“Monstrous valuations”, “Bubbles” and “rampant demand for the hot investment theme”: Monday’s reports in the AFR on valuations and ESG are overstated and reasonably simplistic. ESG focused stocks are typically growing more strongly than the often structurally challenged ESG laggards and, as a result, have higher near-term valuation multiples. However, there is an area of the market that is being overlooked in the search for ESG opportunities. Investors who are looking for a greater variety of “pure” exposures to ESG-related growth drivers as well as potentially greater return opportunities should consider Sustainable Aussie Small Caps.
Whilst many argue that the reasons for increasing valuations include the rise of ESG Indices, increasing ESG FUM growth by shifting investor dollars into large caps and an over reliance on proxy voting and ESG research providers as a metric of ESG performance; it is becoming apparent that in the smaller end of the Australian market, there is an under representation of ESG coverage. This sector is typically overlooked in both ESG research and data, as disclosure in smaller Australian companies remains mixed. This provides opportunities for ESG focused investors who are well equipped to complete detailed analysis and undertake engagement with smaller companies with the benefits - often also including greater return opportunities than their large-cap counterparts. Smaller companies are also typically more exposed to the theme of sustainability which has become more important, not just to investors, but also to their customers and other stakeholders such as their employees.
Some small cap stocks where the eInvest Future Impact Small Caps Fund (Managed Fund) (ASX: IMPQ) is finding interesting return opportunities include:
· Kathmandu (ASX:KMD)
Kathmandu is a leader in sustainability in the retail sector and is trading at an attractive relative valuation at a 13x FY20 P/E multiple (compared with ~16x of their peers), with a strong balance sheet. KMD demonstrates leadership in sustainable supply chain management: including improving the lives of workers in their supply chain, undertaking factory audits and withdrawing from factories where necessary, and using recycled materials in garments – they are targeting the use of 10 million used plastic bottles in their materials. KMD also holds B Corp certification, meeting the highest verified standards of social and environmental performance. KMD has twice scored an ‘A’ in the Ethical Fashion Report. This year KMD also released a five-year sustainability plan, challenging the business to integrate the principles of circular economy throughout the entire business.
Check out an example of what they do here: Sustainability at Kathmandu: Our Factory Audit Process via @YouTube
· Infigen (ASX:IFN)
Infigen owns wind farms and battery storage and over the last few years has pivoted the company’s business model to sell renewable energy to small and medium commercial and industrial customers rather than selling power into the sometimes volatile energy market. It is growing by entering into long term off-take arrangements with other renewable energy owners and selling this energy to enterprises that are looking to reduce their carbon footprint. Infigen’s valuation is undemanding, trading at 15x P/E multiple.
Kathmandu and Infigen are examples of companies that are exposed to positive sustainability themes and also offer investors good value – it’s just that you need to dig a little deeper.
This theme is here to stay and will only become more salient. 2020 year is the year for ESG investing and at eInvest we look forward to being part of the solution: rewarding those great Aussie small caps doing wonderful things in the sustainability space by providing them capital to grow, develop and lead the way for a better future.