My ESG journey What to look for in an ESG fund Going green
Chapter one
Chapter two
Chapter three
content by: fidelity
content by: Jp morgan
content by: M&G
Welcome
CONTENTS
Real engagement in China
contents
ADVERTORIAL
How to invest to make a difference
Under the bonnet of climate change investing
NMA ESG 360
WELCOME
It is almost impossible to look at the world without using a green lens today. From corporate scandals such as Wirecard and Boohoo and the damning IPCC report that called for a ‘code red for humanity’ through to COP26, responsible investing has been at the forefront of news. Whoever stays on the sidelines is destined to lose, and that is one of the issues advisers need to consider when they look at their portfolios and see which fund managers are serious about ESG. Fund houses rushing into ESG territory might be a red flag, and quality over quantity is often the answer when investing sustainably. Here, we look at how advisers have embraced their ESG journey through the years, what real company engagement should look like, and what made advisers flood into ESG strategies over the past three years. We also look at the opportunities around ESG. Growing themes such as social fairness and mental health have started to gain more traction among wealth managers but, as ever, some trends might be too good to be true. Enjoy the read!
Ignore ESG at your peril
Charles Walmsley cwalmsley@citywire.co.uk
ADOPTED ESG: 1995 CHRIS WELSFORD AYRES PUNCHARD
My ESG
Advisers have adopted ESG at different times and speeds. Citywire showcases the ESG journey of five of them
CHAPTER ONE
journey
There’s so much greenwashing going on now. Clients are not stupid. They will catch you out if you don’t stay on top of screening
If we want to preserve the best of nature for generations to come, we have to make an active shift towards a more sustainable way of living and investing
Ayres Punchard Investment Management on the Isle of Wight has offered socially responsible and ethical funds to clients since it was founded in 1995. However, it wasn’t until 2009, in the aftermath of the global financial crisis, that managing director Chris Welsford began to see sustainable investing as a way to reduce risk and improve returns. ‘Until then, it was all about client priorities and personal choice,’ he said. ‘By 2014 there was hard evidence that this approach may lead to significant outperformance.’ In 2018, the firm was made an inaugural ‘impact champion’ of Worthstone’s Impact Investment Academy. Today, 95% of its assets under advice are invested in a sustainable and impactful way. Its ‘Key to the Future’ investment approach is offered as a bespoke advisory portfolio for individual clients with specific requirements or as a discretionary model portfolio available on the Transact and Fundment platforms. Welsford hopes it will soon be available on others, too. In running the portfolios, he relies heavily on his own research and engages with fund managers on risks they have possibly missed. ‘We perform detailed in-house research on companies’ sustainability, their positive and negative impacts and their compliance with the UN Global Compact, looking at human rights, labour rights, anti-corruption and the environment,’ he said. ‘We ask: do the positives outweigh the negatives? Have fund managers missed an important potential risk that could undermine our shared investment thesis?’
JENNIFER HILL
Darren Lloyd Thomas’ ethical journey began in 1999 when he was asked to advise the dean of St Davids Cathedral. ‘I’m pretty sure he advised me when it came to his portfolio! It was a brilliant experience,’ he said. ‘Thereafter, as the son of a Baptist minister, I was fortunate enough to be referred clergy and church clients who had firm views on what they most wanted to avoid within their portfolios. This was a steep learning curve for me, but it shaped the business that we run today.’ Pembrokeshire’s Thomas and Thomas Wealth Management has run ethical portfolios since the adviser and his wife Lisa launched the firm in 2006. A decade later, by which stage it had £1m in purely ethical portfolios, came Pro-Ethical, the firm’s dedicated ethical portfolio service. Five years on, the firm has £34m in ethical portfolios – more than half of its assets under advice. ‘Since building a clear proposition and ethical discovery journey for our clients to follow, growth has been exponential,’ said the managing director. In managing portfolios, Thomas starts with negative screening. ‘This may not be trendy, but we believe it’s far more important to start by understanding and respecting our clients’ red lines before we focus on positive impact. ‘There’s so much greenwashing going on now. Clients are not stupid. They will catch you out if you don’t stay on top of screening.’
ADOPTED ESG: 1999 DARREN LLOYD THOMAS THOMAS AND THOMAS WEALTH MANAGEMENT
Since Cleona Lira was a little girl, she has been worried about issues such as tourism, mining and deforestation in her native Goa, India. Having come to the UK to study in 2004, she has been discussing investing with values since she started her own advice practice in 2013. Some 85% of her assets under advice are now invested ethically. ‘I am a big fan of sustainable investing,’ she said. ‘I am happy the investment universe is becoming more enthusiastic about ESG; we can all do “whatever we can” to help create the world we want to live in.’ She recognises some advisers might be tired of hearing about ESG, but Lira talks passionately about it. The chartered financial planner, who has recently joined Welsh firm Celtic Financial Planning where she is heading its new London office, has backed that up with qualifications, having recently passed the CFA certificate in ESG investing. ‘ESG is increasingly being seen as an integral part of the analytical framework for investment,’ she said. ‘Talking about ESG or values with a client is looking at a client from a whole-person perspective. ‘My view is to take a very non-judgemental and neutral approach as a thinking partner and guide to my client; it is not my role to lecture or preach to anyone. However, I believe in sustainable investing and am transparent with clients about my preference and why.’
ADOPTED ESG: 2013 CLEONA LIRA CELTIC FINANCIAL PLANNING
Jessica McGuigan’s status as a millennial has informed her stance on ESG investing. ‘I believe strongly in sustainability, which influences the way I speak to my clients about their views,’ she said. ‘I’ve noticed that my younger clients have stronger views than my older ones, too.’ 27-year-old McGuigan has worked in financial services for six years and became an adviser three years ago when she started talking with clients about their ethical preferences. She is currently a financial planner at Oxford-based Critchleys. Several clients now invest in sustainable funds or bespoke ‘green’ portfolios – a total of £4m or around 13% of her personal assets under advice of £30m. ‘Sustainable investing should be explained to the client in detail, in the same way you would explain other investment strategies, such as passive versus active investing. ‘Are there any areas they want to avoid or causes they care about strongly? This shifts the conversation from performance to what impact clients want to have with their investments – the legacy that they want to leave behind.’ For McGuigan, advisers have a responsibility to ask the questions – and revisit the discussion at review meetings. Having introduced the concept of sustainable investing, she has found that many clients’ interest grows. ‘If we want to preserve the best of nature for generations to come, we have to make an active shift towards a more sustainable way of living and investing,’ she added.
ADOPTED ESG: 2018 JESSICA MCGUIGAN CRITCHLEYS
London-based Partners Wealth Management (PWM) began researching ESG investments in 2019, when many discretionary fund managers (DFMs) were at the beginning of their own ESG journeys. ‘What quickly became clear was that each DFM engaged with sustainable investing differently,’ said Richard Atherton, partner and head of sustainable investing. ‘With little consistency across ESG tools, especially when applied to multi-asset, it was impossible to compare the sustainability of different portfolios.’ The firm’s core investment proposition is an independently selected, regularly reviewed panel of 16 DFMs. However, it soon realised that it would have to produce its own analysis tools in order to cut through the inconsistency of ESG investing. ‘It would need to be from a client perspective, have precise definitions to allow accurate comparisons but also be flexible enough to not favour one DFM investment style over another,’ said Atherton. The result was the PWM Green Matrix in late 2020. This allows PWM’s advisers to construct investment strategies that dovetail with clients’ sustainable beliefs and requirements. Today, almost 12% of the firm’s assets under advice is invested in ESG propositions. ‘We believe ESG metrics will be incorporated into the vast majority of multi-asset portfolios going forwards,’ added Atherton. ‘As the negative effects of climate change increase, it will be interesting to see whether broad ESG portfolios will meet investors’ sustainable investment needs or if they will require more impactful solutions.’
ADOPTED ESG: 2019 RICHARD ATHERTON PARTNERS WEALTH MANAGEMENT
We believe ESG metrics will be incorporated into the vast majority of multi-asset portfolios going forwards
What to look for
As the breadth and depth of the ESG investment universe expands, what should advisers look for in an ESG fund?
in an ESG fund
A chief executive who isn’t considering environmental risk is essentially broadcasting a lack of attention
There has been a marked acceleration towards responsible and sustainable investing, with clients of all types reassessing their long-term objectives. But the proliferation of related products has made it harder for advisers to assess the universe. And assess it they must. For Patrick Thomas, head of ESG portfolio management at Canaccord Genuity Wealth Management, an analysis of ESG risk by everyone from companies to investors is no longer a question of ‘do we do it?’ but one of ‘how do we do it well?’ ‘It’s what investors want, and not just young investors – it’s everyone from climate activists to BlackRock,’ he said. ‘We’ve moved to a world where fund managers are expected to have integrated ESG analysis into their investment process and saying they aren’t doing this extra work before buying stocks is like saying they didn’t bother reading the company annual report. ‘We’ve also moved to a world where companies themselves are expected to consider ESG risks and opportunities as part of their business strategy. A chief executive who isn’t considering environmental risk is essentially broadcasting a lack of attention.’ When assessing ESG funds for clients – whether labelled ‘responsible’, ‘sustainable’, ‘impact’ or indeed having no such marker – an assessment of attributes at both a fund and fund manager level can help advisers identify those who are doing it well.
While there are definition and labelling inconsistencies with ESG products, they generally do not matter as much as people think. ‘It’s irrelevant to us if the fund is labelled sustainable or not, and we don’t take the rating of the fund by independent providers into consideration either,’ said Tom Buffham, an analyst at wealth manager Brewin Dolphin. ‘Ultimately, it’s all about getting into the detail and having conversations that go much further than what’s put on the marketing materials.’ Brewin’s fund research team deems a firm-wide culture of adopting sustainability to be essential in identifying ‘ESG leaders’. Beyond signing up to the UN’s Principles for Responsible Investment, it expects a sustainability ethos to run throughout the business. ‘External signals might be signing up to the UK stewardship code and setting net-zero carbon targets, but we also assess how well a firm adopts best practice and exclude some of the largest asset managers that we believe fall short,’ said Buffham.
CULTURE
It is this detailed reporting that is absolutely critical to determining what the fund is doing and how this is being applied at the underlying holdings level
CHAPTER TWO
Doing ESG well requires a commercial structure that encourages long-term thinking, coupled with skilled people. Therese Niklasson, global head of sustainability at fund manager Ninety One, cautioned against confusing quantity with quality. ‘Headlines of managers doubling their ESG teams shouldn’t be seen as the full story; it needs to be coupled with what they are doing in risk teams, product teams, compliance and most importantly skills directly in investment teams,’ she said. ‘There’s no substitute for passionate portfolio managers [PMs] and analysts. It’s not credible if 90% of a company’s PMs turn out to be sustainable investors overnight.’
PEOPLE
Patrick Thomas
What other resources and expertise is the fund manager able to draw upon? ‘Challenging questions would be about whether those resources are dedicated exclusively to a particular fund or whether they serve a wider platform,’ said Rob Martin, director of strategy and ESG at LGIM Real Assets. What are the firm’s research capabilities? In response to a lack of reliable third-party ratings, many asset managers have constructed their own internal rating capabilities generated by a centralised ESG team. ‘This is a good alternative if sufficient resource and rigour have been put behind it, but it’s always preferable for in-depth sustainability analysis to be conducted by the investment team that owns the investment,’ said Niklasson. ‘This ensures proper analysis and understanding of the ESG risks and opportunities of each investment.’ Training is another key consideration, particularly for teams that need to upskill on highly specialist areas such as climate science and figure out how to incorporate this into their financial modelling. ‘Without adequate training and support, it is impractical, if not impossible, to expect this to happen,’ added Niklasson.
RESOURCES
Ravenscroft analyst Shannon Lancaster favours funds with an impressive team, a repeatable process and portfolio that aligns with the objective. ‘We look past external ratings and like to know why each holding is in the portfolio,’ she said. ESG boutique Trillium believes the best ESG providers are pure play in nature. ‘I don’t understand the intellectual inconsistency of some ESG fund providers that on one hand take a moral stance by screening out investments in tobacco, but at the same time are happy to own a hard rock miner or harmful consumer goods companies,’ said portfolio manager Jamie Mariani. However, backing and engaging with ‘greening’ companies, as opposed to only those with the most exemplary ESG records, can bring about the greatest change. The right approach comes down to each individual client’s preferences and objectives – does the portfolio align with them? Equally, Martin suggests asking if a fund manager’s remuneration is tied to his or her ESG objectives.
PORTFOLIO
Clients need to be confident that their fund managers are truly holding management teams to account
Richard Clode
There’s no substitute for passionate portfolio managers and analysts. It’s not credible if 90% of a company’s PMs turn out to be sustainable investors overnight
Therese Niklasson
Investors should expect clarity and transparency from their fund managers. For funds that focus on screening, Quilter Cheviot seeks to ascertain how clear the screens are. For those that focus on sustainability, it wants to understand how they demonstrate this in practice. Richard Clode, manager of the Janus Henderson Global Technology Leaders fund and the recently launched Janus Henderson Horizon Sustainable Future Technologies fund, explained not only how his views on sustainability define his investment universe but also the impact on profits and the planet. ‘We try to provide a clear articulation that we view technology as the science of solving problems. By providing innovative solutions to some of the greatest challenges our world faces we can provide a natural synergy by accessing some of the largest and most sustainable growth markets delivering on our dual mandate of both sustainable and long-term capital appreciation objectives,’ he said.
TRANSPARENCY
For Clode, engagement is too often a box-ticking exercise focused on fairly esoteric, generic topics rather than tailored specifically to the company in question. ‘Clients need to be confident that their fund managers are truly holding management teams to account,’ he said. Brewin Dolphin expects firms to have a clear approach to engaging with company management, with a tried and tested escalation process to ensure that their engagements are taken seriously. ‘We’ve seen a good example of this recently when the use of Thermo Fisher DNA sequencers in China resurfaced after their pledge to restrict sales in 2019,’ said Buffham. ‘We were particularly impressed with the response we received from Brown Advisory when we engaged with them on this holding, demonstrating it had been engaging on this topic consistently since the company’s promise in 2019.’ One fund that TAM Asset Management uses is Ninety One UK Sustainable Equity, which has been engaging with companies to calculate Scope 3 carbon emissions, pushing companies to monitor the full impact of their product’s life cycle. ‘This promotes full transparency and continual improvement in the fight against climate change,’ said TAM analyst Dan Babington. Quilter Cheviot favours fund managers that break down their voting and engagement record to a fund level. Director of responsible investment Gemma Woodward said: ‘It is this detailed reporting that is absolutely critical to determining what the fund is doing and how this is being applied at the underlying holdings level.’ •
ENGAGEMENT
Gemma Woodward
Going
Adviser portfolios have started recognising the risks and opportunities in ESG
Green
A fund or investment product that does not consider ESG is not protecting shareholders’ interests
Many advisers seem to have ignored critical ESG-related investment factors until recently. The number of wealth managers integrating environmental, social and governance (ESG) considerations in their offerings has more than doubled in the last three years, from 37% to 80%, according to research by consultant Bfinance. Research by Hymans Robertson Investment Services (HRIS) suggests one reason is they are finally recognising the crucial impacts ESG-related factors can have on investment performance. Its analysis shows 81% of advisers believe ESG risks are essential in building client portfolios. London-based John Ditchfield, head of responsible investment at Helm Godfrey, said there is now widespread acceptance, backed by research, that risk management processes should consider ESG factors. ‘It has been proven many times that ESG factors can impact shareholder value,’ he said. ‘BP, VW – and more recently Boohoo and Kingspan – have all experienced huge scandals arising from poor management of ESG-related issues. ‘So a fund or investment product that does not consider ESG is not protecting shareholders’ interests. Reporting on ESG factors has to be part of their stock-level research process.’
Tim Cooper
There is also compelling evidence that investments with good ESG ratings outperform those without, and that more successful companies tend to score well on ESG measures. New York University Stern recently analysed over 1,000 research papers from between 2015 and 2020 and found a positive link between ESG and financial performance in 58% of the studies. Only 8% showed a negative correlation, with mixed or neutral results for the others. This positive effect was clearer over longer periods, which makes sense given that ESG encourages sustainability. For example, as firms move towards electric vehicles and green energy, they proof themselves against negative impacts of oil shortages on profits and share prices. ESG portfolios also protect investors in market downturns, as they fall less steeply than non-ESG portfolios, NYU Stern said. Meanwhile, research firm Morningstar showed that ESG funds outperformed non-ESG last year in three out of the four investment categories it analysed – global, Europe, and large companies. Emerging markets was the only category where it did not find that effect. Alan Cram, investment director at Harrogate-based Ellis Bates, said as more companies come round to improving their ESG practices, it represents a huge investment opportunity. ‘Our socially responsible portfolios mix companies we’ve identified as ESG leaders in each sector, with companies we see want to change. That change will make a huge difference to performance over five to 10 years. We’re blending our own quantitative and qualitative analysis to identify these companies.’
Opportunities abound
John Ditchfield
Wealth managers have long-viewed governance as an important risk factor but impacts on people and planet have come more to the fore recently, said Ditchfield. These risks are also still growing due to worsening climate change and human pressure on nature, as highlighted by the Covid pandemic. A company that manages its environmental risks, such as water scarcity, will be more adaptable in the face of climate change, he said. Cram added that more emphatic environmental regulations will force change. ‘That has made the risks more prominent and urgent,’ he said. ‘Companies that were travelling in the right direction on environmental practices will benefit even more. Those that weren’t will dwindle away.’ Tony Byrne, managing director at Milton Keynes-based Wealth & Tax Management, and manager of the CCM Intelligent Wealth fund, said he only invests in renewable energy. But ESG risks are complex, and he has sold out of the recent trend towards electric cars, for example. ‘The many finite elements used to manufacture electric cars — such as rare metals in their batteries — make you wonder whether they are environmentally friendly at all,’ he said. ‘We sold Tesla two years ago, and we sold Chinese electric carmaker Nio too. We’re considering investing in hydrogen fuels because they will power cars of the future.’
risks and opportunities
Byrne is also investigating potential investment opportunities in cultivated meat. ‘All meat and fish will be grown in laboratories in future,’ he said. ‘That’s the sort of company we’ll invest in as it has many benefits to society, including fewer cows emitting methane. For example, Agronomics invests in that area, and we bought a significant weighting in it two years ago.’ Hardman said many of her clients want to invest in ethical aspects of food production, such as free-range and wholefood production, vegan foods and vegetable boxes. However, investments in sustainable food production can be difficult to assess, because many producers are privately owned. ‘Instead, we invest in larger companies like Kerry Group, because it has good disclosure and production practices,’ she said.
Food challenges
Clean energy funds are trading at a premium, but there’s demand almost everywhere for renewables
Lisa Hardman
Cram said social fairness was another growing category of risk and opportunity with clients, especially after Covid highlighted the impact of widening wealth gaps, and some companies treating employees and customers poorly. ‘There is more pressure to balance business goals with social fairness,’ he said. ‘People are taking more notice of how the way companies treat people. Again, those that have always behaved responsibly will stand out even more.’ Hardman said a related trend is clients, especially those in caring professions, wanting to invest around mental health issues — for example, companies who provide good mental health support. This is another area for the future as ESG fund managers are not reporting enough on this factor yet, she added. She said yet another emerging social risk is data security. ‘Although ESG funds tend to have large weightings towards technology, because it is often part of the solution to social problems, cybersecurity and data privacy can be problematic,’ she said. ‘We rely on ethical analysts to brief us on why they don’t hold certain big technology companies because of, say, their data governance issues and lack of openness.’ One geographical opportunity in the ESG space is emerging markets, where fund managers have increased activity. ‘As ethical specialists, it’s been hard to access emerging markets, but we’re seeing more EM funds launch,’ Hardman said. ‘We want more emerging markets to balance our holdings in the US, where many ethical funds tend to focus. We’re researching that and will make more decisions around emerging markets in upcoming investment committee meetings.’ •
Data and mental health
CHAPTER THREE
Byrne said he is still avoiding oil companies because he believes they continue to impact society negatively. However, oil producers could become the clean energy companies of the future because they are investigating new areas such as geothermal heating. ‘They might turn oil wells into geothermal wells, and produce clean energy far more cheaply, long term, than fossil fuels,’ he said. ‘We’re investigating investments in geothermal.’ Lisa Hardman, director at Norwich-based Investing Ethically, agreed one of the biggest areas of opportunity is energy, including hydrogen fuels. ‘The opportunity is to marry returns with ethical practice in big growth areas such as renewables, biomass and energy efficiency; plus other areas such as waste management and recycling,’ she said. ‘For example, we’re replacing some corporate bonds with renewable infrastructure as our clients prefer that to road building. The days of people thinking wind turbine investments are a bad idea are gone. The renewables industry is developing rapidly. ‘Clean energy funds are trading at a premium, but there’s demand almost everywhere for renewables. So people accept paying over the odds because that is where the world is going, and it’s a buy-and-hold, defensive stock.’
FIDELITY INTERNATIONAL
SPONSORED STATEMENT
Find out more on sustainable investing at Fidelity
The rapid growth in e-commerce has been accelerated by the Covid-19 pandemic, with significant knock-on implications in terms of fuel emissions and packaging waste. Against this backdrop, we have been working with ZTO Express, China’s biggest express-delivery company, to chart a route to more sustainable growth in this young and fast-growing industry. Covid-19 lockdowns contributed to higher e-commerce volumes globally, which played out on a grand scale in China. The country’s leading delivery firm, ZTO Express, saw shipments surge 40% last year, similar to growth seen in markets like the UK and the US. Yet volumes were astonishing: ZTO delivered about 47 million parcels a day – more than FedEx, DHL and UPS combined. Manufacturing and moving all those packages adds up to a staggering amount of fuel emissions, and materials consumption, an obvious area of concern to sustainability focused investors. But the sector is also grappling with a price war driven by fierce competition, which has been pressuring many Chinese delivery companies to cut corners. Over the past two years, our investment team has been engaging in a running dialogue with ZTO’s management which has contributed to the company’s embrace of more comprehensive standards of disclosure around the environmental, social and governance impact of its rapidly expanding operations. In early 2019, we first reached out to ZTO executives to discuss an unfavourable ESG report written by a third-party rating agency. A lack of sustainability disclosures was partially to blame for the poor rating that ZTO had received. Going through the report line by line, we explained global ESG standards to company officials while stressing the importance of regular and quality disclosures. Founding chairman Lai Meisong, a carpenter-turned billionaire, later showed us over the course of many meetings that he has the long-term vision needed for pursuing high ESG standards, even in a challenging business environment. In late 2019, ZTO published its first ESG report, setting a good example for the young industry. Competitors SF Holding and Best soon followed suit. Moreover, ZTO’s board passed a motion in 2020 to integrate more sustainable practices into daily operations and to reflect them in senior management compensation, in line with our advice. Environmentally, a key improvement made by ZTO in the last two years was the reduction of paper documentation. Fidelity advised the company on this, and the change was also driven by another ZTO investor Cainiao, the logistics arm of e-commerce giant Alibaba, sharing industry best practice. By introducing e-waybills and smaller sheets of paper for the printed documents, ZTO has reduced paper consumption per package by 70%, saving some 50,000 tons of paper each year. That is equivalent to saving 850,000 trees or 500,000 tons of carbon emissions. In addition, it has started to recycle packaging materials and experiment with new-energy vehicles. A fleet of more than 7,000 high capacity trucks have replaced less efficient vehicles, each saving two litres of fuel per 100 km and reducing 15 tons of carbon emissions a year. When it comes to social and governance issues, ZTO also stands out from competitors for its well-aligned interest among stakeholders. Like most peers, the company relies on franchisees to keep up with the fast pace of China’s e-commerce growth, though SF Holding has been an exception with a direct-control model. Franchisees often handle the pickup and last-mile delivery, while companies like ZTO operate a network of sorting hubs which are more scalable. What sets ZTO apart from competitors is that it has turned many of its franchisees into shareholders and thereby minimised disputes over profit sharing. Having shareholder franchisees allows the company greater control over the well-being of drivers and riders. This model is likely to have helped the company avoid labour disruptions last year when some rivals suffered strikes over wage arrears at the franchisee level. The industry in general is prone to work accidents due to a strong emphasis on speed and a huge number of temporary workers, who are often hired to cope with seasonal spikes in orders around key retail dates like November 11. On the world’s biggest retail ‘holiday’, known as double 11 or Singles Day in China, the country’s e-commerce giants tallied nearly 1tn renminbi ($152bn) in combined sales last year. Nevertheless, ZTO took measures to minimise work hazards among both temporary and long-term staff, including thousands of hours of training, in line with Fidelity’s advice. The progress we have seen in ZTO’s sustainable push represents only a small step forward for the industry. For most Chinese delivery firms, the top line and the bottom line remain prime focuses as they face tough competition and low awareness of sustainability in the general public. They have a lot of catching up to do compared with global industry leaders like FedEx, which has set a 2040 target of carbon neutrality, and DHL, which is working towards zero emissions by 2050. With 83 billion express parcels swirling around China last year, the country’s delivery market has become a key battleground for achieving global carbon neutrality in the next few decades. Bringing sustainability here will mean broader benefits for society that extend beyond just the financial rewards, and ZTO looks to have helped set off a positive chain reaction towards that goal. •
Fidelity Equity Analyst Terence Tsai shares his first-hand insight into working with China’s biggest express-delivery company as it charts a route to more sustainable growth
Important information Source: Fidelity Sustainable Investing Reports. This information is for investment professionals only and should not be relied upon by private investors. The value of investments and the income from them can go down as well as up and clients may get back less than they invest. Past performance is not a guide to the future. Investors should note that the views expressed may no longer be current and may have already been acted upon. Changes in currency exchange rates may affect the value of an investment in overseas markets. Investments in emerging markets can also be more volatile than other more developed markets. Reference to specific securities should not be interpreted as a recommendation to buy or sell these securities, but is included for the purposes of illustration only. A focus on securities of companies which maintain strong environmental, social and governance (“ESG”) credentials may result in a return that at times compares unfavourably to similar products without such focus. No representation nor warranty is made with respect to the fairness, accuracy or completeness of such credentials. The status of a security’s ESG credentials can change over time. Issued by FIL Pensions Management, authorised and regulated by the Financial Conduct Authority and Financial Administration Services Limited, authorised and regulated by the Financial Conduct Authority. Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. UKM1121/37086/SSO/NA
Explore more of our insight
What environmental challenges have you seen across the e-commerce industry and how has that been impacted by Covid-19?
How have you been working alongside ZTO Express to instigate positive change in corporate practices?
How has progress been with ZTO since then?
What sets ZTO apart from competitors?
What does a sustainable future look like for this sector?
Terence Tsai Equity Analyst, Fidelity International
JP MORGAN ASSET MANAGEMENT
Interview with Portfolio Manager KATIE MAGEE
COP26 itself is already a key step in the fight against climate change, says Katie Magee, investment specialist at J.P. Morgan Asset Management. Still, all economies have a lot of work to do to make an impact. What’s the role of the asset manager in reaching the ambitious goals set by the climate change agenda? At COP21 in 2015, the Paris Agreement was adopted, which gave all nations around the globe an opportunity to commit to targets that would address climate change. They agreed that they would revisit the agreement every five years; COP26 is that opportunity for everyone to come back to the table, see what plans we have in place and how much more aggressive we can be. From an investor’s perspective, this could have a meaningful impact on markets for several reasons. For example, if governments and policymakers agree to a higher price on carbon or introduce more carbon taxes, that’s going to have an impact on the bottom line of every company that emits greenhouse gases. At the same time, if they’re investing more in subsidies for greener energy, that could really benefit the companies that are already moving in that direction while also potentially benefiting global GDP growth. Climate change is at the top of our agenda when we think about the biggest impacts on investor portfolios over the next year, five years and even decades. One way we are incorporating climate change considerations into client portfolios is by building carbon transition-aware strategies. We know that our investors’ portfolios are going to be impacted by climate change and any actions that come out of COP26. We seek to invest in companies that are best prepared to address climate change and for the transition to a low-carbon world, such as those focused on managing their carbon emissions, water and waste. We also look at how companies are managing the physical risks of climate change and any potential reputational risks. We still invest across every sector, but in a less carbon-intensive way. We do incorporate minimum safeguard exclusions, such as norm violators, weapons manufacturers and tobacco industries. But when it comes to climate change, we don’t feel that excluding large sectors entirely from our portfolio is the right way to make an impact. Instead, we lean into the winners and underweight the laggards because we believe that engaging as invested stakeholders with the companies that need to make the biggest change will be the more successful approach to mitigating climate change. For example, we need to reduce greenhouse gases emissions, but global demand for energy is actually increasing as more countries develop. Simply divesting from the energy sector pushes the problem on to someone else. Instead, we should be engaging with these companies and pushing them in the right direction; they could be the ones developing some of the innovative solutions that we need to see to address this challenge. We prepare portfolios for the carbon transition by looking at how companies are thinking about their carbon emissions, but also how they approach climate-aware strategies to managing their own businesses. By investing more in companies that are that are moving in the right direction, and avoiding or underweighting companies that are not, we can build a broad, well-diversified global equity portfolio that seeks to limit carbon emissions. Every year the global population emits about 50 billion tons of greenhouse gases into the atmosphere. This traps heat and causes further global warming. In line with the Paris Agreement, we need to bring this number down to zero or even into net negative territory. So we’re asking: “What are the key drivers of greenhouse gasemissions and what specific innovations do we see that help address those causes?” The biggest drivers of emissions fall into a few different categories: electricity and heat, manufacturing, buildings, transportation and agriculture. We look for companies that are aligned to each of these challenges, and that are developing new solutions to address them. We are finding opportunities in renewable energy, such as solar and wind power, electrification and providers of electric vehicles. In the agriculture space, which contributes one-fifth of global emissions, precision agriculture is an exciting innovation that helps farmers water and fertilise the plants in the most efficient way, which mitigates the negative environmental impacts. One of the big topics that will be addressed at COP26 is the fact that our plans are not aggressive enough to meet the aims of the Paris Agreement. We expect that the investment required to get there is over $100tn over the next few decades. Thankfully, we are already seeing support from governments and businesses, as well as changes in behaviour from consumers, which are all contributing to the development of new technologies that can bring down the costs of climate solutions. And the exciting thing is that the businesses providing solutions may be small start-ups or parts of large conglomerates and exist anywhere in the world. That’s why we use big data and analytics to scan more than 13,000 companies globally to find the most relevant. Fundamental bottom-up research then helps us identify the best candidates for a high conviction portfolio of companies providing the solutions needed to address climate change. •
KATIE MAGEE Investment Specialist at J.P. Morgan Asset Management
WHAT DOES COP26 MEAN TO YOU AS A LARGE INVESTOR?
WHERE DO YOU INVEST TO PUSH THE CLIMATE CHANGE AGENDA FORWARD?
DO YOU EXCLUDE CERTAIN SECTORS OR DIVEST FROM OTHERS?
We are already seeing support from governments and businesses, as well as changes in behaviour from consumers, which are all contributing to the development of new technologies that can bring down the costs of climate solutions
HOW DO YOU BUILD A PORTFOLIO FOR CLIMATE-AWARE STRATEGIES?
We prepare portfolios for the carbon transition by looking at how companies are thinking about their carbon emissions, but also how they approach climate-aware strategies to manage their own businesses
WHAT ARE THE KEY SECTORS YOU ARE DIVERTING CAPITAL TO SO THAT THEY CAN CHANGE THE WORLD WE LIVE IN?
ARE THERE ENOUGH PLACES FOR YOU TO INVEST IN THESE INNOVATIVE SECTORS?
M&G INVESTMENTS
What does it really mean to invest to tackle climate change? Rachel Roddy, ESG Investment Specialist at M&G Investments, explains what lies behind a climate change strategy and what part engagement plays in the process.
We only invest in companies that can provide solutions to the challenge of climate change. Specifically, we believe there are three key areas that need to be focused on. First, we have clean energy. This relates to renewable energy producers, such as solar, wind and hydro, as well as companies that provide critical components used in the production of renewable energy. Over half of global CO2 emissions are caused by power generation, which emphasises how critical this transition to renewable energy is. The next area that we look at is green technology. This covers companies involved in building efficiency, electrification, clean transportation and products that promote sustainable agriculture. This is important because industry and transportation account for around 35% of emissions. We need solutions to make these areas less polluting and one way to do this is using improved technology to make this more efficient. The final area that we look at is the circular economy, which covers companies whose business models are based on reducing, reusing and recycling. Although most emissions today come from power generation, addressing this isn’t going to solve the climate problem on its own. We need companies that have closed loop models that, rather than sourcing virgin material, can recycle or reproduce materials. There are three main ways to look at climate in an equity portfolio: low carbon strategies, climate transition strategies and climate solution strategies. A low carbon strategy is one that will not invest in companies that emit a lot of carbon. A transition strategy targets companies that are high emitters today but have the ability or are on the path to lower their emissions in the future. This sort of strategy focuses on reducing the carbon that these companies are emit, and while this is broadly positive, it is unlikely to address the size of the issue at hand. Finally, we have climate solutions, which is what we focus on. This is investing in companies that provide solutions to the challenge of climate change. To adopt this approach, you really need to get under the bonnet of what a company is doing. You need emissions data and if a company doesn’t provide the data, then you have to engage with them to source it. You can’t just take anecdotal stories for climate solutions. We have to prove that each company is net climate positive – i.e. that the business saves or avoids more carbon than it emits. We have a very strict exclusion criteria that fully excludes companies involved in gambling, non-medical animal testing, controversial weapons, adult entertainment, etc. For power generation utility companies, we will only invest in those that are either 100% renewable or have a small legacy exposure to fossil fuels. When we look at the investment credentials of a company, we look for good, sustainable business models. We have a long holding period that averages around seven years, and therefore want to invest in companies that have high-quality business models. We then look at companies that have a clear intension and purpose. Finally, we look at a company’s impact credentials and try and identify those that have a positive climate impact and whose revenues from impactful products and services are material, measurable and additional. Given that we integrate ESG in our investment process, most of our companies already score well from an ESG perspective. We encourage companies to engage with the Science-Based Targets Initiative and use the SBTI tools to set their targets. These targets guide companies on how much and how quickly they need to reduce their greenhouse gas emissions to prevent the worst impact of climate change. Technology is coming more and more to the fore and that will be key going forward. It’s really important to emphasise that 35% of emissions are from hard-to-abate areas. These are areas that can’t be electrified such as carbon intensive industries like cement, aviation, steel, heavy transportation. In response to this, we’ll see blue and green hydrogen play a huge part in the transition to net zero in these areas. Green hydrogen is made using electrolysers powered by renewable energy. Blue hydrogen is created using natural gas with any resulting emissions being captured and stored. The technology does work, but it’s just a case of getting the cost down to make the economics of it work. We hold a number of early-stage companies in the portfolio, for example one is a manufacturer of electrolysers and one is a manufacturer of fuel cells. Whilst setting targets for 2050 is important, the key for COP26 will be countries setting intermediate targets for the next 10 to 15 years. This will really add urgency to the longer-term task of hitting net zero. In recent months, we’ve seen US President Joe Biden propose targets to cut emissions in the US by 50% for the year 2030. We’ve also seen the European Commission put forward their ‘Fit for 55’ plan, which is the 55% cut in emissions by 2030 from 1990 levels. All eyes will also be on China, the world’s largest polluter, as it’s their first Conference of Parties since committing to a net-zero target, and the country has not yet publicly stated any medium-term targets. •
Rachel Roddy ESG Investment Specialist at M&G Investments
Where do you invest to push the climate agenda forward and how do you do it?
What strategies are there to address climate change?
Over half of global CO2 emissions are caused by power generation, which really emphasises how critical this transition is to renewable energy
What else do you need to consider for a climate-aware portfolio?
How do you engage with companies?
Within that net zero space, are there any innovations that you particular like?
How optimistic are you that COP26 will lead to a long-term change?
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