There are three names that we at Kames Capital have identified as ‘leaders’ in the sustainability race and five names that are building themselves up and who we predict will be big names in this field soon. 
Below are our ‘leaders’ in the sustainability sector: the big companies showing the rest of the sector what to aim for.
Tesla
Most people will have heard of Tesla or Elon Musk by now, but many still perceive the company to be a niche producer of unaffordable cars. Then they worry that the brand will be overtaken by manufacturers such as BMW or General Motors, but we don’t think that’s the case. Tesla’s technical leadership, pace of innovation, scale advantage and the strategic cul-de-sacs faced by their competition make it highly likely that it will remain the global leader in pure electric vehicle production for years to come (it had more than 80 per cent market share Q4 2018). This was cemented further by the launch of the Tesla Model 3, the first affordable (under £40k), mass produced, long-range electric vehicle available globally.
Shimano
Trek and Cannondale will be recognisable to most keen cyclists, but the company adding the most value to cycling, in our view, is Shimano. It’s the global market share leader of bicycle gears and brakes and a trusted brand that is synonymous with quality and reliability. Decades of focussed research and testing in extreme conditions make this a brand that captures a meaningful share of the market profits. A recent move into e-Bike drive chains has followed the same pattern and they are now positioned to offer the best product in this market, too. Their products enable clean and congestion-free transportation and, as an organisation, they actively promote sport and a healthy lifestyle.
Illumina
Worth around $40bn, Illumina are the global share leader in the genetic diagnostic tools, or ‘genomics’, market. Whether it is a basic 23andMe ancestry test, a population study, or a highly complex analysis of specific cancer genes, it is likely that an Illumina machine has been used. The cost of genomics is coming down rapidly and Illumina is the key enabler of this… innovating faster than the competition.
But what about the ones that are less well-known, perhaps the more immature when it comes to their disruptive growth phase? They’re not as recognised in the market, so this can be riskier due to the unknowns about their market position. We believe that these could be the leaders of the future, so it would be silly to ignore them.
We call these the ‘improvers’.
Everbridge
Software-as-a-service is a monthly subscription-based business model which is hosted in the ‘cloud’, like Netflix or Spotify. Everbridge uses the same model, but does something much more important; they save lives, and money, during and after a crisis. Their system can send out millions of critical messages per minute, analyse live data feeds, provide situational awareness and use multiple modalities (text, email, apps etc.), all while an emergency is ongoing. Unlike traditional one-way emergency communications systems their success is leveraged on a scalable cloud-based notification engine and contact database. Everbridge are the best-in-class global player with the broadest suite of solutions and the longest list of blue chip and government clients (e.g. Facebook, Uber, Microsoft, Oracle, Florida, Met Police, and Airbus).
Insulet
Many investors have heard of Novo Nordisk or Abbot Labs, both of which offer services and products to diabetics globally. Less well known is Insulet, which is a manufacturer of an innovative tubeless 'pump patch' called OmniPod – the only product of its type that has been approved by the FDA and European healthcare systems. The device is small, robust and water-proof, and replaces multiple daily injections, providing 24-hour delivery of insulin. Insulet have dramatically increased access to this product in recent years by investing in their distribution and manufacturing capacity, while also getting approval across the majority of health care providers and insurers in the US and Europe. We believe that they are in the early stages of their growth and expect profitability to improve meaningfully as the business scales.
Hotel Chocolat
Yes, Hotel Chocolat make delicious chocolate. They’ve elevated the quality of their chocolate above the standard newsagent’s bar, but it’s come at a cost. They decided to invest heavily in their supply chain (the cocoa growers), while also building out their own retail distribution network. By doing so, they have an extremely high quality source of sustainably grown cocoa and are maintaining the business of the overseas growers, without having to pay away margins to any middle-men. The business is now in a position to grow this highly profitable model globally, while generating strong cash flows in the process. Like everything in life, you get what you pay for.
Planet Fitness
The fitness industry – and particularly the gym business – has historically been a poor place to invest. High levels of competition and capital intensity (Jacuzzis and swimming pools) and expensive monthly subscriptions made this an expensive, cyclical business. In came disruptive low-cost models and this all changed. Planet Fitness is the leader of this business model in the US and their superior franchise model (93 per cent of gyms are operated by franchisees) means growth is quick and there’s high free cash flow margins. Transparent, low-price strategy (as little as $10 per month) means lower and mid-income members can afford it. Their ‘no gymtimidation’ model means that 54 per cent of members are female and 40 per cent of members have never been to a gym previously. All of this is underpinned by structural growth in the market via general fitness trends, falling rental costs due to failing bricks and mortar retailers and a very large US market for them to roll out their format.
Green Dot
Green Dot defines itself as a “pro-consumer bank and financial technology innovator” and its mission is to “reinvent banking for the masses”. What does this mean and why should we trust it? Green Dot was founded in the late 1990s to serve the unbanked population in the US and their founder did this with the invention of pre-paid debit cards. Without the incumbent legacy issues associated with traditional bricks and mortar banks, this business – over time – built technology capabilities to support store-branded cards for retailers such as Walmart and now supports around 100,000 retail stores in the US. Fast forward 20 years and Green Dot has a significant competitive advantage in serving these demanding customers and in doing so have developed a “banking-as-a-service” platform, which enables other banks and partners to distribute their products. Such a platform is not just a powerful economic model that serves shareholders, we believe it also greatly improves financial inclusion and allows those previously excluded from the system to build credit ratings and gain access to the normal financial services we all take for granted.
Craig Bonthron is co-manager on the Kames Global Sustainable Equity fund. The views expressed above are his own and should not be taken as investment advice.