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The Discovery of Compelling Sustainable Investment Opportunities

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There are many ASX listed small and mid-cap companies making a positive contribution to creating a sustainable future.  It is the aim of the Perennial Smaller Companies Sustainable Future Trust and the associated ASX-listed eInvest Future Impact Small Caps Fund to seek out these companies.  Importantly, we are focussed on investing in these companies in a way that generates attractive, above benchmark returns for our investors.

The investment process draws on the investment experience within the award-winning Perennial small cap investment team to seek out compelling sustainable investment opportunities.  The funds are different from some other ESG-focussed funds as rather than screening-out ESG unfriendly stocks from an existing portfolio, the funds actively seek to invest in companies that are having a positive effect on creating a sustainable future.  This philosophy is inspired by the United Nations Sustainable Development Goals (“SDGs”).

While the funds have a number of investments that are focussed on reducing greenhouse gas emissions and improving environmental outcomes – there are other investments that are focussed on delivering a sustainable future more broadly.  These include companies that are looking at delivering improved healthcare which will benefit patients, medical practitioners and hospitals.

PolyNovo has been one of our most successful investments to date.  PolyNovo developed the company’s NovoSorb technology in conjunction with the CSIRO.  The NovoSorb product is formed into a biodegradable temporising matrix that is a dressing for the treatment of severe burns and wounds.  The company is further developing NovoSorb for use in hernia patients and breast reconstruction procedures.  The product benefits patients, medical practitioners and hospitals in that the healing outcomes are superior to the existing solutions for burns and wound patients.  The outcomes are superior in both the physical appearance of the patient after healing and the time taken to heal.  The Sustainable Future Trust initially invested in PolyNovo when the share price was approximately $0.50 and we sold most of our holding in July 2019 at $1.70 on valuation grounds.  We have retained a small holding in the event that the outcomes generated by the company exceed the market’s high expectations.

Next Science is another innovative company that is seeking to solve a global problem.  Next Science has developed a number of products using its Xbio technology that reduces biofilm bacterial infection in hospital environments. The company’s products are currently being distributed in the US by 3M and are expected to be available for sale in Europe shortly.

An interesting medical device company is Imricor.  Imricor is developing products that can be used to carry out MRI-guided cardiac catheter ablation procedures.  These procedures are currently carried out in an X-ray environment which limits the precision with which the cardiac surgeon can carry out procedures to correct cardiac arrhythmias.  Imricor’s products are expected to greatly improve the accuracy of this type of surgery and that will result in superior outcomes for patients, surgeons and hospitals involved in these procedures.  The key innovation in Imricor’s products is that the devices do not contain metallic parts which is necessary for the product to operate in an MRI environment.

Phoslock is a water remediation company with global operations which is aligned with SDG 6 Clean Water and Sanitation and SDG 14 Life below Water. The Phoslock product was developed by the CSIRO to reduce excess phosphate from water environments. This phosphate often causes algal blooms.  Phoslock has a number of projects globally with the most significant involving improving water quality in China. The company is also currently undertaking trials to improve water quality in the Everglades in the United States.

We have a number of investments which are looking to reduce greenhouse gas emissions in the broader economy and which are aligned with SDG 7 Affordable and Clean Energy and SDG 13 Climate Action.  These include both renewable energy companies and companies that are seeking to achieve improved greenhouse gas outcomes in other innovative ways.

Two of our renewable energy investments are Meridian Energy and Mercury Energy.  These companies are relatively mature businesses with significant market shares in the New Zealand energy market.  Both of these energy retailers generate 100% of their electricity from renewable sources.  Meridian Energy generates hydro energy on the South Island of New Zealand while Mercury generates hydro energy and geothermal energy on the North Island of New Zealand.  Mercury is also currently developing a 119MW wind farm on the North Island of New Zealand.  Both of these companies are well-placed to benefit from New Zealand’s proposed Zero Carbon Bill.

Other renewable energy investments include Genex Power and Infigen Energy.  Genex is developing the Kidston renewable energy hub in North Queensland.  This includes an existing 50 Megawatt solar farm, a proposed 250 MW “hydro battery” and a further 270MW solar farm.  It is developing the hydro battery in a disused mine in conjunction with energy retailer Energy Australia and J-Power which is a Japanese hydro energy company.  It has received the majority of financing and approvals for the project and is expects to finalise the remaining approvals prior to the end of 2019.  Genex is also expected to shortly commence construction of the 50 MW Jemalong solar power project in NSW.

Infigen Energy operates wind farms in South Australia and New South Wales and is developing a 25MW battery at Lake Bonney in South Australia.  Infigen’s strategy is to develop or enter into long term offtake agreements with renewable energy projects.  It then sells this renewable energy to commercial and industrial customers in Australia, allowing corporates to reduce greenhouse gas emissions.  In order to do this Infigen is required to manage the risk of solar and wind renewable energy assets not generating energy at peak power prices.  Infigen has recently acquired small “peaking” gas power plants in NSW and South Australia which will allow it to better manage this risk for a larger renewable energy portfolio.  This will allow it to increase the amount of renewable energy that it can source and sell to corporate customers.

A company that is seeking to improve outcomes in relation to a different greenhouse gas problem is Synlait.  Synlait is a dairy company based in New Zealand that is seeking to improve farming practices.  Interestingly, emissions from farm animals are one of the more significant greenhouse gas issues in NZ.  Synlait has a target to reduce on-farm greenhouse gas emissions by 35% per kilogram of milk solids by 2028.  This is in addition to the company’s off-farm greenhouse gas reduction target of 50% per kilogram of milk solids over the same period.

Calix is a company that has a number of projects focussed on a sustainable future and which are aligned with SDG7 Affordable and Clean Energy and SDG 11 Sustainable Cities and Communities.  One project seeks to solve another greenhouse gas issue – the highly emissions intensive cement and lime production processes.   Calix is trialling its carbon dioxide capture technology for lime and cement as part of Project LEILAC (Low Emissions Intensity Lime and Cement) at Heidelberg Cement’s plant at Lixhe, Belgium. Some of Europe’s largest cement and lime companies are involved in Project LEILAC including Heidelberg Cement and Cemex.  Calix recently announced that a pilot plant had successfully demonstrated separation of carbon dioxide with more than 95.0% purity and that testing will continue at full design capacity over the next 12 months. The aim of Project LEILAC is to enable cement and lime industries to reduce their carbon dioxide emissions dramatically without significant energy or capital imposts.  Calix has also recently announced that it received funding for a project to produce high performance and low cost lithium-ion batteries in Australia.

These are just some of the companies in the portfolio which are focussed on making a positive contribution to creating a sustainable future – not just in Australia but globally.

People often ask something along the lines of “All that all sounds very interesting…but has this translated to good investment performance?”  Pleasingly, it has, with the Sustainable Future Trust having outperformed the S&P ASX Small Ordinaries Accumulation Index by 6.7% p.a. from inception in February 2018 to 31 August 2019.  We are working hard to continue to produce strong returns and demonstrate that investing in a sustainable way generates superior returns to more traditional investment strategies.

Disclaimer: Please note that these are the views of the writer and not necessarily the views of Perennial Value. This article does not take into account your investment objectives, particular needs or financial situation.