The Ethical Investor: Do ‘sin’ investments pay off, and ESG stock tips from Pengana Capital’s Amy Pham
Link copied to
The Ethical Investor is Stockhead’s weekly look at ESG moves on the ASX. This week’s special guest is Amy Pham, Fund Manager at Pengana Capital.
Should ESG investors go cold turkey on ‘sin’ stocks and put their money purely on ethically-themed companies?
Many of the biggest global asset managers have apparently done so.
The largest sovereign wealth fund in the world, the Pension Fund of Norway, has been excluding tobacco companies from their portfolio since 2010.
The fund has also turned its back on coal producers, weapons manufacturing and other companies that it says “violate fundamental ethical norms and impose substantial costs on society”.
Blackrock and BNP Paribas have also recently divested away from coal, with BNP releasing a report that singled out the combustion of coal as the largest single source of global warming.
You can see this trend proliferating across the asset management industry, with around 1,500 managers overseeing a combined $40 trillion now committed to fossil fuels divestment, according to the latest report by DivestInvest.
Even our own Woolworths (ASX:WOO) wants to create a ‘cleaner’ story for investors by announcing a major shakeup last year, saying that it would ditch booze, pubs and pokies businesses.
But from a pure return perspective, is this all a smart move?
Not according to the latest data from Morningstar.
Since the early 2000s, so-called sin stocks have been outperforming.
These are stocks broadly defined as companies with activities considered unethical or immoral. Alcohol, tobacco, gambling, adult entertainment, and weapons are usually grouped in this basket.
But the definition has since been broadened to include coal and fossil fuel companies, which ironically have delivered stellar performances this year.
In 2021, Energy has been the best performing sector on the S&P 500 on the back of a 70% increase in oil prices.
The coal industry meanwhile pays one of the highest dividend yields, with Morningstar predicting an 11% dividend yield on stocks like Whitehaven Coal (ASX:WHC).
With most eyes fixated on Energy, the property sector is one that may have been overlooked by ESG-focused investors.
Amy Pham, fund manager at Pengana Capital, explains to Stockhead why properties could play an important role in an ESG investor’s portfolio.
How does ESG investing relate to properties?
“ESG issues in the property sector include things like the energy efficiency of a building, health and safety, community relations, as well as corporate governance such as board structures and shareholders’ rights.
“We rank companies based on ESG factors, and screen out those who don’t score well.
“The process of ranking is qualitative, and we send out a questionnaire survey to each company for each of the E, S and the G.
“We send a survey because we focus on the small cap end of the market, and these companies don’t have the capacity to be ranked by a third party tool like Sustainalytics.
“But this survey method actually gives us an opportunity to talk to the managers themselves, and get us a better insight into how they incorporate ESG into the process rather than just making motherhood statements.”
Where do you see growth within the property sector?
“Where we focus on is the alternative space, which is anything outside of the traditional retail or industrial assets category.
“These include businesses such as childcare, manufactured home estates, or data centres.
“Going forward with all the trends such as urbanisation, the Internet of Things, ecommerce, aging population; these are going to drive demand and growth in the alternative sector.
“At the moment in the Australian REIT sector, alternative assets only represent 6% whereas in more mature markets like the US and the UK, they make up 60%.
“So we see an organic, secular trend growth in the alternative sector to drive earnings growth here in Australia.
“And these earnings will be a lot less cyclical than your office, retail or industrial assets, because of the headwinds associated with large office and retail malls post-Covid.”
How will a property investment do in a high interest rates environment?
“We are cognisant of the rising inflation and rates environment that we’re in.
“But if we look at the property REITs, because their lease structures are linked to the CPI, they actually give you an inflationary hedge.
“Yes, going forward rising rates will indeed slow down valuation, but on the flip side, the earnings from these assets are quite protected.”
Which ASX-listed REITs or property stocks are you looking at?
“We really like Charter Hall (ASX:CHC).
“They’re really a fund manager and under this low rates environment, they provide very strong FUM (funds under management) growth. In the past five years Charter Hall has been able to grow their FUM by more than 20%.
“In terms of valuation, Charter Hall is trading at a multiple of about 18 times, which is below their peers of about 20 to 25 times.
“We also like Peet (ASX:PPC). They are a residential developer but more than that, they are involved in land subdivision.
“We think they’re really leveraged to this affordable housing and population growth thematic.
“Going forward, we believe that Peet’s pipeline of 44,000 lots across Australia will provide them with a pretty secure future growth.
“Another one that we like at the moment is SCA Property Group (ASX:SCP).
“SCA owns convenience and sub-regional centres, and we like this because land value in those areas has gone through the roof.
“A lot of the convenience and sub-regional centres have also got quite a lot of land attached to the centre and we think going forward, that will provide them with a development upside.”
There are three reasons why EV uptake has been relatively slow in Australia: the limited availability of models, the price, and the lack of charging infrastructure, which has fuelled ‘range anxiety’.
The Federal Government’s Future Fuels strategy announced last week included a $132 million pledge to speed up the rollout of hydrogen refuelling and electric charging stations.
There’s even a plan to build 50,000 home charging stations.
Some Australian developers like Mirvac have been implementing home EV charging stations for years, and experts believe this will become the standard.
“Once you see EV ownership start to accelerate to 100 per cent of new vehicle sales, which is expected by 2035 to 2040, then you have to wonder how everyone will charge their vehicle,” Dr Scott Dwyer, research principal at the Institute of Sustainable Futures told Domain.
“Home charging will be the most dominant form of charging. That’s where 70 or 80 per cent of charging will take place.”
Dr Dwyer said building the EV infrastructure into a new property development would cost less than retrofitting homes down the track, because developers would buy and install chargers in bulk.
“This transition is akin to any other major nation-building project, such as motorways or the NBN rollout,” he said.
The company announced a significant increase to the modelled renewable energy penetration rate for the Mackay Potash Project. Front End Engineering Design (FEED) work has delivered an 84% renewable energy penetration rate, which supports its transition to net zero emissions.
National Australia Bank (ASX:NAB)
The bank announced mortgage rate discounts for users that cut emissions at home. The bank and a consortium of other lenders including Natwest have backed an Adelaide-based startup ValAi, a tool that could rate the sustainability of a household.
The views, information, or opinions expressed in the interview in this article are solely those of the interviewee and do not represent the views of Stockhead.
Stockhead has not provided, endorsed or otherwise assumed responsibility for any financial product advice contained in this article.