10 stocks for harnessing the most important thematic in finance

Climate change is a global issue, and a global issue requires a global response. In finance, that means investing in global companies that are making market-leading returns and also delivering a positive global impact. 

But not all companies that claim to deliver a positive impact actually do, let alone actively practice what they preach from an ESG perspective. That's where Hari Balkrishna and the team running the T. Rowe Price Global Impact Equity - I Class fund come in. 

In this wire, we'll unpack three sectors and the impact-oriented qualities which can be found in each. And so that you don't have to do the sifting yourself, Balkrishna will share 10 stocks within those sectors that can make a big impact on the planet and on your portfolio.

EDITED TRANSCRIPT

LW: What gives you confidence that you can identify the winners and avoid the losers in this rapidly evolving market?

Hari Balkrishna: The opportunity in identifying winners and losers in impact is it's actually relatively easy to identify the losers. So the losers are the ones that are not delivering a positive environment and social impact. I think that's a relatively straightforward exercise. But for the ones delivering positive environment and social impact, the nice thing about impact investing is a lot of those tailwinds are not something like artificial intelligence - where suddenly something comes up and all these stocks run-up like 100% and then someone's missed the boat. These are genuinely relatively slow-burn trends, but trends that I think have a very long way to go.

So you take Linde (NYSE: LIN) as an example. That US$50 billion clean tech opportunity is something that I think manifests itself over the next decade. In terms of that top-line acceleration, it's not like this is suddenly going from 10% growth to 100% growth. This is still slow-burn growth, but plotting growth that year in, year out is better by three or four percentage points. The market is so focused on the rate of change that the markets become really short-term in their horizon. And so if we're actually willing to be patient and look out multiple years ahead, we can really take advantage of this because this is one of these examples where you buy and hold something and it lasts for the next 10 years.

You look back over the last 10 years and think, 'Wow, the power of compounding that over 10 years has been extremely powerful,' and that's what we're trying to exploit. And I think when you identify the winners, it's really important to understand the value of industry structure with an impact. So to take an example of commoditised solar panels, you can generate impact in solar panels, but the industry structure is so commoditised that over time our view is the economic returns are not durable.

Whereas when you find relatively oligopolistic market structures that allow for the preservation or ideally expansion of economic returns over time, so industrial gases or waste management or HVAC, or recycling vending machines for example, where there are individual companies with 70% market share. 

We think that creates a very durable economic moat around it. That allows that impact and that financial return to be persistent over time. And so we want to exploit that and that's how we identify the winners.

Why do some banks fit into an impact-friendly investor's portfolio? 

So when we think about banks - I have to also qualify which kind of banks fit an impact mandate, it's not every bank. So we're not invested in banks like JP Morgan or Goldman Sachs or Morgan Stanley. 

We're talking specifically about banks that enable financial inclusion. We define financial inclusion as economies that are typically at the bottom quartile of GDP per capita as defined by global statistics. 

And in those economies, retail banking, SME, as well as micro-finance really has the potential to unlock a lot of social mobility. And that's really what we focus on. 

So HDFC Bank (NSE: HDFCBANK), for example. HDFC Bank has 52% of its branches in semi-urban and rural areas in India. So effectively going into areas where banking hasn't been as accessible and making that banking is accessible and making credit available to farmers or people starting up their lives in so many different ways. 

We invest in markets like the Philippines. So we have a holding in BDO Unibank (PSE: BDO). And again, BDO is an example of a bank that is really driving financial inclusion in the Philippines going from a corporate mix to primarily a retail mix over time.

We don't just invest in retail banking. We own a financial that's listed in Taiwan called Chailease (TPE: 5874). It effectively unlocks credit for SMEs in China that is not available to those SMEs through the mainstream banking system. So if this is a small SME trying to securitise some of their assets or trying to basically securitise receivables or gain a loan in exchange for machinery, this is a company that actually enables that. 

So banking is really important in my view in terms of defining where you're at in that retail credit penetration cycle. And to the extent we can identify those where that financial inclusion is enabled, I think fit an impact mandate quite well.

Why should technology companies be a prominent part of an impact investor's portfolio? 

Where we have technology investments, they're more like Monolithic Power Systems (NASDAQ: MPWR). So semiconductors that are enabling energy efficiency and analogue and industrial applications would be one example. 

Tech companies that allow SMEs to basically compete with big tech companies. So if you take Amazon (NASDAQ: AMZN), for example. Amazon effectively clips nearly 30% in some cases of an SMEs revenue. And so we're trying to invest in those companies that help those SME's not get eaten up by Amazon effectively. So we own a company called HubSpot (NYSE: HUBS), and for $30 a month, you can literally set up your CRM system, your operations system and your service system on HubSpot online. 

It's a cloud-enabled solution. So that would be another example of technology companies. And then also semiconductor companies that reduce the digital divide. So the ones where you can package more semiconductors into the same space or where you can bring down the cost of digital access because of what they do. That would be another example of tech companies [we invest in]. 

It also looks like in our fund that we have tech, but there are certain companies, for example, like Keyence (JP: 6861) in Japan that makes machine vision systems and manufacturing applications or industrial tech that reduces manufacturing waste. So it looks like we have tech, but it needs to be seen with a healthy degree of nuance there because we're not invested in the Apples and the Microsofts of the world. 

What makes a good healthcare investment in the impact investing context? 

With healthcare, there is a temptation to classify everything as positive impact. And so one has to be really discerning about what actually qualifies as a positive impact investment. And for me, there are really three conditions that have to be met to qualify. 

The first one is, does the stock improve the pace of healthcare innovation right in the ecosystem? And some of the holdings we have in that bucket would be Danaher (NYSE: DHR), Thermo Fisher Scientific (NYSE: TMO) and Agilent Technologies (NYSE: A). These are life science tools companies that effectively provide biotech and biopharma companies with the tools they need to actually do the R&D, the research and all the innovation that actually goes into new technologies like cell and gene therapy or proteomics as the case might be. 

The second criteria we look for is whether a company can reduce the cost of healthcare and provision effectively, so companies that allow for mass manufacturing of really rare or really expensive drugs. So if it's a contract development manufacturing organisation like Lonza (SWX: LONN) for example, that helps companies manufacture monoclonal antibodies, that would be an example of a company that reduces the cost of a life-saving therapy.

And the third criteria would look for is genuine ground-breaking innovation in the biopharma or biotech space that really has the potential to transform patient lives. So examples like cancer and Alzheimer's, where you have this real unmet need, a real problem in society and where this company can go and really help to solve that. So Daiichi Sankyo (TYO: 4568) is a name that we own in Japan and they have a technology called antibody-drug conjugates that basically could become the standard of care for cancer cures, in my view. So those would be the criteria.

Looking for more than just returns from your investment?

The T. Rowe Price Global Impact Equity Fund targets specific companies that not only make good economic sense, but also focus on making the world a better place for all. Find out more.

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