Top ESG picks for 2020

Chocolate, finance and pharma: Invesco manager's sustainable business bets today

Ruth Saldanha 24 April, 2020 | 1:29AM

 

 

This video is part of our Earth Week special report

Ruth Saldanha: The Invesco Oppenheimer International Growth Fund has a Morningstar Analyst Rating of Bronze. The fund managers look for growing companies that fit into a variety of themes and sub-themes that also serve as a foundation for other Invesco Oppenheimer offerings. The main themes are mass affluence, new technology, structuring and ageing. George Evans, one of the managers of the fund, is here today to give us his top picks from the fund that are also good from an ESG perspective.

George, thank you so much for being with us today.

George Evans: Thank you very much.

Saldanha: The first pick that you have is the world's largest chocolate manufacturer, Barry Callebaut. Why is this stock a good ESG pick?

Evans: Well, Barry Callebaut is very interesting. As you mentioned, it is the largest chocolate producer in the world. From the ESG perspective, it's actually doing a lot of extraordinarily good things. So, the first thing is that the cocoa is sourced from a lot of emerging markets, but primarily, one of the biggest sites is – places from which they source is in West Africa. So, Barry Callebaut has been very involved in improving the supply chain for many aspects that really look very good from an ESG perspective.

So, the first thing from a social perspective, they've been instrumental in making sure that child labor is not being employed in the farming or the production of the cocoa bean. The second thing is they've been very, very instrumental in educating the local farmers and trying to get them to be more productive and to actually be able to, sort of, farm in a more responsible way and also derive a more steady income from it. So, I think in terms of spreading the sort of social good and making them a much more – making them benefit from – the farmers benefit from it is a particular goal of theirs. Particularly, in Europe, we're looking at companies that are getting more and more interested in not just the sustainability, but where are the cocoa beans actually sourced from. So, they have very, very good systems in terms of the traceability to make sure that they know exactly where it is from. 

So, the side effects of making the farmers more educated is going to be that the farmer is not just going be more profitable but it's going to be more sustainable as well. So, from the environmental and the social and the sustainability point of view, it scores extremely well, and they are a positive force, not just going along with things that other people are doing. They are actually the catalyst for a lot of the positive change.

Saldanha: Your next pick is London-based financial services firm, Legal & General. The company is popular among income-seeking investors mainly because of its dividend payouts, especially now that U.K. banks are not paying dividends anymore. The stock has fallen overall more than the FTSE index since the start of this year. So, is it a buying opportunity from an ESG standpoint?

Evans: Well, we think it's a buying opportunity. We think it's very well-positioned from several points of view. The first thing is that it has a unique position, it actually being able to source assets, which it can package up, which can provide the income for – many of the pension plans in the U.K. are finding it difficult to sort of source income. And this is going to be even more critical as we look into sort of the post-pandemic world where interest rates are so low and a lot of real estate. So, they've been able to package up source assets that can that could provide the income to match against the liabilities of the British pension funds.

From the social point of view, we like Legal & General because it is a company that has been very, very instrumental in developing the secondary and tertiary cities outside of the southeast of England. One of the biggest problems in the U.K. has been the degree to which London and the southeast has been the only engine of growth or the primary engine of growth in the U.K. economy for many years. So, being able to get involved in private-public partnerships to develop cities like Cardiff, which is the largest city in Wales, and other cities in the regions is, to our mind, a very beneficial aspect of what they're doing. It has fallen a lot. I think it's seen as a company that is highly geared to sort of U.K. GDP. And so, anything that's going to affect the growth rate is going to be amplified in terms of the reaction of L&G. But Legal & General, we think, has got a very, very good future. It has a unique position in this ability to match liabilities with the assets and really help in solving the British pension fund problem.

Saldanha: Your third pick is Danish pharmaceutical company Novo Nordisk. From an ESG standpoint, during this pandemic, how are you viewing the pharmaceutical space in general, and why do you like this stock?

Evans: Well, we haven't been sort of specifically picking stocks in reaction to the pandemic. I think the pandemic has created the pricing opportunities to go into many areas that we have liked historically, but where the share prices were pretty full. Pharmaceuticals features structurally highly in our investment thinking. These companies have a lot of technology, a lot of innovation and they're solving a lot of the world's problems. Now, from the perspective of where we see our existing portfolio being advantaged within this pandemic, we own companies that are involved in the diagnostic space.

So, one of our larger holdings is Roche, the Swiss pharmaceutical company. Fully one-third of its revenues is derived from diagnostics. So, diagnostics testing is one of the big buzzwords that's going on around about how we are going to tackle the pandemic, manage the after-effects and hopefully, prevent a resurgence of the outbreak after we'll go back to work. So, diagnostics is very, very important to them and to us. We also own Siemens Healthineers, which is one of the leading imaging and diagnostics companies as well. So, there are several lines of business in the pharmaceutical portfolio that we already own that are going to be advantaged.

Novo Nordisk, we like. It's one of the companies that is best positioned for dealing with diabetes. So, there are two big companies in the world that are well-positioned for this. There is Novo Nordisk, and Eli Lilly, both of which have extremely high dominant market shares.

So, unfortunately, one of the side effects of the emergence of the developing world, which has been one of the most positive features of the last sort of 30 years has been the uplift in incomes and quality of life for the vast majority of the planet. I mean, overall poverty has gone from – extreme poverty has gone from about a third as measured by the World Bank to less than 10%, which is a great outcome, obviously. But one of the side effects has been that people's diets have changed and have become much more Western. The Western diet has – there's a lot more fats in it, you know, McDonald's, et cetera, et cetera. So, people are eating a diet – they're eating more, but their diet is having deleterious side effects, including diabetes, obesity and conditions such as that. So, Novo Nordisk is one of the companies that's leading the way to manage diabetes, come up with innovative care for diabetes and also, obesity.

Saldanha: Thank you so much for joining us today with your perspective, George.

Evans: Thank you so much.

Saldanha: For Morningstar, I'm Ruth Saldanha.

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Ruth Saldanha

Ruth Saldanha  Ruth Saldanha is Senior Editor at Morningstar.ca

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