By Michael Brush
The biggest challenge for any well-meaning ESG investor is to do well by doing good, as the cliché tells us.
But that’s not easy. Given all the pitfalls in the markets, it’s even tougher to “do well” with the constraint of having to favor companies with good environmental, social and governance, or ESG, metrics.
Given the challenges, I thought it would be useful to catch up with a fund manager to get useful tips you and I can learn from.
Andrew Braun, who manages the Pax Large Cap Fund /zigman2/quotes/201318721/realtime PXLIX -0.91% , fits the bill. His fund beats its Morningstar large-blend fund category and Russell 1000 benchmark by 9.5 and 4.5 percentage points over the past year. He also beats those benchmarks by several percentage points over the past three years, according to Morningstar.
The key takeaways: Braun gets his outperformance from three sources beyond the help from his team: 1. Putting money in the path of six ESG mega trends. 2. A small basket of business metrics that lead him to winning companies. And 3. A proprietary ESG rating system.
Let’s take them in order.
The six key ESG mega trends
A fundamental rule in investing tells us it pays to pick companies that get a boost from mega trends. Braun and his team own companies they think get a lift from the following six ESG mega trends. This is a good guide to favorable trends as you research ESG companies on your own.
1. Cloud computing
This counts as an ESG mega trend because it’s energy-efficient for companies to use shared data centers instead of having their own. Thanks to a big strategic shift introduced by Satya Nadella when he was promoted to CEO in 2014, Microsoft /zigman2/quotes/207732364/composite MSFT -2.09% is now at the center of the evolution of cloud computing. Microsoft’s Azure cloud platform recently posted annual revenue growth of over 50%, even though it’s already a giant business with over $20 billion a year in sales.
Another play on this mega trend is Equinix /zigman2/quotes/208927761/composite EQIX +0.92% , which runs over 225 data centers in 26 countries through its Platform Equinix. “They’re another facilitator of this very powerful mega trend,” says Braun. This real estate investment trust, or REIT, pays a 1.66% dividend yield.
2. Resource efficiency
Braun and his team at Impax Asset Management look for companies that offer products that save energy and money, or upgrade their equipment to do the same thing.
Here, Trane Technologies /zigman2/quotes/202648041/composite TT +1.62% offers heating, ventilation and air conditioning (HVAC) products and services that help building operators reduce carbon footprints. “Installing their equipment is a powerful tool to combat climate change,” says Braun.
Another example is Procter & Gamble /zigman2/quotes/202894679/composite PG +1.86% because it sets targets for reduced carbon emissions in its own operations, among suppliers, and for consumers through product offerings that encourage them to use more cold water. The company also ranks high in ESG at Impax because of its gender equality targets.
3. Vehicle electrification and autonomous driving
Tesla /zigman2/quotes/203558040/composite TSLA -6.44% would be the poster child for this category. But it’s not a Pax Large Cap Fund holding. Instead, Braun favors less glamorous producers of components used in these vehicles. As electric vehicle usage grows, so will these companies.