Investing in companies that demonstrate a ‘social conscience’ is a trend that has been gathering significant momentum in recent years, but it’s really picked up the pace thanks to climate change concerns and the global pandemic.
More money has been flowing into environmental, social and corporate governance (ESG) rated stocks as investors around the globe increasingly place higher value in sustainability and transparency.
Growth in the sector is also expected to strengthen after United States President Joe Biden announced his US$2.3 trillion infrastructure plan to control climate change and “spark the electric vehicle revolution”.
One company poised to benefit from this growing interest is Envirosuite (ASX: EVS), which helps businesses achieve their ESG targets via its environmental management technology.
Speaking with Small Caps, chief executive officer Jason Cooper praised this new trend of mindful investing and outlined how Envirosuite supports the sector.
“We’re all about how we help industries and communities co-exist. With growing regional communities and urbanisation, people are living closer to mining, aviation or waste treatment facilities where they may work. We’re a key enabler to ensure that both companies and communities thrive.”
What is ESG investing?
ESG covers three broad factors that ‘socially responsible’ investors would consider when weighing up a potential investment decision. The categories include concerns such as reducing pollution or waste, sustainability, ethical practices, diversity and other ways a company’s board and management drives positive change.
Companies are rated on these environmental and social responsibility scales by third party, independent companies and research groups.
In essence, ESG investors aim to make the world a better place, rather than base an investment’s evaluation solely on its potential profitability and/or financial risk.
Environmental management technology
Envirosuite’s software-as-a-service (Saas) model and technology solutions helps companies manage and mitigate environmental impacts such as noise, vibration, odour, dust, air and water quality.
The company offers three product suites to support industries including aviation, mining, waste and water treatment and claims its technology can help organisations go beyond compliance and make decisions to also minimise cost.
Mr Cooper said one of the most “compelling” and “unique” features of its technology is odour detection.
“We have a world-leading ability to sense the odour and build it into our platform to understand where the source of that odour is, using reverse trajectory modelling.”
Another exciting achievement is Envirosuite’s recent contract win with NASA to provide noise monitoring technology for its X-59 quiet supersonic flight community testing.
“To be selected in that space not only highlights where we are today in that technology, but also where we’re going to be leading to in the future,” Mr Cooper said.
Global expansion plan under new chief
Mr Cooper, who moved into his current role in March, said Envirosuite has a very compelling story but previously lacked “sizzle” when it came to external marketing.
His current focus is to drive a global expansion strategy, underpinned by a recent $14 million equity raising, and increase exposure to the retail market.
“With the increasing interest driven by ESG criteria and the US administration’s US$2 trillion proposed investment into infrastructure, we believe now is the opportunity to further invest in the growth potential for the water product suite, to accelerate our product roadmap and drive growth in the North American market,” Mr Cooper said.
In April, Envirosuite delivered a record quarter, reporting an 180% increase in annual recurring revenue (ARR) of $2.1 million plus the addition of 13 new customers. The success of the quarter brings the company’s year-to-date ARR to $42.5 million.
Growth in Australian ESG investments
According to the Responsible Investment Association Australasia (RIAA) 2020 benchmark report, ‘responsible investment’ assets under management (that is, managed by professional fund managers) have grown 17% year-on-year to $1,149 billion. This makes up more than a third of Australian assets under management.
In addition, the ‘responsible investment research universe’ (comprised of 165 investment managers recognised to be applying responsible investing approaches) has been valued at $1.9 billion and accounts for about 60% of Australia’s full investment management market.
The report found institutional investor demand was the main driver for growth in responsible investment funds with ESG integration increasingly becoming a core part of mainstream portfolio decisions.
Growth in retail investor demand is reportedly driven by external events including bushfires, climate strikes and an increasing public awareness of climate risk.
The impact of COVID-19
RIAA also noted how more sustainable companies and funds that integrated ESG and other responsible investment approaches have consistently outperformed the general market since it was disrupted by the global pandemic.
“The thesis that responsible investing supports stronger outcomes for society and the environment, alongside delivering superior financial returns, has been put to one of its toughest market tests with the COVID-19 pandemic,” the association said in an additional briefing note.
“The COVID-19 crisis has highlighted that investment managers executing responsible investment approaches are more resilient to the downside experienced during recent economic volatility.”
In addition, Mr Cooper forecasts an increased need for ESG monitoring technology as people become more aware of the environment in which they live.
“From a market perspective, COVID-19 has clearly impacted the airports, but that will start to increase in the short-term.
“Airports are leaning into us to ask how we can help, because they know noise levels are going to be more of an issue moving forward.”
“Our engagement has increased with airports around the world including the likes of Heathrow and Los Angeles World Airports, so I see a significant market opportunity on the back of COVID-19,” he said.
Another strong growth area for Envirosuite is the mining industry.
“It’s important to us because mining is an essential industry but generally speaking, its connected to a community. We’re able to help mining customers live with a community – we minimise where dust is going or noise and vibration when they’re doing blasting,” Mr Cooper said.
“The number one issue in mining is that social licence to operate – if mining companies don’t understand their impact on communities, they can be shut down or it will limit their expansion capabilities.”
A recent report by global consulting firm PwC, Mine 2021, also showed mining companies with higher ESG ratings delivered 34% average total shareholder returns over the past three years, 10% more than the general market index.
Other ESG stock returns
The launch of the S&P/ASX 200 ESG Index last July was propelled by the growing popularity of investments rated high on the ESG scales.
But in contrast to RIAA and PwC’s data, the returns from top ESG-rated companies on the ASX have been on par with the benchmark index.
In the last quarter, the ESG Index has returned 7.55% compared to the S&P/ASX 200 companies which delivered 8.67% returns. In June alone, the difference has been 0.5%.
Although, the notion of ESG investment is that it’s not just about the financial gains but being ‘socially responsible’. Either way, positive returns are being made and investors may feel better about influencing positive change and the far-reaching, longer term impacts their investments could make on the world.