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Global credit: the new frontier for sustainable investors
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Bargains galore, but watch out for value traps
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Fund managers must use their immense power to protect the planet
The UK equity income funds on hit lists
Thematic winners
What Makes an “Impact” Investment Manager?
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Has thematic investing changed the face of asset allocation?
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Active vs passive
No substitute for active managers when picking thematic winners
Sector overview
An equity income comeback?
Bonds for Change: Using Fixed Income to Help Avert a Climate Catastrophe
Inflation protection
A UK equity shelter?
Playing the revolution
FILM: Sustainable food
How to be a net-zero investor
Undercover Selector
What the fossil fuel crisis means
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Making firms behave better
Case studies
Should fund managers engage or divest from problem companies?
ESG
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by John Schaffer
With traditional portfolio construction techniques, such as the 60:40 split, looking stale, is there a case for investing thematically? Although still a relatively nascent area, assets in thematic funds have more than tripled to $595bn (£422bn) worldwide, up from $174bn three years ago, according to Morningstar. The Covid-19 pandemic has also resulted in huge inflows into thematic strategies, paired with eye-catching returns in certain funds. Is it time for thematic investing to become more of a core focus for asset allocators?
Allianz Global Investors Aegon Asset Management
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Speakers featured in this video include:
John Teahan, manager of RWC Enhanced Income Will Argent, manager of Gravis Clean Energy Income Jonathan Waghorn, manager of Guinness Global Energy and Guinness Sustainable Energy
The energy crisis has underlined just how reliant the UK is on fossil fuels. As a consequence, energy prices are shooting up, with a tough winter ahead for lower-income households. Fossil fuels still accounted for 38.5% of electricity generation in 2020, while nuclear sources only made up a small fraction of power generated. So how far is the UK away from a renewable transition, and what investment opportunities are available in this urgently needed transition to clean energy?
FILM: Clean energy
The energy crisis has underlined that we must address clean energy solutions in the battle against climate change
by Christopher Johnson
Helmet firm lacking Chinese factory transparencY: Mips
We first bought Mips in July 2018. The company was born out of research carried out at the Karolinska Institute and the Swedish Royal Institute of Technology into brain trauma. Mips discovered that if a protective lining was inserted into crash helmets, that allowed the head to spin 10-15mm on impact. This greatly reduced the incidence of brain trauma and concussion. We bought Mips for the positive societal impact its products had. The business also has exceptionally high returns on assets.
Fund managers often talk about how they engage behind the scenes, but rarely give any evidence of how exactly they do this. So we asked three fund managers to give examples of how they have communicated with companies to influence their behaviour. This is what they told us.
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Three fund managers highlight how they have used their influence to make firms behave better
Mips’ supply-chain code of conduct was only available in Chinese and not published
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When did you first buy the stock, and why?
A fraction of what it could be had we not taken profit out of it on the way up. We have a 5% limit on any individual stock.
How big is the position in your portfolio?
Mainly granularity and disclosures. The company only had 35 employees when we started our position [61 in 2020], so they had not devoted the time and resources to collating and making available information about their ESG on the website. It assured us that it audited the factories they used once a year to ensure compliance with all employment regulations, but the supply-chain code of conduct was only available in Chinese and not published.
What needed improvement from an ESG perspective?
By engaging with Mips multiple times to encourage and exhort. By sharing examples of best practice of other companies in our portfolio which provide excellent and exhaustive disclosures.
How did you use your influence to improve ESG behaviour?
The sustainability report it produced in 2020 is an improvement on 2019. During the year it expanded sustainability initiatives, adopted performance indicators, and engaged with an external human rights expert. It has a whistleblower policy in relation to code of conduct, which all suppliers must sign. It also reports that all products are made from recyclable plastic and aims for 100% of packaging to be renewable. This latter was a new disclosure, but we couldn’t find the current percentage. There are lots of good things happening, but we need to see more granularity in the audits.
What is the situation with the company now?
We would particularly like to see Scope 1, 2 and 3 emissions reporting and third-party verification. Mips should address overboarding – its chairman is also CEO of [outdoors brand] Thule. Mips uses Thule as a benchmark for their ESG reporting and realises it is a couple of years behind it, but ensures us it will get there.
What needs to be done now?
Comgest first acquired a position in Kosé, a Japanese multinational beauty and cosmetics company, in 2017. It had a strong growth profile, with expected five-year, double-digit earnings-per-share delivery. It was also increasing its margin, had strong brand loyalty, balance sheet and cashflows. Kosé also had a proven culture of working in harmony with its stakeholders and the environment. It formed an environment committee as early as 1997 and stopped using microplastic beads in its new cleansing products in 2014.
Japanese beauty brand’s poor water disclosure: Kosé
2.5% of Comgest Growth Japan as of 30 September. It has been a core position in our concentrated fund for over four years as well as a top 10 position in 10 quarters during that time.
While the company had an excellent track record on environmental matters, it had not disclosed information via environmental disclosure firm CDP. Importantly, this included the water questionnaire. Kosé was seen as a high priority company for water disclosure because of the vital role water plays throughout the cosmetics value chain. Kosé had been asked by the CDP to disclose on climate change since 2009, on deforestation since 2013 and on water security since 2014 but had never responded to any of the information requests. Comgest took on the lead role in an engagement to improve this, through a non-disclosure campaign.
In early 2018, we commenced as the engagement leader for Kosé, to encourage the company to complete the CDP water questionnaire. Comgest and the CDP sent an engagement letter to Kosé on behalf of 23 institutional investors from around the world. Kosé subsequently agreed to collaborate. Our investment team in Tokyo led the information exchange with Kosé and provided examples of best practice. Local language skills and a strong relationship with the company were key to this engagement. By September 2018, Kosé was pleased to participate in all three CDP disclosure questionnaires – climate change, water, and forest.
Kosé continually works on initiatives to collect information on environmental emissions. These figures are now consistently disclosed and reported. The company has signed the UN Global Compact (UNGC) and is carefully aligning its business activities to selected UN Sustainable Development Goals.
While the company has good diversification on its board, we would like to see more independent members.
We have owned Entain for over five years. A lot of gambling companies are listed in the UK because of the rich history the industry has here. Over the last decade, the digital transition has been on the forefront of our minds, and we believed that the betting industry was going to be able to make that transition to digital very effectively.
Scrutinising the gambling industry as it goes digital: Entain
Entain is worth 5% of the fund.
Although the gambling industry in the UK is one of the most heavily regulated, these companies have a social contract to uphold as the industry has the potential for harm. We understood early on that there is no point for us investing in something which is economically effective if it is societally ineffective and if the governance is not great.
We explained to Entain that there were other digitally successful companies trading on much higher multiples with much higher growth prospects than it had. We showed the company how much it could be valued if it took appropriate steps to reduce potential harm as it expanded digitally.
Now, Entain is using data to manage whether users have enough money to play. If you gamble late at night, you will receive an alert to ask you if you are sure about continuing.
One can never rest in a heavily regulated industry with a digital customer, and Entain will have to evolve as its customer habits evolve. This requires technology and a deep understanding of both, which the industry has in spades. The industry needs to understand that there will be no economic benefit if they do not master how to ensure their product is not creating untold damage to society.
Kosé had been asked to disclose on climate change, deforestation and water security but had never responded to any requests Chantana Ward
David Kneale, Mirabaud Asset Management
Now, Entain is using data to manage whether users have enough money to play Wesley McCoy
Citywire AAA-rated Sharon Bentley-Hamlyn, manager of Aubrey European Conviction fund
Citywire A-rated Chantana Ward, manager of Comgest Growth Japan Equity fund
Citywire + rated Wesley McCoy, manager of ASI UK Value Equity
Kosé had been asked to disclose on climate change, deforestation and water security but had never responded to any requests
Chantana Ward
Now, Entain is using data to manage whether users have enough money to play
Wesley McCoy
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Disclaimer Socially responsible investing is qualitative and subjective by nature, and there is no guarantee that the criteria utilized, or judgment exercised, by PIMCO will reflect the beliefs or values of any one particular investor. Information regarding responsible practices is obtained through voluntary or third-party reporting, which may not be accurate or complete, and PIMCO is dependent on such information to evaluate a company’s commitment to, or implementation of, responsible practices. Socially responsible norms differ by region. There is no assurance that the socially responsible investing strategy and techniques employed will be successful. Past performance is not a guarantee or reliable indicator of future results. The services and products described in this communication are only available to professional clients as defined in the MiFiD II Directive 2014/65/EU Annex II Handbook and its implementation of local rules. This communication is not a public offer and individual investors should not rely on this document. Opinion and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. All investments contain risk and may lose value. Statements concerning financial market trends or portfolio strategies are based on current market conditions, which will fluctuate. There is no guarantee that these investment strategies will work under all market conditions or are appropriate for all investors and each investor should evaluate their ability to invest for the long term, especially during periods of downturn in the market. Outlook and strategies are subject to change without notice. PIMCO is a trademark or registered trademark of Allianz Asset Management of America L.P. in the United States and throughout the world. ©2021, PIMCO. PIMCO Europe Ltd (Company No. 2604517) is authorised and regulated by the Financial Conduct Authority (12 Endeavour Square, London E20 1JN) in the UK. The services provided by PIMCO Europe Ltd are not available to retail investors, who should not rely on this communication but contact their financial adviser.
Here are three case studies of how PIMCO, in collaboration with investors, issuers, asset owners and asset managers, can help align efforts to bring cohesive and meaningful change even sooner.
On the ground, we engage with issuers – across corporates, sovereigns, and others – to encourage enhanced disclosure on climate change, biodiversity and the United Nations Sustainable Development Goals (SDGs). We also participate in a range of industry initiatives that are linked to the implementations of the TCFD, including the Bank of England’s Climate Financial Risk Forum’s scenario analysis working group. As co-founders of the United Nations Global Compact (UNGC) CFO Taskforce for the SDGs, we engage global CFOs on sustainable development, leveraging the nearly 10,000 companies participating in the UNGC. We explore climate change in the context of broader sustainability risk and are supportive of the SDGs as the reference framework to assess these wide-ranging risks, such as biodiversity, water scarcity, and human and labour rights. Finally, we also seek to engage with issuers on innovative debt issuance opportunities to advance the Paris Agreement and the SDGs.
Our ESG engagement in action
In 2020 Company B, an Australian pension fund, announced a Climate Change Transition Plan that will see the A$60 billion fund commit to reducing the absolute carbon emissions in its portfolio by 33% by 2030 and to net zero by 2050. They are the first major Australian pension fund to make carbon reduction commitments of this scale. We have been working closely together to enhance the positive impacts of their portfolios, measuring the carbon footprint of their portfolios so that they are able to measure the change and improvement over time, and allocating more to issuers with favourable ESG profiles.
2. Client partnership: Partnering with one of the largest Australian pension providers
Automaker Company C has broadly delivered on their 2020 sustainability targets and has set new 2030 targets. PIMCO engaged on the alignment of their electrification strategy and climate ambition with the Paris Agreement on climate change. Moreover, we raised supply chain issues and advised an expansion of their disclosure around upcoming supply chain targets for 2030 and the potential use of CO2 as a criterion for procurement. To date, Company C has aligned their new CO2 goal with the Science-Based Target initiative (SBTi), and are exploring how to disclose more information in due course, for example on absolute emissions targets and how they go beyond regulations. Company C is also moving to an integrated report approach.
In many ways, the COVID-19 pandemic has helped focus attention on core issues in ESG investing: not only climate change, but also inclusive economies, healthy communities, safe and equitable workplaces, resilient supply chains, and alternative and cleaner energy. At PIMCO, these and other factors have long been embedded in our research, engagement, and investment decisions. We will continue to engage with issuers bond by bond as they come to market, and our participation in groups such as the CFO Taskforce for the SDGs helps influence industry standards and drive innovation. As active investors, our goal is not just to find opportunities, but to create them for our clients. Discover more insights into sustainable bond markets, industry trends, and investing for a net-zero-carbon future in PIMCO’s annual ESG Investing Report.
3. Issuer engagement: Partnering with a Multinational corporate manufacturer of Automobiles
PIMCO’s process for monitoring and managing climate risk in investment portfolios supports the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), which we signed in June 2019. Our holistic approach includes governance, strategy, the risk management framework, and our climate-related metrics and targets. When evaluating climate-related risks and opportunities within specific sectors and issuers, we typically begin with two broad categories: transition risks (e.g., tighter regulations on carbon emissions) and physical risks (e.g., how the rising intensity and frequency of extreme weather events affects critical assets and natural resources used or relied upon by the issuer). To help analysts evaluate climate risk, PIMCO’s ESG specialists designed seven proprietary tools, drawing on our decades of experience in fixed income analysis. The insights from these tools help portfolio managers better manage and mitigate climate-related credit risks and assess a portfolio’s alignment with targets from the Paris Agreement – the global accord to limit the global temperature rise by year 2100 to 1.5°C – 2°C above pre-industrial levels.
An integrated and collaborative approach to climate research
At PIMCO, we believe bonds are the foundation of a sustainable global recovery: the bonds that serve as investments and sources of capital, and also the human bonds that endure across communities, between nations, and among industries and investors. These are the bonds from which the world is building a more sustainable future. Looking ahead, we recognise the profound impact that climate change will likely have on the global economy, financial markets, and issuers. Risks and opportunities related to climate change may materialise in unexpected ways, and it can affect investments across asset classes, including a wide range of fixed income securities: corporate credit, mortgage-backed securities, sovereign and municipalities. That’s why we have developed tools to evaluate material climate risks through an investment lens, and we offer an opportunity for investors to target global climate action with their bond allocations.
BY PIMCO
CONTENT BY
Company A is a leading global investor membership body and the largest one focusing specifically on climate change. In 2021, Company A published its Net Zero Investment Framework to provide a common set of recommended actions, metrics, and methodologies through which investors can maximise their contribution to achieving global net zero global emissions by 2050. PIMCO co-led the Sovereign Bond working group for Company A’s Framework and provided input to the Corporate Bond working group.
1. Industry leadership: Partnering with a leading global investor membership body
As co-founders of the United Nations Global Compact CFO Taskforce for the SDGs, we engage global CFOs on sustainable development, leveraging the nearly 10,000 companies participating in the UNGC
Legal & General Investment Management Limited is Authorised and Regulated by the Financial Conduct Authority. The views expressed withing this video are those of Legal & General Investment Management. Past performance is not a guide to future performance. The value of an investment any income taken from it is not guaranteed and can go down as well as up; you may not get back the amount you originally invested. This is not a consumer advertisement. It’s intended for Investment Professionals and should not be relied upon by private investors or any other persons. This video should not be taken as an invitation to deal in Legal & General Investments. Legal & General Investment Management One Coleman Street, London EC2R 5AA Registered in England no 2091894 Source: LGIM unless otherwise stated. ©2021 Legal & General Investment Management. All rights reserved. No part of this video may be reproduced in whole or in part without the prior written consent of Legal & General Investment Management.
Our job is not to find and pick the winners, because it’s too early for that. Our job is to build a portfolio that gives investors exposure to the growth of a whole new economy
Source: Morningstar Direct. Manager Research. Data as of December 2020.
Howie, what is LGIM doing to help investors contribute to a greener, healthier world?
Fund managers have been lining up to set ambitious and worthy net-zero targets, but how exactly can they achieve this? Ahead of next month’s COP26 climate conference, Jefferies global head of ESG research Aniket Shah offers some advice to help fund managers achieve this critical goal. With the economy still ‘fossil fuel addicted’, Shah wants to see oil majors challenged more. He also outlines how much he thinks needs to be invested in renewable infrastructure to meet the Paris agreement’s 2050 mission.
Unlike other solutions that take an existing portfolio and make it greener by applying various ESG screens or excluding certain sectors, our sustainable ETF range targets companies that are going to contribute toward a green future. Our thematic approach is very different, in that it focuses on areas we expect to have a considerable impact on a sustainable economy. Those include energy storage, clean energy and, more recently, hydrogen.
Hydrogen production accounts for 2.2% of global greenhouse emissions - more than the airline industry. Why does it still play a major role o the way to a more sustainable future?
First and foremost, it’s important to recognise that hydrogen won’t be the sole driver of a clean energy revolution. You’ve got to look at it in combination with more established forms of renewable energy generation like solar panels and wind turbines. Those have a good foundation already, but hydrogen is still at a much earlier stage. It’s true that grey hydrogen isn’t the way forward to build a sustainable society. That’s why we focus on green hydrogen, which comes from renewable energy sources instead of fossil fuels. Electrification through clean energy and battery technology can get us most of the way to net zero, but green hydrogen is the key to lowering emissions in industries where electrification alone is not enough.
How do you go about selecting companies that can advance a green hydrogen economy?
Since the industry is changing so fast, we need to constantly adapt and evolve our classification system. Our job is to find companies that actively invest in this space and contribute to its growth. Those companies may be driving revenue already, but in many cases, they’re still building the foundations of the hydrogen economy. In other words, you can’t just go into Bloomberg or another classification system and say, what does the hydrogen economy look like? Instead, we target the entire value chain. For instance, when it comes to hydrogen generation, we’re looking at companies that provide things like membranes, catalysts or pump compressors. Ultimately, it comes down to utilising global data and working with a range of experts to carve out the universe.
Is that the same approach you take with your clean energy and battery ETFs?
Yes, absolutely. On top of external or proprietary data, we collaborate with dedicated experts who help us understand how those areas are going to develop and grow. And off the back of that, we build our investment strategies. Using clean energy as an example, we look at component suppliers, equipment manufacturers and utilities in the wind and solar power space. Many investors would call that active research. We ultimately end up with a selection of 50-plus stocks, which gives us a pretty focused high-conviction portfolio that is dedicated to investments into clean energy only. Often, you won’t find a lot of those companies in other funds. That’s something we pride ourselves on - finding unique opportunities that have a low overlap with traditional equity portfolios.
What kind of opportunities would they be?
We do invest in companies that more people might have heard of - Vesta, for example – but we also give a near-equal contribution to newer businesses that investors are less aware of. On the topic of clean energy, we’re talking about companies like SolarEdge or TPI Composites. Even though they’re US-based component suppliers, many traditional US equity portfolios don’t hold them. Our job is not to find and pick the winners, because it’s too early for that. Our job is to build a portfolio that gives investors exposure to the growth of a whole new economy. We’ve seen portfolios that focus on the big names everybody knows and probably already hold elsewhere. What that also means, though, is that you’re increasing concentration risks for multi-asset investors.
You’ve made the case for hydrogen and clean energy investments, but what’s the deal with batteries?
It’s all well and good if you can use the energy that’s generated from solar and wind power right away, but what if you can’t distribute it immediately? You need the capacity to store it. The demand for storage solutions has risen sharply over the past few years. The lithium-ion battery segment, for example, has a compound annual growth rate of close to 14%. Even so, the energy storage space is only at the beginning. It needs to catch up with the amount of infrastructure we’ve built to capture solar, wind and, of course, hydrogen power.
In a nutshell, what’s the investment case for storage technologies, then?
The more people utilise alternative energy sources, the more we need to invest in infrastructure that is able to store that energy. Take electric vehicles as an example: the hottest topic isn’t how fast the technology is evolving but how quickly we can get charging points, so electric vehicles become a means of transportation for the masses.
Are there any issues investors should be aware of?
The challenge is the cost of producing those new battery technologies. Even so, it’s worth noting that it has come down over the past few years and will continue to do so as scalability increases. Companies are more innovative in this space, whether it’s Samsung SDI or Tesla. That spells opportunity for investors.
LGIM’s Thematic ETF range incorporates three sustainable energy solutions:
L&G Hydrogen Economy UCITS ETF L&G Clean Energy UCITS ETF L&G Battery Value-Chain UCITS ETF
All of the funds are forward-looking and focus on building a greener economy. As Howie Li put it: ‘If you really want to make a change, you need to invest in sustainable growth themes. Just excluding specific sectors isn’t enough.’
Small- and mid-cap companies tend to be more vulnerable to economic disruption than their larger counterparts on the FTSE 100. So why invest in these companies for income? And should small caps be paying out regular dividends at all? Chris McVey, manager of the Octopus UK Multi-Cap Income, argued that alongside the growth prospects of smaller companies, small and mid-caps also offer better dividend cover than the likes of oil majors and tobacco stocks. The Citywire A-rated manager also highlighted some of his top UK income stock picks, as well as when he thinks dividends across small and mid-caps will recover to pre-pandemic levels. Over the past year, the UK Multi-Cap Income fund has returned 44.2% compared with a sector average of 29.1%.
Octopus’ McVey: Small- and mid-caps offer much better dividend cover
Green hydrogen uses renewable energy production. We can see throughout the entire value chain that it is produced on a carbon-neutral basis
Randeep Somel, M&G Climate Solutions fund
UK equity income may have been out of fashion for some time, but our data highlights several funds on wealth buy lists, indicating the sector continues to be an important pillar in a balanced portfolio
Jefferies’ global head of ESG research, Aniket Shah, offers some advice to fund managers as the battle to become net-zero investors
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Dividends have increased significantly this year, but not everything is as rosy as meets the eye
Important information For Professional Clients only, not suitable for Retail Clients. This is a financial promotion and is not investment advice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice. The Royal London Global Sustainable Credit Fund is a sub-fund of Royal London Asset Management Bond Funds plc, an open-ended investment company with variable capital (ICVC), with segregated liability between sub-funds. Incorporated with limited liability under the laws of Ireland and authorised by the Central Bank of Ireland as a UCITS Fund. It is a recognised scheme under section 264 of the Financial Services and Markets Act 2000. The Investment Manager is Royal London Asset Management Limited. For more information on the trust or the risks of investing, please refer to the Prospectus or Key Investor Information Document (KIID), available via the relevant Fund Information page on www.rlam.co.uk. Most of the protections provided by the UK regulatory system, and the compensation under the Financial Services Compensation Scheme, will not be available. Issued in October 2021 by Royal London Asset Management Limited, 55 Gracechurch Street, London, EC3V 0RL. Authorised and regulated by the Financial Conduct Authority, firm reference number 141665. A subsidiary of The Royal London Mutual Insurance Society Limited.
Past performance is not a guide to future performance. The value of investments and the income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested.
Find out more about the fund at rlam.co.uk/GSCF
This fund represents a genuine fusion of RLAM’s expertise in sustainable investing and credit investing. For example, given the asymmetry of risk in credit, we have a strong philosophical commitment to secured lending to protect clients’ interests. With the relative inefficiency of credit markets, this can often be achieved with no adverse impact on yield. There are plenty of bonds that offer security at a higher yield than comparable unsecured bonds. Often, however, they are not included in mainstream credit indices and require some effort and research expertise to uncover – this is what I mean by “genuine active investing”. A similar argument applies to ‘labelled’ (such as green or sustainable) bonds. While a good thing in theory, they have shortcomings – not least that blind demand can lower the yield. Following the herd into labelled bonds could very easily reduce returns. Many issuers do not ‘provide a net benefit to society’ (our definition of sustainability), such as fossil fuel companies. Also, they are often issued with somewhat vague commitments and limited penalties for missing any targets. We also believe that diversification is crucial in managing risk. This is ultimately why we launched the fund – building on our historically strong credit and sustainable franchises, it offers a global solution to clients seeking diversification away from sterling credit. While this greatly enhances the opportunity set, it increases the importance of having a strong investment process – and the self-discipline and checks and balances to follow it. Eight months or so after the fund’s launch, it’s going pretty much as expected – I have, after all, been managing a segregated client fund with a global and ESG-driven mandate for four years. While financial markets have been challenging at times as Covid-related effects have played out, this disruption provided opportunities to build out the fund on attractive terms – it took a little longer than expected, but this patience paid off. There are clear risks emerging to the post-Covid recovery, not least supply chain-driven inflation, but the fund is well-placed to deliver on its mandate.
As society has increasingly accepted the risks posed by environmental, social and governance (ESG) factors, there has been an exponential increase in interest in sustainable investing. In equities, as investors have increasingly embraced ESG analysis, there has been a coalescence of standards and terminology, and better data help for sustainable fund managers. Credit investing is some way behind and, while catching up quickly, is more virgin territory. Inevitably, the increased interest in ESG-related investing has led to myriad fund launches. What makes the RL Global Sustainable Credit Fund different from other new funds? First, RLAM has a long-established presence in sustainable investing in general (our UK equity-focused Sustainable Leaders Fund celebrated its 30th anniversary in 2020); and sustainable credit in particular, with over 12 years of experience in sustainable sterling credit. We currently manage over £12bn in our sustainable funds. We believe that this experience gives us a clear edge over asset managers who are new to this area. We have a clear and consistent sustainable investment philosophy and process; and have built a team of specialists to analyse sustainable investment opportunities. This proprietary expertise is guided by an independent external advisory committee that plays a significant role in assessing our processes, reducing the risk of fund managers ‘marking their own homework’. These various elements can’t be easily replicated by less-experienced asset managers.
This fund represents a genuine fusion of RLAM’s expertise in sustainable investing and credit investing
Eight months after launching the RL Global Sustainable Credit Fund, Senior Fund Manager Rachid Semaoune discusses the opportunities of extending RLAM’s parallel expertise in sustainable and credit investing into global credit.
Underpinning these factors is our belief in genuine active investing. Bonds are a lot more complex than equities, and investment decisions demand special care regarding governance and credit structures. You can lend money to a company either on a secured or unsecured basis; to different parts of the capital structure; or to a ring-fenced entity or bankruptcy-remote SPV. That has to be taken into account in your ESG analysis as well as your credit selection. Our experience of closely analysing bond documentation and covenants packages is a real advantage. It is surprising how readily some managers are prepared to use group-level equity-oriented ESG data to inform credit investment decisions. Even more so when many issuers have no listed equity and therefore no such ESG data profile. This highlights an important aspect of credit markets for sustainable investors: they provide opportunities to gain exposure to different investment themes from equities, such as social housing. Our proprietary ESG research capability helps to uncover opportunities in credit areas not covered by third-party equity-based ESG ratings.
Rachid Semaoune, Senior Fund Manager, RL Global Sustainable Credit Fund
An old myth is that socially responsible investing can hurt returns. But the pandemic has helped bust that fallacy and is clearly underlined by the performance of ESG funds favoured by wealth managers. Our data shows that of the 10 most popular funds in model portfolios that apply an ESG layer as defined by Morningstar, the seven equity strategies featured have all made top quartile gains when measured against their respective peer groups over three years. The two most popular equity funds, Liontrust’s Sustainable Future UK Growth strategy and the Royal London Sustainable Leaders Trust, both have top decile returns within the UK All Companies sector over the period. And among the remaining three fixed income funds, the Rathbone Ethical Bond fund stands out within the Sterling Corporate Bond sector, having returned 19.6% against an average of 16.7% over the same timeframe. All the funds in the group for which Morningstar data is available have also received net inflows over one and three years, benefitting from the increased popularity of ethical investment among the public more broadly. Together, they have taken in £6bn since October 2018, £2.9bn of which they have attracted in the last 12 months alone.
The ESG funds on hit lists
The Sanlam socially responsible investment (SRI) models specifically focus on the environmental and social aspects of ESG investing. When selecting funds, we prefer to blend factors in all our active models, including the SRI range. Blending reduces exposure to style-rotation risk and the need for timing. Accordingly, our choice of funds is driven primarily by their factor attributes and consistency of approach, followed by the managers themselves. In the case of our SRI models, we additionally require all managers to have an explicit approach to social responsibility via exclusion and/or meaningful and material engagement. Sustainability has many longer-duration attributes, with the core benefits usually accruing over time. However, there are typically shorter-term benefits too, such as a decline in idiosyncratic risk. Liontrust Sustainable Future UK Growth gives us focused exposure to the UK mid-cap growth space via an experienced and relatively stable team. Their philosophy provides long duration growth exposure with a consistent market-cap bias. Royal London Sustainable Leaders provides exposure to larger cap names. It is less ‘growthy’ and it’s more pragmatic approach to sustainability also provides portfolio diversification benefits. Dollar exposure, thanks to its habitual 10%-20% allocation to US names, helps provide some traditional risk-off aspects. A lower cost of capital (yield) is not necessarily an attribute sought by bond investors, but there are ways to benefit. The Rathbone Ethical Bond fund gives us a lot of exposure to lower-rated investment grade credit. These investments are less likely to be tripped up by failing to focus on the benefits of the E and S, and are more likely to be in thematic industries that attract capital: all positive credit attributes. Rathbones’ positive screen means the fund can also benefit from companies lowering their cost of capital (declining yields) by positive change.
Barry Cowen, Senior fund manager of collectives and model portfolio solutions, Sanlam
AB International Health Care is an active, bottom-up, stockpicking fund, with the manager and analyst team focusing on businesses rather than falling in love with the science. It identifies good fundamental business attributes rather than trying to predict exceptional one-off binary events that occur with low probability – for example, the success with one specific drug. The focus is on an attractive return on invested capital profile and the reinvestment of profits back into each business they own. This philosophy has been developed over a number of years by Citywire + rated manager Vinay Thapar, who has a background in academia but has also spent a considerable amount of time as an analyst and investment manager. Thapar is supported by a six-strong healthcare specialised team and this strong fundamental sector-specific research is a key attraction of the fund. More generally on thematic strategies, it really depends on the theme itself and if this is consistent with our house view, but also the construction of each product and in particular any overexposure to individual stocks.
Duncan Blyth, senior investment manager
by Robin Amos
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The table below shows how many MPS vehicles hold each of the 10 most widely held ESG funds, with a toggle to show the minimum number of wealth firms that own them. Scroll over the boxes to see which funds are held in the most portfolios. With some funds held in multiple portfolios run by the same wealth manager, the number of vehicles may not always match the number of firms.
The top thematic sectors in funds of funds, mixed asset and model portfolio vehicles
Source: Citywire/Morningstar
A fund selector’s view
We explore our extensive buy list data to reveal the favourite ESG funds among selectors
VEHICLE
Hawskmoor IM (3) Casterbridge Wealth (3)
Janus Henderson UK Responsible Income
Tilney (2) LGT Vestra (2) Hawksmoor IM (2)
TwentyFour Sustainable Short Term Bond Income
EQ Investors (2) Hawksmoor IM (2) King & Shaxson (2)
EdenTree Responsible & Sustainable Sterling Bond
Hawskmoor IM (5)
Liontrust Sustainable Future Global Growth
Casterbridge Wealth (3)
Stewart Investors Asia Pacific Sustainability
Hawksmoor IM (4)
FP WHEB Sustainability
EQ Investors (3) Hawksmoor IM (3)
Ninety One Global Environment
Sanlam (4)
Royal London Sustainable Leaders Trust
Sanlam (3) Casterbridge Wealth (3)
Rathbone Ethical Bond
Liontrust Sustainable Future UK Growth
FIRM
Most popular UK equity income funds
The chart below shows how many MPS vehicles hold each of the 14 most widely held thematic funds, with a toggle to also show the minimum number of wealth firms that own them. With some funds held in multiple portfolios run by the same wealth manager, the number of vehicles may not always match the number of firms.
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Important Information Past performance is not a reliable indicator of future performance. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested. Issued and approved by T. Rowe Price International Ltd, 60 Queen Victoria Street, London, EC4N 4TZ which is authorised and regulated by the UK Financial Conduct Authority. © 2021 T. Rowe Price. All Rights Reserved. T. ROWE PRICE, INVEST WITH CONFIDENCE, and the Bighorn Sheep design are, collectively and/or apart, trademarks or registered trademarks of T. Rowe Price Group, Inc. 202110-1862363
I think public markets are essential to achieving the collective goals of society. In its purest form, supplying new capital to an entity that could not otherwise access capital to generate its intended positive impact is the origin of impact investing. While impact investing has deep roots in private capital and philanthropy, solving for today’s elevated and global environmental and social pressure points demands a complementary approach. In public equity markets, this means understanding, addressing, and aligning the interests of stakeholders— including shareholders, fiduciaries, and listed corporates—to capture, accelerate, and pursue positive outcomes. Given the magnitude of the world’s environmental and social challenges, we believe that private markets alone will not suffice to build the required solutions to the very real and very complex friction points that exist for our planet and our global community. To match the magnitude of the issue with a magnitude of response, governments, capital owners, and asset managers must work together to incentivise and align listed businesses with better practices. Impact investing is one way to do this by adding a perspective into the investment process directed at the broader consequences of a business’s operations.
Q. Can public equity investing really make an impact on key environmental and social concerns, especially when compared with private investing?
Impact investing brings a nonfinancial dimension to the investment process—a values‑based approach that seeks positive environmental and/ or social impact as part of distinct performance targets. While originally the domain of private investors, we believe the potential to capture and create impact in public equity markets has broadened tremendously over the past decade.
FOR PROFESSIONAL CLIENTS ONLY. NOT FOR FURTHER DISTRUBUTION.
'To match the magnitude of the issue with a magnitude of response, governments, capital owners, and asset managers must work together to incenbusinesses with better practices'
Q&A with Hari Balkrishna, Portfolio Manager, T. Rowe Price Global Impact Equity Strategy on understanding the required foundation to build, manage, and measure an impact portfolio.
We aspire to be a partner to our clients, using our full breadth of ideas to harvest both impact and alpha over the long term, while managing for risk, given challenging times, will invariably come to our natural habitat of investing. Impact investing has grown tremendously in recent years, and we do not believe there needs to be a sacrifice of return potential in order to implement a values‑based approach. This is directly linked to how positive environmental and social outcomes are becoming more measurable, which in turn is being reflected in the economic potential of a business. Part of my role as an impact investor is helping individuals and institutions make sense of what’s happening in the world around us and how that could manifest into risks and opportunities within investment portfolios.
Q. How do you make a difference for clients as an impact investment manager?
Impact is achieved within an investment portfolio in more ways than simply owning and capturing the economics and activities of certain types of companies. It involves directing fresh capital toward desired impact outcomes, alongside impact‑oriented company engagement, proxy voting, and the associated influence feedback loop. As a starting point, it is important to screen companies from an impact lens for both materiality and measurability of the desired outcome. This requires an understanding of a business in the context of a defined impact framework expressing clear principles and intentions and identifying businesses that are best in class. For us, this is driven by a combination of evaluating a company’s current and future operations and the alignment of earnings or revenues with the United Nations Sustainable Development Goals (UN SDGs), with a holistic perspective on a business, using the five dimensions of impact framework¹ . As a truly global asset manager, we are ready to supply new capital to areas of target impact. We will also use our position of ownership to enter into dialogues with companies where we can see the potential to accelerate the good aspects of their operations, while helping to mitigate the negative externalities that naturally exist even in the purest of business operations.
Q. How does an investment manager contribute to positive impact?
It is important to distinguish that impact investing is not environmental, social, and governance (ESG) integration, and it is also a different discipline from sustainable investing. It does, however, incorporate both but also takes a step further. Impact investing in public equity markets lives in the same domain as other styles of investing. We do not believe there needs to be a sacrifice of return potential, and we believe the opportunity set is unrecognizable from a decade ago. However, impact investing backed by stock‑picking outcomes requires equal if not greater levels of due diligence in research to avoid excessive concentration, crowding, and disappointment. In our view, a forward‑looking perspective, a stable and expert research foundation, and a good level of imagination will be key features of successful investment processes.
Q. How does your portfolio differ from the theme/factor of ESG, sustainability, or even impact?
With a forward‑looking perspective and a combination of aggregate analysis where it makes sense, along with individual and holistic analysis where it does not. To be clear, data to measure impact today remain incomplete, while common standards of impact measurement have not been developed on a par with performance/ returns analysis. This makes impact measurement inescapably complex. The challenge for the industry is that impact investing lives in a complex world of risk and opportunity—one of great change and disruption. The solution for us is to be a good partner and contribute to innovation in the field of impact measurement and reporting, helping clients navigate this journey with the data and trust they need. Leveraging multiple dimensions of our research expertise (both responsible and fundamental) while investing for clients in the field of responsible investing and impact reporting will, we believe, be a real advantage over the long term. ¹Five dimensions of Impact Framework: We use the Five Dimensions of Impact framework to carry out impact due diligence of a given stock. This framework provides a comprehensive assessment of the impact of a company, which is analysed across five dimensions: What outcome is occurring in the period?, Who experiences the outcome?, How Much of the outcome is occurring (scale, depth and duration)?, Contribution—would this change likely have happened anyway? and Risk—What is the risk to people and planet if impact does not occur as expected?
Q. How do you approach the challenge of data and measurement in the impact sphere?
Hari Balkrishna, portfolio manager, T. Rowe Price Global Impact Equity Strategy