Growth companies by definition are those that have substantial potential for growth in the foreseeable future. Value stocks are undervalued companies that can often provide long-term profits. However the definition of what exactly is a good value for a given stock is somewhat subjective and varies according to different perspectives. Are these constructs of value or growth really beneficial and why can you not have both? How do you define them? Can all stocks really be either one or the other? Even major indexes have a different methodology for categorising. Some good value funds have growth characteristics as well. There is also an opinion that the long dispute between growth and value equity investors is obsolete due to both concepts becoming ineffectual as a result of the shift from active investment into passive investments.
Historically ‘big oil’, and the ‘tobacco majors’ have been viewed as both growth and value at different points in time. But when ESG research began with a simple premise that, companies with weak ESG practices run higher risks of future scandals and thus a higher tail risk, there were plenty of examples within these types of ‘old growth’ companies to support this notion. A major example of this being the Master Settlement Agreement (MSA) reached in November 1998 between the state Attorneys General of 46 states, five US territories, the District of Columbia and the five largest cigarette manufacturers in America regarding the marketing and promotion of cigarettes. As well as requiring the tobacco industry to pay the settling states billions of dollars yearly forever, the MSA also imposed restrictions on the sale and marketing of cigarettes. Then there is the BP Deepwater Horizon oil spill, regarded as one of the largest environmental disasters in US history, and as of 2018, clean-up costs, charges and penalties had cost the company more than $65 billion (Source: Reuters).
With the increasing awareness of ESG matters and of the crises presently facing the world (e.g. urbanisation, resource scarcity & climate change) opportunities for ‘new growth’ arose. The renewable electricity market has witnessed exceptional growth in recent years facilitated by falling costs, innovation and global policy support. Renewables represented almost two thirds of the net new electricity capacity built in 2016, driven mostly by solar power and Chinese investment (Source: Quilter Cheviot).
‘New Growth’ provides protection from the crises hanging over us and the challenges caused by changing demographics such as urbanisation. Urbanisation causes significant concerns to both humans and animals. The promise of jobs and prosperity, among other factors, attracts people to cities. Half of the global population already lives in cities, and by 2050 two-thirds of the world’s people are expected to live in urban areas. But in cities two of the most unrelenting problems facing the world today converge, poverty and environmental degradation. Poor air and water quality, insufficient water availability, waste-disposal problems, and high energy consumption are intensified by the increasing population concentration and demands of urban living. Intensive urban growth can lead to greater poverty, with local governments unable to provide services for all people. Concentrated energy use leads to more air pollution with significant impact on human health. Urban development can magnify the risk of environmental hazards such as flash flooding. Pollution and physical barriers to root growth promote loss of urban tree cover. Animal populations are inhibited by toxic substances, vehicles, and the loss of habitat and food sources.
In our SRI models we recognise the worth of new growth as both a solid performing investment strategy and a way to do much needed good. For example in our SRI models we are invested in the Climate Assets Fund which invests in companies providing solutions to the problems of using fossil fuels, and of energy scarcity. These companies are involved in renewable energy generation, green transport, products and technologies for green building design and construction and energy efficiency. This fund also invests in companies providing solutions to the problems of resource scarcity, such as those involved in waste management, production and processing of environmentally friendly materials, waste-to-energy, coastal protection, productivity and efficiency gains, and process control.
The SRI models are also invested in the Impax Asian Environmental Markets fund whose investment objective is to generate long term capital growth from rapid and sustained growth in the markets for cleaner or more efficient delivery of basic services such as energy, water and waste in certain countries in the Asia Pacific Region. Such investment is imperative as Asia is moving into an era of unprecedented urbanisation.
These investments aren’t just the latest fashion with a shelf life, their growth potential is linked to an increasing global need for the companies and the solutions they provide. Additionally such companies will benefit from the increasing environmental regulation and policy (e.g. climate change law) rather than be penalised by it and at the same time will not be vulnerable to scandal and risk like the ‘old growth’ stocks. New growth is already demonstrating its ability to provide superior returns.