Green is good

With ESG regulation and public awareness increasing sharply, capital is flowing away from high ESG-risk companies and to those that stand to benefit from a changing landscape. Encouraging this shift is more sophisticated reporting and interpretation of ESG data along with a growing belief that an ESG focus can actually improve shareholder returns. So, regardless of the personal stance investors have on subjects such as climate change and workers' rights, these issues are becoming increasingly important considerations for anyone that is on the hunt for the best investment opportunities of the coming decades and wants to reduce the likelihood of truly ghastly losses. 

A leap of faith

A central difficulty for investors wanting to assess the impact of ESG on the performance of companies is that while the costs associated with ESG-related projects are fairly easy to quantify, the most profound benefits are often not. True, some projects can offer clear efficiency gains or product improvements with quantifiable payoffs, but frequently the timing and impact of benefits is very hard to gauge. 

A mining company, for example, will find it easy to quantify the costs required to raise health and safety standards. It is much harder to put a figure on the benefit of an accident that didn’t occur due to the spending. But while we lack a precise measurement for what-may-have-otherwise-happened, any investor in Brazilian miner Vale can attest that accidents are often very financially material. The cost to human life, meanwhile, is insurmountable 

It is not only the avoidance of an idiosyncratic event that is hard to record as a number on an excel spreadsheet. Take productivity gains from investing in staff engagement and welfare. The exact gain is likely to be hard to pinpoint, but again, the costs are not.

However, just because benefits can be hard to measure does not mean spending by companies on ESG is not of significant value to shareholders. ESG-related investment is increasingly being seen alongside other important intangible factors that have a big impact on long-term shareholder returns, such as research and development (R&D) spending and brand building. Importantly, researchers are finding ever more evidence that canny ESG investment leads to share price outperformance.

Focus on what really matters

For many years, researchers have tried to assess the significance of ESG issues on share price performance by studying historical data. Results have been mixed, although meta studies suggest findings have generally been encouraging. More recently, though, there has been some particularly illuminating work based on the idea of 'materiality'. Put simply, there is evidence that when companies demonstrate a strong understanding of where their own ESG risks and opportunities lie, and they allocate capital to those areas, shareholders benefit a lot. “[ESG analysis] is really only useful for risk management if it is targeted and looks at the factors that are financially material,” says Simon MacMahon, executive vice president of ESG Research at ratings provider Sustainalytics.

A noteworthy study highlighting the importance of a targeted approach to ESG came out of Harvard Business School in 2015 Corporate Sustainability: First Evidence on Materiality. The study assessed the performance of shares in companies scoring well on issues that really mattered in their industry. To decide on what really mattered, the researchers used a so-called 'materiality framework' that was painstakingly developed over several years by the Sustainability Accounting Standards Board (SASB) and published in 2014. 

Looking back at 20 years of data from 1992, the study found companies that had addressed the most material ESG risks for their businesses produced strong risk-adjusted outperformance (alpha) – a substantial 5.6 per cent for an value-weighted portfolio based on the best 10 per cent of companies. Significantly, companies that limited their ESG focus to only the issues that mattered most in their industry, while ignoring other ESG issues, performed best. Meanwhile, companies that focused on the wrong ESG issues – issues that were 'immaterial' to their industry – reaped little, if any, benefit. That said, they tended to do no worse than companies that scored badly on both material and immaterial issues. 

There is a strong common sense element to these research findings. From a prosaic perspective, companies that are able to identify and address material ESG issues can: head off idiosyncratic and costly upsets; keep ahead of regulation and even turn it into a source of competitive advantage; improve efficiency; and identify new, profitable market opportunities. Less prosaically, but perhaps more significantly, management teams that have an ability to target material ESG issues demonstrate a deep understanding of their business. This in turn suggests they are likely to have strong capital allocation skills across the board, which is key to a management team's ability to create value for shareholders. 

Meanwhile, when it comes to addressing ESG risk – or any risk for that matter – it does not bode well when companies either put their heads in the sand (perhaps because they’re too financially or managerially stretched to engage) or lack the acumen to target the things that really count.

Follow the money

None of this is to say there is no longer a debate about the link between ESG and shareholder returns. Yet such debates may soon become of less significance than the simple fact that professional investors are ploughing more money into the area, having begun to see ESG as a way to improve returns and win new investment mandates. “The conversations we used to have with investors – which were about whether paying attention to [ESG] issues detracted from performance and were just a nice-to-have – have gone,” says Therese Niklasson, global head of ESG at Investec Asset Management.

While the industry is by no means seeing a wholesale shift towards ESG investing, there is certainly a lot of momentum – too much to ignore. For example, Morningstar recorded $8.9bn (£7.35bn) of net inflows to US sustainable open-ended and exchange traded funds (ETFs) in the first half of 2019 compared with $5.5bn for the whole of 2018. Fitch recorded a 15 per cent rise in assets in ESG money market funds to $52bn over the same period compared with just 1 per cent growth in the whole of 2018. Meanwhile, from the start of 2016 to 2018, the Global Sustainable Investment Review estimated sustainable investment assets grew from $22.8 trillion to $30.7 trillion (although measures of this type vary vastly and sustainability is often loosely defined). 

It’s not only investors that are corralling capital based on their ESG concerns. Banks and insurers are also paying increasing attention to ESG risk out of a fear that returns could be savaged by involvement with industries facing increased regulation, fines, technological disruption and natural disasters. A recent illustration of this is that banks accounting for around a fifth of the ship lending market have already agreed to stop lending to shipping groups that do not sign up to the International Maritime Organization’s pledge earlier this year to cut the industry’s carbon emissions by half by 2050.

All this means is that an increasing amount of capital is flowing to companies with low-ESG risk and away from those with high-ESG risk. These capital flows have the potential to impact a key determinant of shareholder returns, the cost of capital. What’s more, any upward pressure on the cost of capital for high-ESG risk companies is happening because another key determinant of long-term shareholder returns – return on capital – is judged to be deteriorating. 

This creates a self-reinforcing virtuous cycle for low-ESG-risk companies and a vicious one for high-ESG-risk companies, with a knock-on effect for share valuations, too. It would be wrong to get too carried away, though. For now, the amount of money involved continues to be a relatively small proportion of the whole, but the recent surge in ESG enthusiasm looks too significant to ignore.

How do you measure this ESG stuff?

As investors have got more serious about ESG, the quality of companies’ sustainability reports has improved as has the quality and quantity of data published. “In the last three years the level of disclosure has skyrocketed,” says Shaunak Mazumder, manager of the L&G Future World Global Equity Focus Fund.“This is almost like financial level data and is actually more granular.”

But for private investors, quantity and granularity may be more of a hindrance than a help when trying to get a clear idea of whether a company is delivering where it matters. This is particularly true because ESG definitions and standards often seem to be all over the place. This not only means it can be hard to make comparisons between companies, but it also means so-called 'greenwashing' is rife, both at the company level and by funds purporting to invest in ESG strategies. 

Take the example of an oil and gas company that has best-in-class environmental standards when it comes to running its own operations. The trouble is, this information is of limited help to investors given the real impact of these companies' products lies with the 90 per cent of emissions that come from end users. Some oil and gas companies do quantify this beyond-the-factory-gate impact, but many others still don’t. Similar cradle-to-grave considerations need to be applied to many other industries from car manufacturers, to packaging firms, to clothing retailers. 

“Look particularly at oil and gas companies,” says Lauren Peacock, pensions campaign manager at Share Action. “Look at the proportion of capital expenditure they are actually putting into renewables and not the amount they talk about them in their reports.”

Faced with a confusion of terminology and reporting standards, quantifying ESG risks and opportunities is a big challenge for investors that aren’t lucky enough to have a team of specialist analysts on hand and a range of external risk reports to consult. But this does not mean private investors need give up in bafflement. 

Taking account of ESG issues should form part of any attempt to assess the quality of a company anyway. This is just good sense. Few investors are likely to want to pile into tobacco shares without first considering the risk of legislation and regulation. To view ESG issues as something separate to other factors that drive investment returns is an approach that’s likely to end in tears.

What may need to become more important is the weight that investors put on ESG-related considerations when assessing a company as a whole. And while it would be nice to have more structured, simplified and readily-available ESG information, diligent private investors already possess the most important tools for assessing ESG factors: common sense and vigilance.  

To quote from the brochure of the Fundsmith Sustainable Equity Fund (GB00BF0V6141), run by a master of common-sense investing, Terry Smith, “There is merit in investing in sustainable businesses but investors will pay a penalty in terms of performance for doing so if it is not approached in a holistic manner. The investment process needs to pay as much attention to the economic sustainability of the business as it does to commonly reported ESG factors.”

Three ways to use ESG to boost returns

There are three broad approaches to using ESG to improve investment returns. The first approach is simple avoidance of high-risk companies and sectors. A good example of this approach can be seen at the moment in divestment from the fossil fuel sector. It may feel easy to characterise the decision to shun fossil fuels by the likes of Norway’s $1 trillion state pension fund and the Church of England as a bit of halo polishing. However, there is important financial rationale behind such moves. 

Big producers of oil, gas and coal own very substantial reserves. An influential 2011 Carbon Tracker report estimated that to meet the Paris target of limiting temperature rises to 2C by 2050, only 565 gigatonnes of CO‎2 could be emitted compared with fossil fuel reserves equating to 2,795 gigatonnes of CO2 if burned without carbon capture. With rapidly changing public attitudes, regulation, and importantly, plummeting renewable costs, investors are faced with the very real prospect that oil and gas companies and miners will be left owning huge reserves with no economic value; so-called 'stranded assets'. Given that this industry often plans the development of mines and oil and gas fields on a multi-decade basis, it is particularly ill-suited to navigate rapid changes and therefore highly vulnerable. It’s not hard to see why for many investors avoiding such areas is principally a financial choice rather than a moral one.

An interesting adjunct to the large-scale divestment from certain industries and companies is that contrarians have historically been able to profit from this kind of situation. So-called 'sin' stocks can become oversold on the back of regulatory concerns and moral outcry. In the past this has often provided an opportunity to hoover up shares on the cheap. However, there is a sense that the challenge to high-ESG-risk companies may be so great that this strategy will become a far less reliable road to riches. “I’ve invested in the toxic stuff where things can only get better,” says Steve Clapham, founder of training and research firm Behind the Balance Sheet. “But I think that kind of opportunity is now going to shrink away.”

The second approach to ESG is more positive. This involves investing in companies that are doing a good job at managing ESG risk and improving. Strong reporting of, and engagement with, financially material ESG issues can be seen as a very useful indicator of broader management and business quality.

“We engage with companies to tell them they are underscoring on certain ESG topics. As they improve ESG management, you can then get multiple expansion,” says Mr Mazumder. “If you don’t look at ESG, it's now like saying you don’t look at the financials that are disclosed... when there is poor governance it is hard to trust that the fundamentals that are there, are there in any kind of sustainable way.”

The main challenge for investors taking this approach is to distinguish between companies that are focusing on financially material issues as opposed to those involved in 'greenwashing'. For example, a clothing retailer that cuts its in-store carbon footprint is all well and good, but this becomes a piffling matter if it has a supply chain based on child labour in filthy factories and customers who send their purchases to landfill after a single wear. A challenge for investors is to think beyond company-controlled operations and consider risks associated with sourcing and product life cycles, too; increasingly companies are being held to account on issues that are outside their direct control but well within their influence. A selection of seven of Sustainalytics' best-in-class companies can be found in the accompanying table along with some fundamental data.

SOME BEST-IN-CLASS ESG COMPANIES

Source: S&P Capital IQ & Sustainalytics ESG ratings

Arguably the most exciting opportunities thrown up by focusing on ESG issues lie in finding companies that offer solutions to pressing problems – the third approach to ESG investing. Simon Clements, of Liontrust Asset Management’s sustainable equities team, says: “We’re interested in companies providing solutions to the problems we have, which means they’re also benefiting from this shift towards sustainability… The themes we’re targeting can take years to play out so you want to only be buying things that are really high quality.”

Companies that can find a competitive advantage while benefiting from the growth associated with the drive towards sustainability have the potential to deliver really great returns. This kind of opportunity lies at the heart of the five London-listed companies that could benefit from ESG trends we’ve chosen to highlight below. Despite operating in very different areas and having very different recent share price histories, all have a noteworthy ESG twist. We’ve purposely tried to highlight a diverse range of situations. The stocks highlighted range from a highly-rated quality play, to a deeply contrarian situation, along with a company speculating on new technology, an all-out growth stock and a value share.

QUALITY: INTERTEK

Source: S&P Capital IQ

A key reason for growing investor interest in ESG is the increase in ESG-related regulation. Companies need to show they comply with regulations and meet a wide range of quality standards. Increasingly, consumers and regulators also expect companies to demonstrate a deep understanding of the risks throughout their supply chain as well as issues associated with products following their sale and to the end of their useful lives. As a global market leader in industrial testing and process assurance, the services provided by Intertek (ITRK) allow companies to manage this increasingly complex job. 

An important driver of growth is increased global trade, which requires multinational companies to prove they meet different requirements in different geographies (see graph). Coupled with rising regulation this is a great recipe for long-term growth.

There is also a growing complexity involved in ensuring companies meet standards throughout the supply chain: from testing of the quality of raw materials used, to vetting manufacturing processes, distribution, and finally the product shipped to the customer. These are common issues across many industries, from oil and gas, to agriculture, to automobiles – proving Intertek has a diverse customer base.

Significant infrastructure and specialist skills are needed to undertake this kind of work. So Intertek’s scale, which includes over 1,000 laboratories in more than 100 countries, provides it with a valuable competitive advantage. What’s more, as the increased regulatory burden makes testing and assurance work ever more demanding for companies to undertake internally, demand for outsourcing should increase. Intertek estimates only about a fifth of the $250bn testing and assurance market is currently outsourced, so there’s plenty to play for.

As well as rising regulation, growth in international trade and pressure on companies to monitor suppliers and end customers, Intertek is well positioned to benefit from a number of other long-term trends, such as the growth of the middle class in emerging markets and faster innovation cycles. 

These supportive long-term trends and barriers to entry show up in the company’s high and rising margins and solid sales growth (see graph). Sales growth over the last five years has had a fairly high dependence on acquisitions, although organic growth has picked up recently. The acquisitions have been supported by a solid record of turning profits into cash. The relationship between testing and international trade means currency movements can have a noteworthy effect on reported numbers and there is a cyclical element to demand, although operating profits grew impressively through the financial crisis. The shares are not cheap by conventional standards, but there are solid reasons to view them as worth paying up for to get exposure to a quality play riding some key ESG trends. AH

SPECULATIVE: JOHNSON MATTHEY

Source: S&P Capital IQ

On 26 July, our new prime minister, Boris Johnson, awoke to find, amidst a mountain of paperwork containing our nuclear codes, EU correspondence from a congratulatory letter the Society of Motor Manufacturers & Traders (SMMT). The trade body, which has spent some time now issuing warnings over the dire impact a ‘no-deal’ Brexit would have on the UK’s car industry, asked the PM to support “the transition to zero emission vehicles by investing in charging infrastructure, increasing consumer incentives and securing a gigafactory in the UK to help retain a globally advanced supply chain”.

On the face of it, a bad Brexit and the trend away from conventional engine systems in cars and trucks could bode badly for the likes of Johnson Matthey (JMAT). The pioneer of sustainable technologies and “complicated chemistry”, as described to the Investors Chronicle by chief financial officer Anna Manz in May, makes catalytic converters within its Clean Air division. An essential car component, catalytic converters significantly reduce the level of harmful pollutants emitted from cars by taking the gases and converting them into water vapour and less harmful gases. The Volkswagen emissions scandal gave us the Worldwide Harmonised Light Vehicle Test Procedure (WLTP), which has ramped up scrutiny on the car industry and its approach to pollution. From 2040, new petrol and diesel cars will be banned in the UK. Hybrid cars, which have been with us for years, are slowly being joined by fully-electric vehicles. A world without smoke could be a world without fire for the likes of Johnson Matthey.

But Johnson Matthey is investing for this outcome. It has spent considerably on its eLNO battery materials, to the extent that operating profits in its new markets division fell by 85 per cent at 2019 full-year results. The company said last year that it expects to start producing its eLNO battery material in 2021-22, which it can also sell into the hybrid market. It is tailoring the material to its customers, and will finish work on its first ‘customer application centre’ in the UK this year, with another domestic plant and a Japanese facility due for completion in 2020. Johnson also has its first production plant, in Poland, which could be scaled up from its initial 10,000 metric tonne capacity to 100,000 tonnes. It also recently signed its first long-term supply agreement for raw materials with Nemaska Lithium.

One could therefore say that Johnson Matthey has its bases covered. Cognisant of the future, it aims to be ready to embrace the electric car revolution. When or whether this will take place is another matter, given the relative paucity of electric car charging infrastructure in the UK and the ecological challenges posed by mining sufficient levels of lithium to put in car batteries. No matter. Johnson Matthey achieved its 2019 target of securing around a 65 per cent share of the European light duty diesel market for its clean air division. It will continue to convert pollutants, and cash, in the near term and has positioned itself to benefit from a possible electric future. AJ

VALUE: DS SMITH

Source: S&P Capital IQ

From an ESG perspective, the prospects of paper and packaging company DS Smith’s (SMDS) are based on some rather contradictory trends. It is hard to view the increased use of packaging as a good thing from a sustainability perspective. However, the ascendancy of e-commerce means rising demand for packaging is an inescapable reality and DS Smith is benefiting from this. As far as sustainability positives go, its products play an important role in ensuring goods ordered online arrive with customers undamaged (e-commerce involves 10 times the number of 'touchpoints' compared with traditional retail). But DS Smith is also capitalising on the need for sustainable packaging solutions in more fundamental ways.

The company estimates sustainability represents a £5.7bn opportunity in packaging. It believes its corrugated products provide a way to tap into this market given 88 per cent of its product is made from recycled materials, 100 per cent is recyclable, and 81 per cent is currently recycled. The company itself recycles 5m tonnes of cardboard and paper a year, as well as offering a range of value-added services to customers including: carbon management, waste management and supply-cycle management. Meanwhile, the company’s own operations have clear CO2 emission reduction targets, with plans for a 30 per cent cut in the 15 years to 2030. It managed a 6 per cent cut in 2018. 

As large multinational companies are coming under increased pressure to focus on their entire supply chain, they are consolidating their suppliers to focus on those that best deliver on sustainability issues as well as service levels. This is leading to increased work from DS Smith’s largest accounts. The scale and international reach of DS Smith’s business, which includes 200 manufacturing sites in 37 countries, also provides it with a competitive advantage when it comes to these valuable customers.

The packaging market is cyclical. It is sensitive to movements in raw material prices, end demand and overall industry capacity. However, the fact that 70 per cent of the company’s customers are involved with fast-moving consumer goods and food – areas that do not experience the same fluctuations in demand as other consumer products – means its business is relatively resilient. 

The company has  racked up a strong record in the 10 years since the financial crisis, growing underlying EPS from 5.3p to 35p and raising operating margins from 5.7 per cent to 10.2 per cent. Indeed, the company’s success at boosting profitability was reflected in its decision earlier this year to raise its margin target from 8-10 per cent to 10-12 per cent. Growth has been boosted by acquisitions. Nevertheless, the balance sheet does not look stretched, with net debt currently represented less than two times acquisition-adjusted cash profits.

However, the move to a sustainable future is not all plain sailing for DS Smith at the moment. While the company has agreed the £450m (£400m net) sale of its plastic packaging business LiquiBox, its niche bag-in-box focus – such as the packaging used for wine – has led to competition concerns. The Competition and Markets Authority (CMA) recently announced a phase two investigation. This coupled with slowing trade in Germany and concerns about excess industry capacity has led to share price weakness in the past year despite the long-term growth potential. AH

GROWTH: IMPAX

Source: S&P Capital IQ

Writing in the summer of 2019, UBS analyst Sam Arie drew two conclusions about humanity’s efforts to arrest dangerous climate change. One is that we will probably fail to reach net zero greenhouse gas emissions by 2050. Another is that, despite this likely failure, we “may very well be on the cusp of a 20- or 30-year sustained bull market in renewable power”.

Mr Arie is not the only one to have spotted this critical moment in the history of the energy industry. Nor is energy the only industry at such a juncture. The way we exploit water, food, and resources are all said to be hovering at or beyond planetary boundaries.

But, until recently, the ingredients required for any major bull market – demand, supply and capital – were not all present under the rubric of ‘sustainability’. Judging by the performance of specialist investor Impax Asset Management (IPX) in the last three years, it’s hard to argue that this remains true.

At the end of July 2016, Impax managed £4.22bn of assets in funds constructed to produce a positive social and environmental impact. At last count, that figure had more than tripled to £14.54bn, a compound annual growth rate of more than 50 per cent. Naturally, this should be viewed against the backdrop of a pan-asset class bull market, and last year’s acquisition of peer Pax World Management. But net inflows have nonetheless remained positive for 14 consecutive quarters, which tells you much about the state of investor demand.

In pointing this out, we don’t mean to downplay the asset manager’s resonance with clients old and new, or to suggest it is merely surfing an asset allocation wave. On the contrary: according to Morningstar, the three-year annualised return across its 26 listed funds ranges from 8.9 to 15.8 per cent. So far this year, Impax’s London-managed listed equity strategies have generally outperformed their generic benchmarks, led by the broad-based ‘Global Opportunities’ strategy.

Added to this are a series of renewable energy infrastructure funds, whose third iteration is currently investing across Europe. Impax also offers segregated mandates to individual investors, and blue-chip partners including St James’s Place, BNP Paribas Asset Management and ASN Bank.

Such strong momentum is reflected in the group’s share price, notwithstanding a recent dip. On an enterprise value to operating income ratio of 16, Impax's shares trade a third higher than asset manager peers, which tend to offer a more generic range of funds. Then again, chief executive Ian Simm’s quarterly outlook can always look past the sentiment-sapping financial or economic issue du jour to a multi-decade tailwind.

Inevitably, competition from better-resourced asset managers will boost competition for fund flows. But Impax can both distinguish itself by focusing entirely on sustainable investing, and being in the right place already.

Regardless, it is likely that the forces which are driving Impax’s assets under management will only intensify in the coming years. Harry Benham, an energy consultant who runs the dollarsperbbl blog, reckons rapid recent shifts in the discussion of climate change and sustainability shows that the social response is becoming memetic, rather than merely technical or political. This means “the energy transition is therefore more cultural and transmitted not only at a technical industrial level, but increasingly at the consumer and political one”, argues Mr Benham. Into Mr Benham’s mix, you can add all manner of investors. AN

CONTRARIAN: COSTAIN

Source: S&P Capital IQ

As the construction industry continues to reel from the collapse of Carillion, investment in the sector may seem like an odd choice from any angle, let alone ESG. But Costain (COST) has worked hard to differentiate itself from its peers, repositioning towards technology integrated infrastructure. The group is keen to promote its 'smart infrastructure solutions' credentials. Indeed, this phrase is mentioned no less than 15 times throughout its most recent annual report. Chief executive Alex Vaughn boasts that Costain is seeking to become the “Uber of construction” by deploying disruptive technologies – certainly ambitious but arguably not the best analogy given the unicorn’s lossmaking abilities.

‘Tech’ has become a largely meaningless buzzword as many companies seek to claim they can keep pace in a rapidly changing world. But with just over a third of its staff in consulting and technology roles, Costain appears committed to a technology-led construction future. The group sees itself at the forefront of a revolution whereby technology and data analysis will play an increasingly important role in improving the capacity and efficiency of the UK’s infrastructure. Conventional wisdom has historically been when infrastructure reaches capacity to simply build more. But while there is the need for large, nationally significant projects such as Crossrail and HS2, Costain sees them as exceptional. Instead, it points to increasing client demand to optimise existing assets, using ‘intelligent’ solutions to make infrastructure more efficient over the course of its lifetime.

In keeping with this structural shift, a five-year strategy seeks to pivot away from reliance on major capital projects and expand the group’s more tech-focused propositions – asset management, digital solutions and consultancy. It believes these value-added services can deliver higher margins, pushing the group’s adjusted operating profit margin up to 6-7 per cent from the 3.5 per cent achieved in 2018. Aiming to raise the combined contribution of these businesses to overall profit from 35 per cent to 55 per cent, this would mark a significant transition from the current predominant focus on complex construction programme delivery.

Long-term trends would seem to be in the group’s favour. While a road full of self-driving cars may seem like a distant (and mildly terrifying) prospect, the government is committed to having fully self-driving vehicles on the road by 2021. As such, Costain is already reaping the benefit of its shift into connected and autonomous vehicles (CAV) infrastructure, successfully delivering the first phase of Highways England’s A2/M2 Connected Corridor – a 'wi-fi road' connecting vehicles and roadside infrastructure.

But the more immediate picture makes Costain’s shares a risky contrarian play. Costain recently proved itself not to be immune to the general malaise afflicting the construction industry. Although the group has undertaken lower levels of capital project activity, its work is still underpinned by large contracts for large customers. A string of contract delays (including the M6 smart motorway and southern section of HS2) and cancellation of the M4 corridor project culminated in a profit warning at the end of June, sending the shares down by around 40 per cent. Underlying operating profit for 2019 is expected to be between £38m and £42m, below broker Investec’s previously forecast £56m. As differentiated as the technology offering is, Costain’s fate (at least for now) remains tied to the prospects of the wider sector. As the bottom may yet to be reached, betting on the future of construction could prove not to be so smart, but the company’s focus on developing more sustainable infrastructure solutions may yet be its long-term salvation. NK