Vivendi, Environnement and Orange are three value stocks that are trading at attractive valuations and pass the environmental social and corporate governance test, according to EdenTree’s Chris Hiorns (pictured). 
Whilst some argue that ethical investing may compromise returns, Chris Hiorns believes the ESG process, which takes environmental, social and corporate governance into account when choosing stocks, adds to returns over time.
“When you see companies that face negative environmental or reputational issues over time, it means those companies have bad corporate governance,” the manager said.
“A bad corporate governance should lead to a bad performance. Ethical investment should therefore lead to better returns.
“In my case, the fund I oversee has outperformed its sector over 10 years, which shows it is possible to deliver returns while investing in companies that make a positive contribution to the environment and society.”
Performance of fund vs sector and index under Hiorns
Source: FE Analytics
Indeed, EdenTree Amity European, the £94.2m fund Hiorns oversees with deputy manager David Osfield, has delivered a total return of 125.03 per cent under his management, compared with a 94.86 per cent gain for the average fund in the IA Europe Excluding UK sector and a gain of 95.64 per cent for the FTSE World Europe ex UK index.
According to Hiorns, choosing the winning stocks, or those that will offer the best value while contributing positively to society and the environment, involves the convergence of two separate decisions: one from EdenTree’s SRIT – the Socially Responsible Investment Team – and one from the investment team and the fund managers.
“The SRIT looks at the reputational risks, corporate governance and environmental risks of the company and they will let the investment team know if the stock is worth from a socially responsible point of view,” Hiorns explained.
“The fund manager will then decide if it is suitable from an investment point of view given the economic financial outlook.
“As part of the investment process we run negative and positive screenings. There are certain activities don’t invest in and will screen out: these include alcohol, tobacco, gambling or munition companies… things that are harmful to society.”
With that in mind, Hiorns has selected three value stocks that are trading at attractive valuations and pass the environmental social and corporate governance test.
Vivendi
The first company highlighted by Hiorns is the Paris-based media conglomerate Vivendi.
“Vivendi owns Universal Music, which saw many years of declining revenues because we stopped buying physical music (DVDs, tapes, CDs…),” he said.
“However, that trend has been completed and, for some reason, people are starting to buy more records.
“More importantly, music revenues from the internet are picking up sharply: for a long time, music companies were unable to monetise people consuming music via internet, but that is changing dramatically.
“We saw it with Spotify, we are seeing it in deals made with Facebook and with other internet-based music companies.”
When it comes to ESG criteria, Hiorns said Vivendi passes the ESG test for its involvement throughout the value chain and the company’s work to promote cultural diversity and share knowledge.
"Other positive points in Vivendi´s favour are its marketing ethics standards and policies as well as the various programmes they have to ensure parental control. They are well known for responsible use of digital content for children and teenagers," he added.
Environnement SA
The next European value stock highlighted by the fund manager is the French provider of environmental pollution analysis Environnement SA.
“Environnement is one example of small company we invest in. They specialise in pollution testing equipment that can detect high quantities of pollution in the environment,” Hiorns said.
“Environnement´s pollution analysers enable people to ensure air and water quality and are increasingly being used by industrial players and governments to monitor air quality.
“They can also detect high levels of reactive materials in the atmosphere, which can provide evidence of the existence of nuclear weapons.”
Among the ESG positives Environnement offers, Hiorns noted the increasing importance of pollution testing equipment to help authorities and organisations manage their environmental impact and mitigate it.
“The company is also a signatory of the UK Global Compact and shows best practice in all areas: quality management, environmental management and health and safety,” Hiorns added.
Orange
European stocks in the telecoms sector such as Orange, a portfolio holding EdenTree Amity European recently increased, is the final pick by Hiorns.
“Telecoms is the cheapest sector in valuation terms: we have had a lot of headwinds for the tech-communications industry, not only through EU regulation but because that regulation increases competition coming into the market,” Hiorns noted.
“However, those trends have tended to reverse more recently and the EU regulators are now more worried about the large internet companies, about ‘the Amazons’, ‘the Googles’.
“The regulatory headwinds those companies were facing came to an end with roaming in June 2017, which was a hit for the telecom companies.”
Additionally, he added, individuals are “increasingly using additional devices and more data”.
That fact, with the take-off in the internet of things as well as the number of devices expected to get connected to internet or Wi-Fi, makes the telecoms industry increasingly attractive from an investment point of view.
Hiorns said: “Orange passes the ESG test as it meets all our criteria, the telecoms firm has well-developed policies and processes for managing its social and environmental impacts and risks.”
“European telecom companies are also trading at historical low valuations in terms of free cashflow,”s the manager added.
EdenTree Amity European fund has 6.35 per cent allocated to the telecoms sector with Orange as one of its top holdings.