbon Reporting (SECR), positioning its strategy in a global context using UN Sustainable Development Goals. The coverage of their ESG reporting is set to expand with plans to report in line with the Task Force on Climate-related Financial Disclosures (TCFD) in 2023.

Fintel's board directly oversees ESG implementation, and has responsibility for aligning Fintel's business strategy with ESG values. The board is advised by an ESG and Wellbeing committee and an ESG team that implements the strategy across the business and reports against key performance indicators.

On the financial front, Fintel reported strong core revenue growth of 9% to £27.1m in 1H22, compared to £24.9m a year ago. Adjusted EBITDA rose 5% to £8.7m with an improved adjusted EBITDA margin of 27%, compared to 26.1% in 1H21. Adjusted earnings per share was up 6% LFL to 5.3p, and adjusted pre-tax profit increased 15% to £6.9m.

Fintel's 9% core revenue growth was driven by continued progress in converting existing revenues to "distribution as a service", now having over 60% of partner revenue converted. The company has maintained its 30% core adjusted EBITDA margin despite continued investment in its digital platform.

Majestic Corporation

As a metals recycler, Majestic's core business itself is part of the company's ESG commitment. Majestic (MCJ Follow | MCJ) processes catalytic converters and redundant IT equipment among other metals-heavy waste, with much of the resulting product used in sustainable technology.

The company is committed to transparency, community engagement, and the UN's Sustainable Development Goals (SDGs) as a framework for its ESG efforts. Majestic maintains its ISO and R2 certifications, follows waste miminisation measures, and strives for energy efficiency, air quality, biodiversity conservation, and sustainable land usage.

Simultaneously, Majestic's business is growing, and the company's first results since coming to market showed an impressive 28% profit increase to $980K. The company also ended the year with cash on hand up US$200k to US$2.7m, underpinning its plans to further expand its facilities.

Majestic currently operates two procurement sites in the US and UK supplied by partners in Mexico, Lithuania, Australia and Italy, and a facility in Malaysia capable of processing 20,000 tonnes a year.

The metal recycling industry was worth $229.6bn in 2021, and is expected to grow at a CAGR of nearly 6% a year to $384bn by 2030 as the battle for mineral resources intensifies. Amid soaring energy costs, environmental concerns, supply chain disruptions, and metal shortages, recycling has become increasingly economical.

hVIVO

hVIVO (HVO Follow | HVO) (formerly Open Orphan) is a rapidly growing specialist contract research organisation (CRO) and leader in testing infectious and respiratory disease products, using human challenge clinical trials. The company's business facilitates development of drugs aimed at tackling significant unmet medical needs, such as treatment of RSV.

hVIVO's human challenge studies make infectious and respiratory disease products, e.g. vaccines and antivirals, available to patients faster than would otherwise be possible, which alone is in line with ESG values in a post-Covid era.

Additionally, hVIVO places a strong emphasis on ethical, transparent, and compliant business practices in the execution of its clinical trials and interactions with volunteers, clients, sponsors, vendors, and investors. The company has minimised its carbon footprint through waste reduction, using local and sustainable suppliers, as well as efficient use of energy. hVIVO also prioritises diversity and equality in its corporate culture, both for its teams and its board of directors, per its Diversity & Equal Opportunities Policy.

More and more pharma and biotech companies are trusting hVIVO's model as they learn about the benefits of human challenge trials. Four of the top ten global biopharma companies are now regular clients of hVIVO.

Human challenge studies provide great value for biotech and pharma companies as they offer access to fast and cost-effective data that enables easy decisions ahead of larger Phase 2 studies. This gives companies the best possible chance of quickly advancing their candidates through the development pathway.

hVIVO's long string of major contracts signed this year speaks to the rapid momentum the company has generated in only 7 months, with the pace continuing to accelerate. The company's book order nearly tripled to £70m in 1H22. In July and August alone, hVIVO recorded £9m of new revenue and added £4.1m to its cash balance.

hVIVO's book order currently stands in excess of £80m, to be recognised across 2022, 2023, and 2024. The company should comfortably achieve full-year revenue guidance of £50m.

Yü Energy

Yü Energy (YU. Follow | YU.) supplies energy and utility solutions to UK businesses, with a focus on digital innovations such as smart metering. The company's Digital by Default and Yü Smart initiatives bring benefits of higher energy efficiency and lower operating costs to enterprise customers, especially relevant in the current climate. The UK's Energy Price Guarantee does not cover businesses, so many have turned to innovative providers such as Yü to address rising costs.

Yü Energy's core business is focused on sustainability which is a fundamental ESG factor. Yü aims to accelerate a low carbon future while operating in a manner that protects the environment and contributes to communities in which the company operates.

Yü Energy addresses the needs of its employees, customers, partners, shareholders, stakeholders, and local communities by focusing on three areas defined in its ESG strategy – product, people, and planet.

Under the "Product" category, Yü supports the UK's requirement of 400,000 public EV charging points by 2030, provides reports and guidance to help customers become more energy efficient, continues to accelerate its smart meter rollout to enable efficient energy management, and aims to supply 100% renewable energy to more customers.

Under the "Planet" category, Yü strives for energy efficient offices, sustainable travel incentives for employees, charitable support, equal opportunity and high compliance standards for GDPR.

Under "People", Yü boasts a 24/7 employee helpline, performance leadership programmes, employee engagement surveys, consistent reward packages, and career development programmes.

Yü Group delivered a stellar set of results in 1H22, with a doubling of revenues, quintupling of profits, and overall great performance across all financial KPIs. Results exceeded forecasts even after 2 recent upgrades.

Yü Group has now delivered four consecutive half-year periods of consistent growth, with strong momentum continuing into 2H22 and beyond. Contracted revenue of £119m is already secured for 2023, providing good forward revenue visibility. The company is very well-funded with £15.7m in cash, and well-positioned to meet its stated medium-term goal of £500m in revenues with an adjusted EBITDA margin of over 4%.

Equals Group

Equals Group (EQLS Follow | EQLS) is a fintech challenger focused on the SME marketplace. In its most recent ESG report, the company outlined a wide range of actions to meet ESG criteria in the areas of sustainable development, employee and customer engagement, data security, and governance.

In terms of sustainability, Equals has reduced its office size, switched to renewable energy providers, employed an environmental waste management service, and offered incentives to employees for using green modes of transport. The company screens suppliers for ESG practices and is targeting "paper-free" offices by 2023.

In terms of employee and community engagement, Equals runs comprehensive training and development programmes, surveys, its "inclusive network" initiative supporting an inclusive working environment, "own the outcome" awards, and Project21 which is a socio-economic programme to give children in Stratford work experience in FinTech.

Equals also protects its customers through anti-bribery and anti-money laundering training. It has a vulnerable customers policy and a transparent pricing and fees model. Moreover, as a FinTech company Equals priorirtises data security. The company runs rigorous oversight of data security, including regular IT infrastructure penetration tests, 3rd party data security compliance tests, and cybersecurity training programmes.

Under the Governance category, Equals complies with the Quoted Companies Alliance (QCA) Corporate Governance Code and runs training to raise awareness and understanding of its employee handbook and code of conduct. The company runs 6 risk and audit committee meetings during the year.

In its 1H22 financial results Equals' adjusted EBITDA more than tripled to £4.9m with revenues up 86% LFL to £31.1m vs £16.9m last year, reflecting standout performances from its Solutions, Forex and White Label services, augmented by a recovery in Travel.

The story was even better in 2Q22, with sales climbing 21% to £17.2m vs £14.2m in 1Q22, alongside an increase of quarterly EBITDA of 72% to £3.1m vs £1.8m in 1Q22, thanks to positive operating leverage. This momentum provided a major springboard into 3Q where turnover was up 55% LFL to £13.3m as of 5 September 2022.

Venture Life

Venture Life (VLG Follow | VLG) is a leader in the self-care market and owner of OTC brands Balance Activ, Lift, Dentyl, UltraDex & Pomi-T among others. The company is committed to ESG values, including sustainability, responsible and ethical trading, charitable support, and employee support.

Venture Life’s ESG committee launched ‘Sustainable Life’ in 2021 which set out the company’s approach to sustainability and becoming a more trusted, responsible, and sustainable business. Following stakeholder consultation, the company has identified priority goals which are aligned with the UN SDG framework.

Emphasis is placed on employee satisfaction and recognising high performance, supporting its staff of 153 through early-stage career development. The company aims to foster a culture of unity across its offices in the UK, Italy, Sweden, and the Netherlands.

On the environment, Venture Life operates a head office designed not to need air conditioning and the manufacturing facility in Italy uses a PV Solar array that currently covers 20% of its manufacturing needs. The company's osmotic plant is closed-cycle, resulting in significant water savings, with a water recovery system for cooling and a water consumption monitoring system.

Venture Life procures plastic, glass, and paper from suppliers that use recycled or mixed materials as much as possible, and the majority of its packaging is recyclable. Responsible consumption & production is a priority SDG, and the company has initiatives in place to reduce waste and increase recycling. Venture Life’s manufacturing facility in Italy was awarded the Bronze sustainability recognition from Ecovadis in 2022.

On the financial front, Venture Life reported 36% higher revenue in 1H22 and a 3% increase in EBITDA margin, reflecting recent acquisitions of BBI Healthcare Limited and the Helsinn Integrative Care Portfolio, which contributed £6.3m to 1H revenues.

Historically, VLG sales have been 2H weighted, which we expect to be further exaggerated this year by the growing momentum in the company's order book. Therefore, we expect full-year performance to be at minimum in line with market expectations.

Oncimmune

Immuno-diagnostics firm Oncimmune (ONC Follow | ONC) closely follows the the 2018 QCA Corporate Governance Code, which is an outcome-oriented approach to corporate governance tailored to the needs of small to medium-sized companies, provided by the Quoted Companies Alliance (QCA).

In practice this means that Oncimmune follows certain governance principles outlined in the code. These include having a business model that promotes long-term value for shareholders, that seeks to understand and meet shareholder needs, taking into account wider stakeholder and social responsibilities, and embeds effective risk management into corporate strategy.

Additionally, the code calls for a balanced board with sufficient up-to-date experience and skills, based on performance evaluations tuned to clear objectives, and promoting a corporate culture based on ethical values.

Oncimmune has aligned its strategy with these governance standards as detailed here.

In terms of financial performance, Oncimmune in September reported FY22 revenues up 3.7% to £3.9m vs £3.7m last year, with new orders for its "ImmunoINSIGHTS" platform starting to come through. The company signed 18 new contracts in FY22, compared to 9 last year and 3 in FY20, with increasing penetration into the top 15 global Biopharma groups.

Better still, ONC's pipeline is climbing by £0.75m/month and presently stands at £11m, providing revenue cover of more than 40% for FY23, including £1.8m within the execution phase, an estimated £2.3m for 1Q, and a further £2.5m in 2Q.

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