The growing concentration of global equity market returns among a handful of companies is creating opportunities for active managers to identify undervalued businesses with attractive fundamentals and strong sustainability characteristics, according to Schroders.

This is based on the fact that periods of heightened concentration can be particularly favourable for disciplined stock pickers, said Edson Fonseca, the firm’s investment product analyst, and analyst Charlotte Smith.

In short, other businesses with resilient cash flows, sound fundamentals and attractive valuations risk being overlooked. And Schroders believes rigorous research, financial analysis and selective engagement with companies is the answer.

Sustainability and value can coexist

A central argument is that value investing and sustainability considerations are not necessarily at odds – despite perceptions that cheaper companies often carry greater environmental, social or governance risks.

Also, value strategies have historically attracted scrutiny because some businesses trade at discounted valuations following regulatory challenges, environmental controversies or concerns over labour practices.

However, Schroders argues that companies can become undervalued for reasons unrelated to their sustainability credentials.

Cyclical pressures, temporary earnings disappointments, shifting investor sentiment and broader market conditions can all contribute to a disconnect between a company’s share price and its underlying value.

For investment professionals, being able to distinguish between genuinely impaired businesses and those suffering temporary setbacks is therefore critical.

Schroders believes the research discipline required to avoid value traps also provides an effective framework for identifying sustainability-related risks.

Governance standards, capital allocation, corporate culture, stakeholder relationships and environmental stewardship can all influence a company’s long-term financial performance. Assessing these factors alongside traditional financial metrics can help investors develop a more comprehensive understanding of potential risks and returns.

Opportunities across the valuation spectrum

Schroders also challenges the assumption that companies with stronger sustainability credentials are concentrated primarily among highly valued stocks.

Its analysis of the MSCI All Country World Index indicates that the distribution of sustainability scores among the cheapest companies is broadly comparable with that of more expensive businesses.

What this suggests is that investors seeking exposure to companies with strong sustainability characteristics do not necessarily need to sacrifice valuation discipline.

Instead, opportunities may exist across the valuation spectrum, including among businesses that have fallen out of favour with the wider market.

When evaluating active equity strategies, the findings highlight the potential importance of combining fundamental valuation analysis with sustainability research.

Schroders argues that the principal challenge is not a shortage of sustainable value opportunities, but identifying them through a sufficiently robust investment process.