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A bigger splash
The sustainable segment of the global equity market continues to outshine its traditional counterparts. Square Mile’s Louis Selby shares some products with water exposure that are making an impact
Last year was a testing time for global equity funds. Against the backdrop of geopolitical uncertainty driven in part by the ongoing Russian full-scale invasion of Ukraine and the situation in Gaza, global markets have been affected by both political and economic uncertainty. In addition to geopolitical factors, global equity fund managers have also had to battle against lower-cost passive funds in an environment that has provided strong tailwinds for large-cap indices.
The buoyancy of the ‘magnificent seven’, which contributed to around 20% of the MSCI World index performance at the end of the calendar year, has driven this. Additionally, high inflation and subsequent high global interest rates have also contributed to this challenging market over the past 12 months, with growth-oriented companies facing difficulties in purchasing materials and expanding their operations in line with investor expectations.
Nevertheless, there is light at the end of the tunnel for a specific subsection of the market. As reported in Morgan Stanley’s Sustainable Reality report, produced by its Institute for Sustainable Investing, sustainable funds have outperformed their traditional competitors within every asset class over 2023. In fact, for equities, sustainable funds achieved a median performance of 16.7% over 2023, whereas traditional equities achieved a median performance of 14.4% over the same period.
Delving further, we can see the funds with the highest level of social and environmental impact have struggled to match the rest of the sustainable market’s performance. This is due in part to their tendency to be exposed to a higher level of mid- and small-cap growth-oriented companies that have underperformed when compared with larger companies. Yet, while relative outperformance is still a critical objective of many global equity impact funds, we argue that investors in these strategies are, in general, stipulating the manager generates positive environmental and/or social impact as a primary objective.
In the following three examples, we have chosen three global equity funds from the Square Mile’s Academy of Funds that have significant exposure to water. These funds should not only offer the potential for good financial performance but, more importantly, generate material positive impact.
Pictet Global Environmental Opportunities
Louis Selby
Investment research analyst, Square Mile Investment Consulting and Research
‘
Sustainable funds have outperformed their traditional competitors within every asset class
over 2023’
Name Name, job title, Company name
Performance in 2023: fund 13.9%; sector 12.5%. Source: Refinitiv Lipper
Luciano Diana, Gabriel Micheli and Yi Du, the managers of the Pictet Global Environmental Opportunities fund, aim to outperform global equity markets over the long term through investing in businesses that contribute to alleviating nine environmental areas highlighted within a 2009 academic study called the Planetary Boundaries Framework. As part of the team’s environmental impact analysis, only companies that derive greater than 20% of their revenue from one of the following themes are considered eligible for investment: renewable energy; energy efficiency; dematerialised economy; sustainable agriculture and forestry; water supply and technologies; waste management and recycling; and pollution control.
The managers are supported by an extensive Pictet outfit, which, alongside a dedicated impact, sustainability research and ESG operations team, also includes all investment professionals that manage 17 thematic strategies ranging from timber and health all the way to robotics and smart cities. These 17 strategies, of which the Global Environmental Opportunities fund is included, are able to leverage 13 thematic advisory boards, who each help to oversee and evolve the group’s environmental and/or social impact themes.
A prominent theme within the portfolio is water and waste, which aligns well with the managers’ water supply and technologies environmental theme. This theme is represented in the portfolio by companies such as Xylem, a manufacturer and provider of services for the treatment of water and wastewater, and Stantec, a Canadian engineering company, which works across varied disciplines and industries to develop water and infrastructure projects. Another particularly interesting holding is Veralto, a newly formed US manufacturer of water technologies focused on improving and securing global water quality across industrial and municipal environments.
Wellington Global Impact
Performance in 2023: fund 6.9%; sector 12.5%. Source: Refinitiv Lipper
Managed by Jason Goins, this global equity fund seeks to provide long-term returns (income and capital appreciation) while investing in companies that offer sustainable solutions to environmental and social challenges. More specifically, the manager targets investments in companies that improve access to and quality of basic life essentials, reduce inequality and mitigate the effects of climate change.
To be included within the portfolio, the manager, in consultation with Wellington’s internal impact committee and ESG research team, will determine whether a prospective company aligns with its three impact criteria: materiality – whether the impact activity in question is central to the company; additionality – the impact case must fulfil unmet social and environmental needs that are unlikely to be addressed by other agents; and measurability – whether key performance indicators can be developed that will help the analysts and managers to understand the nature of the impact and to track progress over time.
In keeping with the water theme, we have identified several companies that provide products and/or services that directly or indirectly improve the quality or efficiency of water resources. Again, Stantec, Veralto and Xylem have made an appearance in this portfolio. However, there are other additions, such as Aalberts, a Dutch company with multiple segments that offer a positive impact on a variety of environmental and/or social challenges. As per the Aalberts website, the company attributes about 16% of its revenue to safe water delivery, improving water quality and enabling the efficient use of water within buildings.
Wheb Sustainability
Performance in 2023: fund 4%; sector 12.5%. Source: Refinitiv Lipper
Wheb Asset Management continues to be at the forefront of impact investing within the global equities space, and its flagship product, Wheb Sustainability, embodies all that the group believes. With nine core sustainability themes, of which water management is one, manager Ted Franks says companies that derive greater than 50% of their revenue from one of their nine themes will ultimately enjoy structural growth and will see relative resilient profitability.
While 2023 was a challenging year for the Wheb Sustainability fund due to the portfolio’s mid-cap bias and positive impact mandate limiting exposure to the ‘magnificent seven’, the core sustainable objective of the team continues to be achieved. Under Square Mile’s proprietary 3D assessment, Wheb achieved an impressive 96% portfolio alignment to impact companies in its February 2024 review.
One theme consistent throughout the portfolio was positive impact on water resources, either through water and waste services or technologies enabling efficient use of water within industrial processes. Spirax-Sarco Engineering, for example, is a British engineering company that specialises in the use of steam within a variety of sectors, such as food processing, drug manufacturing or beer making. Steam is a versatile source of energy, and for Spirax-Sarco, its systems can be used to cut emissions, energy waste and water use, along with reducing costs and increasing output in each of the targeted sectors.
Another company contributing to the fund’s impressive exposure to the theme of water management is Ecolab, a US company that provides services within the fields of water, hygiene and energy. The company is incredibly diverse, and its positive impact on water is far-reaching. However, some specific examples include legionella control, wastewater treatment, corrosion and scale control within pipes and equipment.
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