Good Money Week: Five stocks to tackle global warming over the next decade

Fund managers reveal their top ESG stock picks to hold over the next ten years

In a Good Money Week special, fund managers have shared their top ESG stock investors can hold for the next decade that are fighting global warming.

An increasing number of companies are concentrating their efforts on reducing their carbon footprint in order to reduce the effect of global warming.

Here, portfolio managers reveal their top ESG holding to hold for the next two years that will contribute to tackling global warming.

HelloFresh 

Graham Clapp, manager of the RWC Continental European Equity Fund 

Roughly one third of the food produced in the world for human consumption, approximately 1.3 billion tonnes, gets lost or wasted every year. With a rising global population, more resources are needed every year to feed mankind, which takes an ever onerous toll on the environment and biodiversity. By minimising food waste however, we can reduce the amount of strain and damage caused to the environment.  

HelloFresh is the world’s largest provider of meal delivery kits to cook at home and offers a solution to this problem. By only providing the exact ingredients needed in the recipe, food waste is minimised, and the company can source ingredients directly and reduce food miles in the supply chain. As the market leader, HelloFresh has significant scale advantages over competition, allowing for better margins, lower customer acquisition cost and a better product offering. As HelloFresh has only penetrated a small single digit percentage of its total addressable market so far, which keeps growing as the company enters new geographies, there is a huge runway for growth over the coming decade, and we expect there may be for years to come.   

 

Alphabet and Facebook 

Christopher Rossbach, manager of the J Stern & Co. World Stars Global Equity Fund 

The best way to generate long-term investment returns is to find quality companies that have strong and sustainable competitive positions in good and growing industries, managements that have a track record of value creation and balance sheets so strong they can manage any adversity. 

Alphabet and Facebook fit that bill.  Their core businesses, internet search, cloud computing and social media, are more important than ever.  Their businesses will grow for the next ten years and beyond as digital transformation continues. 

To do that they have to build huge data centres that need energy to operate computers and make sure the environment is neither too hot nor too cold.  Alphabet became carbon neutral in 2007 and became the first company of its size to match 100% of its electricity consumption with renewable energy in 2017.

Today, Alphabet is the world’s largest corporate purchaser of renewable energy. It intends to fully decarbonise its electricity supply and operate on 24/7 carbon-free energy by 2030.  Facebook intends to achieve net zero GHG emissions for its global operations and be supported by 100 percent renewable energy from this year.  Both companies provide huge benefits to their users and customers.  They are ‘natural monopolies’ not because they set out to become ones, but because people do not want to fragment how they search, advertise, process their data or connect with people.  They have to improve what they do to make sure they do not abuse their competitive positions.  However, they understand that they have to change and the latest news shows that they are stepping up and limiting abusive content on their platforms. 

They have great prospects for long-term value creation and are part of the solution, not the problem, in achieving sustainability in terms of climate change and other factors. 

Aveva

Audrey Ryan, manager of the Aegon Ethical Equity fund 

The UK may not have the same breadth and depth of opportunities in some ESG-friendly sectors, like information technology, as the US does, but there are still some fantastic opportunities.  

One such name is Aveva. Aveva is an engineering design and simulation software company. Its technology helps industrial businesses, particularly those in process industries, to design, simulate and monitor their operations in order to increase efficiency, improve safety and lower costs. This is hugely powerful for complex and capital intensive industries, due to the ability to simulate new ideas and designs without necessarily having to build more costly prototypes. 

Aveva’s software and sensor can also facilitate predictive maintenance, which uses machine learning to spot problems before they occur. It means companies are better able to identify underperforming assets, plan and prioritise maintenance, reduce downtime, avoid costly (and possibly catastrophic) events and improve safety and regulatory compliance. Sensors and computer chips now measure and collect information in everything from jet engines to wind turbine gearboxes. 

Despite the clear benefits from these applications, engineering simulation software is still in the relatively early stages of adoption and there remains a huge total addressable market for Aveva and its peers to expand into. Having recently announced a major acquisition in the US, we think AVEVA is well placed to continue the excellent growth it has recorded in recent years, cementing the place it gained in the FTSE 100 in 2019. 

Enphase Energy 

Mary Jane McQuillen, portfolio manager of the Legg Mason ClearBridge US Equity Sustainability Leaders Fund

Enabling adoption of solar energy for residences, Enphase Energy (ENPH) designs and manufactures microinverters for residential and small commercial solar photovoltaic (PV) systems and has a customer base in 130 countries, with its largest presence in the U.S. Enphase was the first company to commercialise microinverters for residential and small commercial solar PV systems. A microinverter is a small inverter placed directly on the back of each solar module, as opposed to the traditional system of one string inverter on the side of the building for all modules.

Microinverters improve the efficient energy capture of a solar PV system by performing maximum power point tracking at the module level, rather than at the array level (all modules combined). They also allow greater flexibility in how modules are installed, in terms of angle, type and number, so houses with multiple roofs at different angles can use more surface area and capture more energy from it. Enphase has also made strides in evolving from a solar inverter maker into a “home energy management” company that can act as the brains for the home’s energy system, including storage and energy management software, which we believe will generate long-term shareholder value as solar adoption grows. 

Avatar

Natalie Kenway

Natalie is global head of ESG insight for ESG Clarity and has been an investment journalist for 16 years. She won Editor of the Year at the Aviva Investors Sustainability Media Awards 2021, and was Winner...