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ESG Review
ESG is getting a lot of attention these days – some say too much. And it’s true, the seemingly omnipresent triad of environmental, social and governance issues can be tiring. We get it. Does that make the idea behind ESG less timely or relevant, though? We don’t think so. And neither do the people we spoke to during conferences or while out and about in the streets. Their reactions to ESG in general and COP27 in particular are summed up in two videos. We also delve into areas that mightn’t necessarily spring to mind within an ESG context. From microfinance to cultivated meat, here’s a snapshot of what’s going on in the sustainable investing space.
Editor's note
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chapter two
Moving in lockstep
CHAPTER ONE
Teamwork will pacify the global energy struggle
CONTENTS:
It’s never enough
chapter tHREE
New frontiers
Video
Five questions, five answers
Content by:
COP revelations
M&G Investments
Wellington management
Comgest
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A balanced and collaborative approach can see the energy transition through its turbulent phase.
words by Ridhima Sharma
chapter one
Sustainable performance A change needs to be put in place to optimise energy consumption through behavioural interventions and new, innovative technologies. This requires policies that facilitate infrastructure and investments, and transform the way we view energy, as well as consume it. To stay on course with the net-zero transition and meet the 2050 goal, industries require a collaborative approach – that is, between customers and suppliers, between industry and cross-industry peers, and across the wider ecosystem of stakeholders. The motives for the global energy transition are already clear, but they will depend on the world's ability to intensify, replicate, scale and further improve collaboration across different sectors and economies. It is only by working together that the foundation for a sustainable future can truly be laid.
Emma Schuster Just Share
Enormous increases in coal prices have revealed the hollowness of these climate commitments and how the rise in ESG integration is greenwash
Gabriela Herculano, co-founder & CEO of iClima Earth, said: ‘Fossil fuel spare capacity is short globally – Opec’s is the lowest on record, so they need to be cautious to use it. Liquefied natural gas and coal production are at a maximum. [And] Russia has exploited the situation to weaponise fossil fuels, stoking the fire of inflation. Price caps are only a palliative to the problem. ‘To solve the crisis, we need to lower physical demand for fossil fuel. This means accelerating the short-term solutions – such as energy efficiency and solar rooftops – and investing in the green economy.’
The pandemic has led to an energy supply/demand imbalance. The latest hurt factor – the conflict in Ukraine – has caused many countries to rethink their energy security strategy and what it will mean for the broader energy transition. Several countries have sacrificed sustainability for energy security, burning more coal to secure energy in the short term. ‘Coal, crude, and natural gas have not become any more investible, cleaner, cheaper, or less volatile since the invasion of Ukraine. Security of supply is a top priority for all countries, the EU in particular,’ said Herculano.
Lack of access to affordable energy has also emerged as a key threat to the transition. With a significant number of households across the UK and the EU struggling to keep up with heating and electricity bills, the still-rising energy prices – contributing to inflationary pressure – are making things ever worse.
Rising energy Prices
Lack of spare oil capacity
Energy security problems
The start-ups that grew old
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CONTENT BY
Japan is the home to the world’s oldest companies and boasts one of the highest concentrations of large, family-run businesses on the planet. At the start of the 21st century, one-third of all Japanese-listed companies had some kind of family control and that remains the case today. Japan’s tendency to corporate family ownership can be explained by its relatively recent industrialisation. First, an industrial and service infrastructure of family companies sprang up alongside and became symbiotic with the state-affiliated enterprises which pushed the country into economic modernity. Second, Japan’s economic miracle of the 1970s is so recent that many founders from that era are still in charge. We believe investors should pay close attention to these businesses, perhaps more than they do at present. We have observed many cases globally when family or founder-owned or run companies align well with shareholders’ interests, and in Comgest’s Japan portfolio we take that idea quite far. About one third of our holdings is from companies which fit that definition. Some examples are Fast Retailing, Nidec, Keyence, Softbank, Pan Pacific, Nihon M&A, Hoya, Obic, Peptidream, Kobe Bussan and Sushiro.
IMPORTANT INFORMATION Data as of 31 August 2022, unless stated otherwise. This marketing communication has been prepared for professional/qualified investors only and may only be used by these investors. Investing involves risk including possible loss of principal. All opinions and estimates are current opinions only and are subject to change. This material is for information purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. The views expressed in this document are valid at the time of publication only, do not constitute independent investment research and should not be interpreted as investment advice. The Japan portfolio mentioned herein refers to Comgest Growth Japan, a UCITS compliant sub-fund of Comgest Growth plc, an open-ended umbrella-type investment company with variable capital and segregated liability between sub-funds incorporated in Ireland and authorised by the Central Bank of Ireland and managed by Comgest Asset Management International Ltd. Before making any investment decision, investors must read the latest prospectus and Key Investor Information Document (“KIID”). The Prospectus, the KIID, the latest annual and interim reports and any country specific addendums can be obtained free of charge at our offices or on our website comgest.com. Comgest S.A. is a portfolio management company regulated by the Autorité des Marchés Financiers (AMF) whose registered office is at 17, square Edouard VII, 75009 Paris, France. Comgest Asset Management International Limited is an investment firm regulated by the Central Bank of Ireland and registered as an Investment Adviser with the U.S. Securities Exchange Commission. Its registered office is at 46 St. Stephen's Green, Dublin 2, Ireland. ves-your-boards-performance • https://www.gendereconomy.org/corporate-boards/
Morningstar Global Sustainable Fund Flows - Q2 2020
A forward-looking ESG momentum strategy focused on the improvements of material ESG factors at an industry level appears to be a promising approach to create alpha
Richard Kaye Co-manager of the Comgest Growth Japan fund
HOME OF THE WORLD'S OLDEST COMPANIES
PRESCIENT’S APPROACH At Prescient, we have adopted a systematic approach to ensure unbiased ESG screening through our in-house ESG-scoring tool. The “Prescient ESG scorecard” is quantitative and data-driven, with data dating back to 2008. This process is integrated across our entire investment process by providing an in-depth measure of each ESG pillar when considering investment opportunities. Given our integrative investment approach to ESG, it enables us to value investment opportunities on a risk-adjusted basis. When assessing Diversity, Equity and Inclusion, we incorporate metrics in both the “S” and the “G” components of ESG. Board structure, Independence and Diversity are some of the key factors in the “Governance” pillar. These factors consider (among others), the percentage of non-executive directors, whether there is ESG-linked compensation for the Board, the percentage of women and female executives on the board. Vital to this is Diversity at the workforce level, which falls under the “Social” pillar. Here, we consider the make-up of the Employee base. We consider (among others) the ratio of women relative to the workforce, as well as the percentage of women and minorities in management and senior positions. This process, along with targets set by companies, allows us to assess the progress being made and ensures the potential for greenwashing is diminished. Importantly, our corporate DNA embraces the mutually reinforcing values of commercial success, long-term sustainability, and investing for positive change. Notably, we do not believe in exclusionary practices and make it clear to our investee companies that we positively view sustainable practices. Companies who embrace and meet sustainable targets are thus more likely to improve their cost of funding and/or garner further support from us. THE WAY FORWARD With the increased focus to enhance corporate governance, ESG strategies and high-quality disclosures, key considerations in any boardroom discussion today should also centre around closing the gap on gender equity. To date that shift towards gender diversity has not been sufficiently significant even though the benefits are clear. Thus, companies should be doing more to promote and implement transformation in order to close the gap for gender and racial diversity on boards.
Russell 3000: Average Annual Active Return
Hoya Corporation, which has parried its core strength in glass processing into near dominance in disc substrates and semiconductor imaging materials, is a classic case. This family glassware business gained national renown from supplying US occupation authority buildings. The company’s willingness to divest its legacy crystal ware business and the camera business, to which many Japanese companies are unprofitably wedded, or to build a contact lens retail network in Japan which draws on Hoya’s ophthalmic presence but sells other companies’ lenses because that is more profitable, all reflect this flexibility and almost ruthless pursuit of return. When we asked founding family member and (former) Chairman and President Hiroshi Suzuki, which businesses he kept and why, his answer was as if from a textbook: ‘the company is not mine; any business can grow old and we constantly need to consider divesting’. The words are not from a book, though; they express how he really felt at the interstices of his organisation. Hoya’s idiosyncrasy in pursuing return and in transparency manifests itself also in the fact that another family member regularly opposes the management at AGMs. As Mr. Suzuki has hinted wryly, a Hegelian dialectical approach to discussion has led to great decisions, but long and difficult meetings.
HOYA
The company is not mine. Any business can grow old and we constantly need to consider divesting
Obic is one of Japan’s leading business software providers and the country’s answer to Oracle for small companies. Since its creation in 1968 by Masahiro Noda, (who remains Chairman and 24% shareholder) it has insisted on keeping all operations home-grown: no sales agents, no mid- career hires. ‘We are like the Chairman’s children’, say Obic staff. That may sound odd in the West, but it has created a consistent and reliable service provider in corporate Japan which is heading Japan’s software solutions to address its labour shortage.
OBIC
Similarly to Obic, Nihon M&A Center is an indispensable presence among small Japanese companies but as a succession advisory firm, is suffused with the founder culture of 10.4% holders Mssrs. Miyake and Wakebayashi. Nihon differs from Obic in its openness to outside talent but shares with Hikari Tsushin that ruthless focus on capital return, efficiency of process and gross profit per employee, traits one would associate with a shareholder-managed company. In one of our conversations with Mr Miyake, he explained how he regularly sells stock to colleagues to bind them more directly into the destiny of the company.
NIHON M&A CENTER
These firms are not the sleepy, hidebound companies one might unkindly expect based on their ownership structure. Rather, as Japan’s domestic investor base returns to its local market by increasing their allocation to Japanese equities after two decades’ hibernation, these efficient capital allocators, these permanent start-ups, are a part of the investible universe which is naturally winning attention. Comgest is pitching its tent there, too.
PERMANENT START-UPS
Japan’s family firms not to be underestimated
Simply put, we view these companies as having a ‘Day Zero’ mentality which translates naturally to capital discipline with a long-term mindset, through the pursuit of unique businesses. These are start-ups which grew old. They speak the language of the shareholders because they are run by a major shareholder. With not just skin, but blood sweat and tears in the game, they certainly seek returns but importantly, they also seek long-term survival. They are the original ‘ESG’ plays before ESG existed; they fulfil a sustainable social role and their capital allocation choices have rewarded our trust.
Some examples are:
● Fast Retailing
● Nidec, Keyence
● Softbank
● Pan Pacific
● Nihon M&A
● Hoya
● Obic
● Peptidream
● Kobe Bussan
● Sushiro
Please read our Investment Letters here
Fundamental social issues such as water and food security are intertwined with climate change
As net-zero targets become a common reality in mainstream investing, many investors are becoming aware of the importance of the just transition. The term represents a move to an environmentally friendly economy in a way that is fair to everyone, seeing social objectives like ending poverty and achieving equitable working conditions embedded in its core. This sort of transition is particularly important in emerging markets (EMs), where the funding gap to achieving the energy transition remains much wider than in developed economies. A recent report from Standard Chartered Bank found that EMs require almost $95tn to transition.
‘Finding the funding will not be easy,’ the report stated. ‘Higher taxes and borrowing in EM could heap more pressure on some of the most disadvantaged communities. ‘EM household consumption would be, on average, 5% lower per year between now and 2060. That’s just not going to work. We need a transition where EMs can reach net zero without sacrificing growth.’ The environmental and social factors must be approached holistically, said Waverton fund selector Paris Jordan – otherwise the attainment of one could come at the sacrifice of the other. ‘It’s becoming evident that environmental challenges must be addressed in a way that doesn’t have negative social impacts,’ she said. ‘Developing countries have the opportunity to leapfrog developed peers in the sense that much of our existing infrastructure was built in much browner ways. EMs have the chance to build greener from the start.’ She noted that challenges still remain for ESG investing in EMs – including lower minimum wages and looser labour laws – but she believes if investors can put pressure on companies to operate in the right ways, it will facilitate a just transition. In terms of investment strategies, Jordan suggested considering an alternative to exclusion. ‘If you exclude a country, sector or company then you might feel your conscience is clear, but it’s almost certain that someone else will come in and invest – quite possibly in a less ethical way. In many cases it’s more effective to take ownership yourself, which gives you the opportunity to exert a positive influence.’ She also noted that a just transition poses a host of challenges for the industry because metrics for social impacts are much more difficult. ‘Data on carbon emissions is relatively easy to assess. [But] things like education are much harder to quantify.’ That is why she believes improving social-factor assessments will be a vital challenge for the industry. Another area of focus for Jordan is microfinance, which can potentially grant more power to households in developing economies – making a just transition more achievable. And as shifting weather patterns create increasing disruption over the coming decades, people will need to cope with the problems that arise. ‘Unfortunately, the impacts of climate change are likely to be felt most acutely in developing nations. Those who have access to short-term credit facilities will be better placed to cope with the inevitable disruption,’ she said. By having the role of a shareholder in a microfinance company, investors can try to ensure that people in this position are not charged unreasonable interest rates for this type of credit. A just transition is a very complex and multi-layered concept, Jordan noted. But it is one that investors will have to get to grips with.
$95tn
The cost of transition in emerging markets
…and think outside the box
Look at the bigger picture…
Investing in infrastructure amid soaring inflation
What a difference a year makes. If in the summer of 2021 consumer price increases were considered a temporary phenomenon and not much to worry about, this year it is hard to ignore the pinch of the rise in the cost of living. Rising inflation has hurt stockmarkets, and investors are searching for assets that could potentially withstand better than others the corrosive effect of generalised price rises.
A new era for bond markets
In our view, that is partly due to the compounding of the healthy dividends that have tended to be paid in the sector, but also because utilities are increasingly seen as being at the heart of the transition to a renewable energy solution. Something else to keep in mind is that real (inflation-adjusted) interest rates are still deep in negative territory. Some market observers are saying that central banks are likely to keep real interest rates negative for as long as possible, because this helps reduce debt burdens for both the public and the private sector.
Inflation hedge?
SONIA = Sterling Overnight Index Average, EURIBOR = Euro Interbank Offered Rate, SOFR = Secured Overnight Financing Rate. Source: Moodys, 28 February 2022 (most recent data available).
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Source: Bloomberg, 31 December 2021. Rebased to 100 at January 2000
MSCI ACWI Utilities vs MSCI ACWI: total return in USD (rebased to 100)
Source: M&G
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One reason why infrastructure can potentially be seen as an inflation hedge is that many of the income streams coming from these assets are linked to inflation. Contracts may stipulate that regular payments such as royalties should be linked to some measure of inflation or inflation-linked payments may be mandated by law – such as in the case of toll roads in some countries. Rising inflation also means rising interest rates, which are likely to affect infrastructure assets because of the consequent increase in the rate at which their cashflows are discounted. However, this issue is not confined only to infrastructure assets; it affects virtually all companies’ valuations. To illustrate this point, while some investors consider utilities – an important sub-segment of infrastructure investing – to be highly sensitive to changes in interest rates due to their bond-proxy nature (as they offer regular cash payments rather like bonds’ regular interest rate payments), in fact over the past 20 years (spanning different interest rate environments) utilities have outperformed the broader equity market (see Figure 1).
Another issue that is currently worrying investors is volatility. The VIX Volatility Index, also known as the “fear index”, climbed to a year-high of 36.45 on 7 March and although it has come down since then, it was still trading around 34 in mid-June, compared to 17 at the end of December 2021 and around 17 a year ago. Russia’s war on Ukraine, besides the immense human tragedy that it is causing, is the major factor behind the spike in volatility on financial markets. The risk of over-dependence on Russian gas has been brought into sharp relief, not only because it is a politicised commodity controlled by an unpredictable regime, but also because the gas is transported through pipeline networks in eastern Europe. One reason why listed infrastructure could display lower volatility could be the higher degree of earnings predictability for companies within this asset class, due to their regular cashflows. This facilitates a more accurate valuation assessment, even during uncertainty. A pre-pandemic comparison of the evolution of earnings before interest, tax, depreciation and amortisation (EBITDA), a measure of a company’s overall financial performance, for the Global Listed Infrastructure Organisation (GLIO) Index versus global equities shows that infrastructure earnings have held up better in the two decades before the COVID-19 pandemic than those of global companies in general (see Figure 2).
Volatility on the rise
Recovery from the COVID-19 pandemic will most likely require big investment in the asset class globally. In fact, governments around the world have already announced various plans to invest in infrastructure to help support the global economy after the COVID-19 pandemic. In the US, a US$1.2 trillion programme aims to repair, modernise and expand America’s crumbling infrastructure. The European Union has embraced the green agenda and is looking to promote renewable energy and clean transport. Besides renewable energy, in our opinion listed infrastructure is a potential beneficiary of other long-term structural trends, such as digital connectivity and demographics. These are powerful themes, which we believe will endure for many decades to come. In this environment, we are extremely optimistic about the long-term opportunities in listed infrastructure.
At M&G we believe the investment industry needs to evolve. Rather than short-termism and quick wins, we believe investing requires forward thinking, a long-term outlook and an active approach when searching for investment opportunities. By investing sustainably in a pragmatic and measured way, we can work towards a future that’s better for everyone, delivering positive returns for both investors and the planet. Find out more: M&G Investments - Join the investment evolution (mandg.com)
Investing towards a better future
The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.
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Year-on-Year EBITDA Growth: GLIO Index v Global Equities
FOR PROFESSIONAL OR INSTITUTIONAL INVESTORS ONLY. CAPITAL AT RISK.
Click to download the chart
Floating rate high yield bonds could offer potential protection against inflation
Until recently, Western economies experienced historically low inflation and interest rates, with loose central bank policies, globalisation and technological innovation all playing a pivotal role in creating an unusually benign economic environment. Today’s higher inflation may be a temporary after-effect of fiscal and monetary policy responses to COVID-19; however, it is just as likely that we are entering a new era in which some of the structural forces that supressed global inflation after the global financial crisis of 2008 no longer apply. For many investors, this means adapting to the potential end of a multi-decade bull run in bond markets. Fixed income securities (bonds) form a core part of many portfolios and are usually expected to provide a combination of lower price volatility than company shares (equities), and a positive real income due to their regular interest rate payments, known as coupons. However, when interest rates are rising, but are still deeply negative after inflation, traditional bond holdings struggle to fulfil either purpose. We believe part of an investor’s strategy to navigate this new environment – or, rather, the return to normal – should therefore involve diversifying their allocation to bonds. In our view, high yield floating rate notes (‘HY FRNs’, or floating rate corporate bonds that are rated below investment grade) are among the potential solutions for investors taking a broader approach to inflation protection. Income that rises or falls in line with interest rates HY FRNs provide regular variable rate coupons, which means the income investors receive will rise or fall in line with market interest rates – usually a cash reference rate, such as SONIA, EURIBOR or SOFR , with the bond’s coupon typically resetting every three months. Unlike fixed rate bonds, which comprise the majority of the global government and corporate bond universe, HY FRN yields can rise without the bond’s price falling – in other words, they have effectively no duration risk.
Importantly, HY FRNs do not typically price in medium or long-term interest rate expectations, given their direct link to prevailing cash rates. Whereas core (fixed rate) government and corporate bond markets have been pricing in higher future interest rates for some time, HY FRNs have not. This means, as long as interest rates are expected to rise further, HY FRN coupons should also increase, without investors needing to worry about timing the perfect entry point to obtain attractive yields. The real level of income that investors receive from HY FRNs is further shielded by the higher yields that these bonds normally command relative to their investment grade corporate or government bond counterparts. This is because high yield bonds present additional credit risks that must be carefully identified and managed; therefore, a high yield bond’s potential return should be expected to more than compensate an investor for the extra risk taken. A more defensive approach to high yield investing In our view, HY FRNs provide a number of advantageous protections compared to the broader (fixed rate) global high yield bond universe. The first is that a higher proportion of the investment universe comprises senior-secured debt, which means bondholders are given priority over other debtholders if a default occurs, while specific company assets are ringfenced to help recover any potential losses. As such, we normally prefer to invest in these securities rather than their unsecured or junior counterparts, and particularly in bonds from companies that are asset-heavy, given historically higher recovery rates .
Downside risks can also be mitigated through active management. This may involve reducing or avoiding exposure to companies that are cyclical (their earnings go up and down as the economy expands or slows) or have less ability to pass on the costs of rising inflation to their customers, such as retailers. Conversely, more exposure can be added to companies that are less vulnerable to volatile commodity prices, such as those in the education, finance and technology, media and telecoms (TMT) sectors. All of our investment decisions are driven by a focus on detailed, bottom-up analysis of each individual bond issuer, which is made possible by the fact that M&G has one of the largest in-house credit research teams in Europe. We believe this gives us a competitive advantage, as we do not need to rely on credit ratings provided by external rating agencies and we can determine whether a bond provides sufficient compensation for risk with a view to meeting investment objectives through the credit cycle. Investing towards a better future At M&G we believe the investment industry needs to evolve. Rather than short-termism and quick wins, we believe investing requires forward thinking, a long-term outlook and an active approach when searching for investment opportunities. By investing sustainably in a pragmatic and measured way, we can work towards a future that’s better for everyone, delivering positive returns for both investors and the planet. The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.
Source: M&G, September 2022
HY FRN COUPONS CAN POTENTIALLY BENEFIT FROM RISING INTEREST RATES
SHORT-TERM INTEREST RATE
credit SPREAD
FRNs - potential additional upside
HY FRN OFFER GREATER EXPOSURE TO THE SENIOR-SECURED PART OF THE CAPITAL STRUCTURE
Source: M&G, Moody’s Research, ICE Bank of America Indices, 30 September 2022.
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do no delete
words by Jennifer Hill
chapter three
From carbon trading to precision agriculture, we look at some of the most exciting new areas for ESG investing that wealth managers have sought exposure to.
The EU’s regulatory carbon market mandates that companies in certain industries buy allowances for their emissions. Last year, RBC Wealth Management started using a bespoke product – a note that tracks rolling futures of the EU Allowance carbon price – to gain cost-effective exposure to carbon trading. It has recently sold exposure and banked gains amid market concerns that the government may intervene to cap the carbon price or increase carbon allowances this winter to lessen the burden of sky-high energy costs on companies. ‘We still like the long-term fundamentals behind the trade and will likely look to re-enter when there’s greater clarity around the geopolitical situation and the price reaches an attractive entry point,’ says RBC’s head of sustainable investing Stephen Metcalf.
Canaccord Genuity Wealth Management is excited about cultivated meat – that is, meat grown in a lab. ‘Given the food sector is 20% of global emissions and most of this is meat, it’s a genuinely exciting decarbonisation story,’ says Patrick Thomas, Canaccord Genuity’s head of ESG portfolio management. While the plant-based meat sector has struggled to take meaningful market share, technology promises to address common objections of poorer taste and higher cost. ‘People tend to agree with the logic of eating less meat but struggle to switch where the cost and taste are not compelling,’ says Thomas. ‘The cost decline of gene-editing has made cultivated meat potentially scalable. We could see a growth trajectory akin to the battery.’ Canaccord Genuity accesses the theme through specialist nutrition-focused funds.
7IM had wanted to allocate to green bonds throughout 2021 but was put off by the long duration and low yields available in developed markets. Then it discovered green bonds issued in emerging markets. ‘The yields on offer were much higher, the bonds typically had much less duration and arguably the impact case was stronger,’ says investment manager Jack Turner. ‘Emerging markets need a vast amount of capital to transition to a lower-carbon world and the private sector is best placed to provide it.’ At the end of 2021, it added the Amundi Emerging Markets Green Bond fund to its 7IM Sustainable Balance fund as well as all its Responsible Choice model portfolios other than the ‘adventurous’ risk profile.
Innovative healthcare companies have recently piqued the interest of Ravenscroft, which allocated around 4% of its Balanced and Global Solutions funds to biotechnology through funds such as Polar Capital Biotechnology. In a world of growing and ageing populations, companies such as Genmab, Vertex and Regeneron are looking for innovative solutions for the diagnosis and treatment of serious diseases that have never been solved before. ‘Healthcare should see significant multiple expansion particularly given the lack of political headwinds and support from the Inflation Reduction Act,’ says Ravenscroft fund analyst Shannon Lancaster. ‘The risk-reward is particularly attractive in small- and mid-cap biotech stocks, which look very oversold. They’re the cheapest they’ve been in 30 years; the correction offers a fantastic opportunity for bottom-up stockpickers.’
Healthcare
Rathbone Greenbank has increased exposure to precision agriculture, a theme that has been in its multi-asset portfolios since their launch in March 2021. ‘While the importance of increasing agricultural productivity and sustainable food production to feed our ever-growing population without exacerbating the effects of climate change has been known for many years, the war in Ukraine and its far-reaching food security implications has highlighted this urgent need to governments,’ says sustainable multi-asset investment specialist Rahab Paracha. Initially, the portfolios owned industrial technology company Trimble, which helps farms to digitalise through satellite technology and boasts software that improves crop performance while protecting soil and waterways from overfertilisation. This year, Deere has been added. It uses drones, high-speed cameras and sensors to help farmers achieve more optimum yields sustainably.
Precision agriculture
Emerging market green bonds
Cultivated meat
Carbon trading
Is your sustainable equity allocation appropriate for today’s environment?
After a period of benefiting from favourable market sentiment, several sustainable equity portfolios have come under some pressure through style or sector biases, as many of the underlying companies are facing headwinds. Given the still-deteriorating outlook, it may therefore be tempting to conclude that sustainable equities are ill-suited to this new, more volatile environment. Yet, we think that the case for more sustainable allocations is stronger than ever due to the long-term nature of these challenges, whether it is the transition to net zero or the need to prioritise all stakeholders. We believe the answer, therefore, lies in taking a broader view of sustainability — after all, a sustainable portfolio does not have to be growth or technology heavy — and building a more resilient core at the heart of your portfolio. We think an attractive avenue to achieve that goal is to identify companies that are outstanding stewards of their shareholder capital and ESG leaders, irrespective of the sector in which they operate. Importantly, this focus on stewardship also minimises the risk of financial and sustainable goals being at odds, as we believe quality companies can focus on positive environmental and social outcomes. We think companies that are good stewards can build support among customers, employees and other stakeholders; improve the resilience of their businesses; and attain a lower cost of capital — which, in turn, potentially helps them provide investors with superior returns on capital over the long run. We believe consistent engagement can strengthen this virtuous cycle further. Sticking to Stewards In the Wellington Global Stewards Fund, we seek to select leading stewards across industries and geographies based on their potential to succeed over the next decade. Active ownership and engagement are therefore incredibly important to us, as illustrated by the fact that we engaged 143 times with portfolio companies in 2021, up from 135 in 2020, including the below examples. Our engagement with a global tyre manufacturer on responsible sourcing and mitigating supply-chain risk helped us to identify what we believe are the manufacturer’s exemplary credentials as a best-in-class steward, from training over 100,000 rubber farmers annually on deforestation and biodiversity risks to actively managing the impact of rubber cultivation on biodiversity and local ecosystems. We support the company’s efforts in supply-chain management through proactive dialogue. Another example is one of a global healthcare company that has been incredibly responsive, transparent, and open to our engagement. Through our research and dialogue we became increasingly confident about the outlook for their return on capital given its stronger balance sheet, more focused mix of businesses, improved capital allocation and promising drug pipeline. After five years under a new CEO, the company has made notable advances in R&D productivity, has exemplified robust employee engagement and has attracted and retained talent despite a remarkably challenging backdrop.
This is a marketing communication. Please refer to the prospectus of the Fund and to the KIID and/or offering documents before making any final investment decisions. Capital at risk.
Why the Wellington Global Stewards Fund?
We believe it is our duty to actively engage with the companies in the portfolio. The goal of our stewardship activities — engaging with managements on ESG issues and voting proxies on behalf of investors — is to support or influence decisions that can maximise the value of companies.
IMPORTANT INFORMATION https://www.wellington.com/en-gb/intermediary/sustainability/sustainable-finance-disclosure-regulation ©2022 Morningstar, Inc. All rights reserved. The information contained herein: (a) is proprietary to Morningstar and/or its content providers; (b) may not be copied or distributed; and (c) is not warranted to be accurate, complete, or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Rating as of 30 August 2022. Past performance does not predict future returns. Rating is based on USD S Acc Unhg. Ratings are not a recommendation. The engagement case studies presented are for illustrative purposes only. The engagement case studies chosen are based on meetings held and focus on topics we think are important to stewardship, giving insight into our process. There can be no assurance we will continue to hold these companies and that they will be profitable in the future. The individual issuers listed should not be considered a recommendation to buy or sell. Please refer to the annual and semi-annual report for the full holdings. CONSIDER THE RISKS Investors should consider the risks that may impact their capital, before investing. The value of your investment may fluctuate from the time of the original investment. A decision to invest should consider all characteristics and objectives as described in the prospectus and KIID. Please refer to the fund prospectus and key investor information document for a full list of risk factors and pre-investment disclosures. please refer to the sustainability-related disclosures for information on the commitments of the portfolio(s). Risks Capital: Investment markets are subject to economic, regulatory, market sentiment and political risks. All investors should consider the risks that may impact their capital, before investing. The value of your investment may become worth more or less than at the time of the original investment. The Fund may experience a high volatility from time to time. | Concentration: Concentration of investments within securities, sectors or industries, or geographical regions may impact performance. | Currency: The value of the Fund may be affected by changes in currency exchange rates. Unhedged currency risk may subject the Fund to significant volatility. | Emerging Markets: Emerging markets may be subject to custodial and political risks, and volatility. Investment in foreign currency entails exchange risks. | Equities: Investments may be volatile and may fluctuate according to market conditions, the performance of individual companies and that of the broader equity market. | Hedging: Any hedging strategy using derivatives may not achieve a perfect hedge. | Sustainability: An environmental, social or governance event or condition that, if it occurs, could cause an actual or potential material negative impact on the value of an investment. This material and its contents may not be reproduced or distributed, in whole or in part, without the express written consent of Wellington Management. This document is intended for marketing purposes only. It is not an offer to anyone, or a solicitation by anyone, to subscribe for units or shares of any Wellington Management Fund (“Fund”). Nothing in this document should be interpreted as advice, nor is it a recommendation to buy or sell securities. Investment in the Fund may not be suitable for all investors. Any views expressed in this document are those of the author at the time of writing and are subject to change without notice. Fund shares/ units are made available only in jurisdictions where such offer or solicitation is lawful. The Fund only accepts professional clients or investment through financial intermediaries. Please refer to the Fund offering documents for further risk factors, pre-investment disclosures, the latest annual report (and semi-annual report), and for UCITS Funds, the latest www.wellington.com/KIIDs. In the UK, issued Wellington Management International Limited (WMIL), a firm authorised and regulated by the Financial Conduct Authority (Reference number: 208573). ©2022 Wellington Management. All rights reserved. As of 30 September 2022. WELLINGTON MANAGEMENT FUNDS ® is a registered service mark of Wellington Group Holdings LLP
Focusing on engagement
We like to define stewardship as investing in companies that prioritise people, the planet and profit. We believe the best stewards balance their impact on people, the planet and profits to build long-lasting advantages: Companies lower their turnover, build loyalty, enhance culture and benefit from diversity when they invest in PEOPLE, including employees, suppliers, customers and the community. Companies positively impact the PLANET and build resilience when they reduce their environmental footprint, consider finite resources and engage proactively on climate change. Companies boost PROFIT when they have investment discipline — balancing shareholder returns today with investment in innovation, business and people for tomorrow.
Actively investing in stakeholders
3
We observed that many “ESG funds” tend to have meaningful style biases. Our value proposition is to offer clients a high-quality, global, large-cap core allocation. We intend to hold companies for +10 years, resulting in a low turnover portfolio that is very much aligned with our long-term engagement initiatives. The Wellington Global Stewards Fund is managed by Yolanda Courtines and Mark Mandel. - SFDR Article 9 - AAA MSCI ESG rating - Five Morningstar Globes & Five Stars
Long term and style agnostic
Engagements with invested companies since inception (January 2019)
Yolanda Courtines Portfolio Manager
2021
143
135
95.4%
100%
Number of Engagements
% holdings engaged with
Alex Davis Investment Specialist
Data source: Wellington Global Stewards Fund engagement tracker. This material is not intended to constitute investment advice or an offer to sell, or the solicitation of an offer to purchase shares or other securities. G = Governance, E = Environmental, S = Social. 'Number of engagements' represents engagement activity with fund holdings. A decision to invest should take account of all the characteristics and objectives described in the offering documents. Please refer to the sustainability related disclosures for information on the commitments of the portfolio.
Short and sweet
Chapter four
Hear it from the experts
We asked five investment experts for their take on the E, S and G side of things. Here’s what they think about the next frontiers in ESG, the impact of the cost-of-living crisis on the ESG space and choices that result in a better future, not just for the privileged but for everyone.
The video features:
Huy Thanh Cung Portfolio manager, Julius Baer
Eric Louw Senior investment manager, Abrdn
Jemima Lyon Associate, Snowball Impact Management
Bhavik Parekh Research associate, MainStreet Partners
Katrina Philander Investment implementation manager, Cavendish Ware
Dear COP
Chapter five
After chatting to various members of the public, we came back with a wish list for COP27
With the 27th edition of the UN Climate Change Conference coming up on 6 November, we hit the streets of London to find out what people think of climate change efforts in general and COP27 in particular. The sense of urgency that came through in our conversations is reflected in the title of this video – ‘Dear COP’. People aren’t just passively standing on the sidelines, waiting for change to happen – they’re actively asking for it. And what’s more, they’re willing to do their bit to make it a reality.
