Premier Miton’s Chief Investment Officer
In this, the second edition of Sustainable Times, we will take a look at a group of companies that are a key part of the equity portfolio and our drive to find companies that have the potential to have a positive impact on society and the environment.
Most of our sustainable equity investments are in companies that are well established, market leaders in their respective industries. We combine this with investments in companies that have the potential to disrupt established markets or create new markets to resolve un-met societal and environmental needs. We are looking for companies that could potentially become the next generation of market leaders. We call this group; the disrupters.
Companies within this group are often smaller in size, newer to public markets and less well known to investors. However, their ambition is often large and the potential impact on society sizeable. Their products and services often relate to resolving some of the larger, more difficult challenges facing society. Carbon capture, micro lending in developing economies, fuel cells and quantum computing are some such industries represented within this group. This is a truly global group from both developed and developing countries.
What we look for in a disrupter
Our process remains the same when analysing this group and we do not compromise on risk tolerance regarding ESG factors, particularly on governance. In addition to our existing process, we assess three further criteria before making an investment decision for this group.
Large addressable market. The companies in this group are often smaller in size. However, the markets they operate in need to be large. Fuel cells, sustainable fashion and renewable fuels would all be examples of large global markets, that are being addressed by relatively new companies. We do not expect the companies to remain small if they are successful, as they grow themselves and their markets expand.
Third party, industry validation. Many of these companies are developing new technologies or production techniques. This can entail greater investment risk and uncertainty as well as greater opportunity. We look for third party validation of the business and the investment case. A joint venture agreement or a strategic shareholding from an established participant in the market or a potential cornerstone customer can provide this validation.
For example, Darling Ingredients, a company turning food waste into sustainable products and renewable energy, have a 50:50 joint venture with Valero, a global leader in the field of oil refining. This initiative provides engineering and operating expertise when building renewable fuels manufacturing capacity. Similarly, fashion company H&M’s shareholding in Renewcell, a developer of fully recycled textile materials, provides some comfort there is a large market for their product when a substantial and well-known buyer of the material owns a stake in the business.
Management of company equity. Finally, we never forget we are investing for financial return, not to provide funding for interesting science projects. We engage with management teams to ensure they are managing the equity in the company in the interests of third-party shareholders, like ourselves, and not just for themselves.
This alignment of interests is essential at these early stages of a company’s life. While we are prepared to invest in companies that are not necessarily profitable today, we need to see a clear path to profitability in the future
Anaergia – fuel from landfill
A recent addition to the portfolio is Anaergia, a Canadian listed company that is relatively new to the public markets having listed in June 2021 and now has a market capitalisation of CAD 600m*. With the founder having built and then sold his water treatment business, his next venture is tackling climate change. The company is in the business of reducing emissions associated with waste that often ends up in landfill. Essentially the company collects solid waste destined for landfill, separates the organic material and converts it to products such as renewable natural gas *Source: Bloomberg as at 01.11.2022.
With 15%** of all US methane emissions coming from untreated waste in landfill, the scope for emissions reduction is significant. In addition to the commercial benefits given current high natural gas prices, we also see strong regulatory support particularly in US with the Inflation Reduction Act offering a tax credit of up to 30% in the US against the costs of the projects. **Source: U.S. Environmental Protection Agency (EPA) 2019.
With new filtration plants coming onstream over the next 12 months, we believe the market will not have long to wait to better understand the return potential of these projects, as well as the positive impact on society and the environment.
Anaergia is a good example of a disrupter company. These disrupters not only offer the potential for growth, but also the potential for game changing technology to tackle some of the most pressing challenges facing us today and tomorrow.
To find out more about Anaergia and their work creating from landfill please click and watch this video, where Duncan Goodwin, manager of the Premier Miton Global Sustainable Equity fund, interviews founder and CEO, Dr Andrew Benedek.
The Premier Miton Diversified Sustainable Growth Fund equity portfolio
The allocation to equities is core to the fund’s asset allocation. It is worth noting that the investment team and process applied is the same as that for the Premier Miton Global Sustainable Growth Fund and the Premier Miton Global Sustainable Optimum Income Fund.
The equity portfolios for these three funds have a very high degree of commonality, with the disrupters playing an important part.