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Environmental, social and governance investing is becoming increasingly popular. In the first half of this year, a net $120bn flowed into ESG funds globally against a net outflow of $139bn across broader market funds.
In addition, many investors are now focusing on the ESG credentials of individual companies before deciding whether to buy them.
Clearly, there are opportunities for some stocks to capitalise on trends such as the world’s push to achieve net zero status. However, in Questor’s view, it is crucial that investors do not lose sight of their core investment principles when accommodating ESG-related factors into their decision-making.
For example, they should not overlook obvious fundamental weaknesses in stocks, such as the lack of an economic “moat” to protect them from rivals or excessive debt, just because they score well on ESG metrics.
Fortunately, the FTSE 250 company Weir offers the best of both worlds. It is a fundamentally sound company that is well placed to benefit from rising demand for metals, such as copper and iron ore, that are used extensively in renewable energy infrastructure and electric vehicles.
The company provides innovative engineering solutions to mining companies that improve their efficiency and environmental credentials. Demand for its products is likely to rise as miners seek to reconcile the inherent conflict between ramping up production to satisfy the world's net zero drive and meeting the increasingly onerous environmental standards that are being implemented across the industry.
Weir's competitive advantage over rivals should be maintained, and even extended, by its growing spending on research and development. It has risen from 1.3pc of revenue in 2020 to 2pc of sales in the first half of the current year and allows the company to improve the digital capabilities of its products.
Last year's acquisition of an artificial intelligence specialist, Motion Metrics, helps to further differentiate its offering and increase its competitive advantage. The disposal of its oil and gas business, also in 2021, gives it a focus on the future as the world transitions to the use of cleaner forms of energy.
In terms of fundamentals, the company's financial position is sound. Its net-debt-to-equity ratio of 53pc and net interest cover of more than six highlight its capacity to withstand a period of rapid monetary policy tightening. Its financial standing also provides sufficient flexibility to make further acquisitions should falling asset prices make opportunities more plentiful.
Its latest half-year report showed that it had been able to offset higher input costs during a period of rampant inflation so that gross margins were maintained. It also announced an efficiency programme that will seek to deliver £30m in annualised savings by 2025.
With more than three quarters of revenue coming from recurring “aftermarket” sources and operations across a wide range of regions and metals, it has a relatively solid business model that could be invaluable during an uncertain period for the world economy. More details on its recent performance will be included in a third-quarter trading update scheduled for release on Wednesday.
Since being tipped by this column in July 2018, the company's shares have fallen by around 20pc. They have been hit by a challenging global economic outlook that has prompted a weaker period of performance for the stock market, as well as company-specific events such as a cyber attack in September last year.
The shares now trade at about 17 times forecast earnings. While this makes them expensive relative to many other medium-sized companies, Weir offers impressive long-term earnings growth potential as the world economy recovers and demand for the metals needed in the future increases.
Clearly, ESG-related factors are a major part of its long-term growth story and are likely to boost its bottom line. Crucially, though, the company has sound fundamentals and a sustainable competitive advantage that cement its status as an attractive investment opportunity.
Questor says: buy
Ticker: WEIR
Share price at close: £15.44
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