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10 funds for a world in transition to a low carbon future

Square Mile outlines the funds it believes will deliver on their promised impacts


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2020 will, of course, be synonymous with the covid-19 pandemic, but it has also seen a real step-change in the move to a net zero carbon future, with massive commitment from the EU and other regions to invest in their energy and environmental infrastructure, writes John Fleetwood, director of responsible and sustainable investing, Square Mile Investment Consulting and Research.

The EU is a clear advocate of the transition to a low-carbon, more resource-efficient and sustainable economy and is supportive of efforts to build a financial system that promotes sustainable growth.

In December 2019, the European Green Deal was unveiled, outlining the EU’s ambition of making Europe the first climate-neutral continent by 2050.

The European green deal investment plan followed earlier this year which will mobilise at least €1trn of sustainable investments over the next decade.

At the same time, ESG analysis is rapidly becoming part of mainstream investing, whilst the range of funds focused on environmental solutions is mushrooming.

Such funds look to be major beneficiaries of the inter-governmental support typified by the Paris agreement and the EU’s Green Deal, which will act as a strong tailwind for the whole sector.

They are also on the right side of a broader popular demand for investment vehicles that can deliver a tangible benefit to the environment and society, alongside a financial gain.

Within this group of funds, we’ve highlighted 10 funds on the basis of our confidence in their ability to deliver the promised impacts.

These funds are rated according to Square Mile’s 3D framework of doing good, avoiding doing harm and leading change, with each fund receiving an impact rating.

The rating summarises the extent to which a fund invests in solutions to social and environmental challenges, avoids companies which cause significant environmental or social harm, and helps to bring about wider benefits through engagement, advocacy and collaboration.

Impax Environmental Markets: AAA 3D Rating

Launched in 2002, this fund was a pioneer in environmental investing long before it became fashionable. This is a primary focus for the fund group and this is its flagship fund, available as an investment trust and a Sicav.

Impax’s investment philosophy is based upon the premise that the most profitable approach to equity investing is to invest in companies that operate in markets where there are long-term themes that underpin growth and where those companies are poorly understood.

Impax does not invest in companies with “average” prospects simply due to their size in the index, and believes that the best examples of inefficiently priced growth are to be found in companies providing more efficient or cleaner delivery of key services – specifically energy efficiency, alternative energy, water infrastructure, pollution control, waste management and food and agriculture related markets.

The portfolio is almost entirely focused on companies providing environmental solutions and clearly identifies its impacts, in terms of avoided carbon emissions, clean energy generated, water saved, and waste treated.

Ninety One Global Environment: AAA 3D Rating

The managers use a proprietary screen to build a universe of approximately 700 companies providing environmental solutions that are most likely to benefit from sustainable decarbonisation.

These are defined as companies that earn at least 50% of their revenues in areas that are impacted by the ongoing transition to a decarbonised energy system.

Ninety One then determines whether the products and services of these companies are more carbon efficient than their alternatives.  Each company in the investment universe has to fulfil this criterion by which revenues can be directly associated with the concept of ‘carbon avoided’.

This universe breaks down into three opportunity sets, renewable energy, resource efficiency and electrification, from which the portfolio is constructed.The aim is to identify companies which genuinely avoid carbon.

To do this, the managers measure all indirect emissions (Scope 2 and 3) alongside direct emissions (Scope 1), since these constitute around 75% of a typical company’s carbon emissions.

This methodology therefore allows the managers to identify companies that are truly contributing to reducing carbon emissions.

Triodos Pioneer Impact: AAA 3D Rating

Triodos is an ethical bank based in the Netherlands with a long history of activism in sustainable finance.

The Pioneer Impact fund focuses on smaller companies which are at the cutting edge of tackling sustainability challenges.

It uses seven sustainable transition themes to identify companies that provide solutions to sustainability challenges.

These include food & agriculture, mobility & infrastructure, renewable resources, circular economy, healthcare, innovation for sustainability and social inclusion.

Although these themes include social areas such as healthcare, the majority of the fund is invested in environmental solutions that will undoubtedly benefit from the major investment in environmental infrastructure.

The fund is one of the more long-standing impact funds dating back to 2007, with a rich heritage resulting from being part of one of the leading ethical banks in Europe.

UBAM Positive Impact Equity: AAA 3D Rating

This fund is one of the new wave of impact funds, with a stated objective of “generating superior returns by investing in beneficiaries of the wave of capital required to address the world’s most pressing challenges”.

To this end the fund invests in a concentrated, low-turnover portfolio of businesses which are part of the solution to these challenges.

This is built on a belief that companies which help to solve the world’s acute societal and environmental challenges are uniquely exposed to a clear growth path over the coming decades and will therefore generate superior returns.

Using the UN Sustainable Development Goals (UN SDGs) as a framework, potential investments are considered in terms of the nature of their products and services and their contribution to the UN SDGs.

Promising candidates are screened through an ‘IMAP’ scoring system developed by the UBP European equity team.

This scoring system measures the intensity of impact by looking at intentionality (spend on R&D and strategy), materiality (proportion of revenues with a positive impact), additionality (uniqueness and leadership) and potentiality (potential for global impact).

A traditional financial overlay is then applied to arrive at a final portfolio.

A long-term, patient and engaged capital approach is employed, looking at under-researched companies.  The investment team comprises eight fund managers and analysts, each with specific responsibilities for different sectors.

A stock picking approach is followed, with 80% of the historical performance of the European Equity team being derived from stock selection.

WHEB Sustainability: AAA 3D Rating

WHEB is a specialist fund manager solely focused on sustainable investing in global equities.

The FP WHEB Sustainability fund invests in high quality established businesses with the majority capitalised at $1bn or more, and which fall into one of nine environmental and social themes defined as providing a ‘solution to a sustainability challenge’, and driven by the megatrends of resource scarcity, population growth, urbanisation, rising living standards and globalisation.

The team’s understanding and communication of sustainability is exceptional, exemplified by their pioneering work in developing an ‘impact engine’ to measure and report on impacts, and by the publication of the Investment Advisory Committee minutes.

The themes of the fund are underpinned by the long-term trends which have resulted in superior sales growth in the types of business in which WHEB invests.

The fund is managed on a long-term basis with an average holding period of four to seven years, which allows management to extract full value from fundamental research, in stark contrast to short-termism that pervades much of the investment management industry.

The managers co-invest in the fund and are part owners of WHEB Asset Management which helps ensure a long-term approach.

Pictet Global Environmental Opportunities: AA 3D Rating

Pictet is a pioneer of thematic investing and this fund embraces multiple environmental themes in the belief that these offer an attractive investment proposition.

The focus of this fund is on companies that play an active role in contributing to a cleaner environment and to an economy that is less intensive on natural resources.

Pictet manages the fund according to the Planetary Boundary Framework. Planetary Boundaries are ecological thresholds for nine of the most important environmental dimensions (climate change, ocean acidification, ozone depletion, eutrophication, water use, land-use, biodiversity, aerosols and chemical pollution).

The investment team analyses whether companies’ core activities, products and services respect these boundaries or not, over their lifecycle. The aim is not only to respect the planetary boundaries themselves but to help others to reduce their environmental impact and to stay within the safe operating space.

The strategy’s investable universe is composed of companies within the opportunity set with greater than 20% of products and services actively solving environmental challenges, but in practice,

Pictet only selects companies whose ‘active’ contributions are substantial in this respect.

Source: Pictet Asset Management GEO Impact Report 2019

Schroder ISF Global Energy Transition: AA 3D Rating

This fund offers a focused exposure to the theme of full energy transition, by investing in opportunities across the value chain, including clean energy generation, energy transmission and distribution, energy storage and electric transport infrastructure.

The manager notes that there is a large disconnect between required investment and current market capitalisations, creating a significant opportunity for equity holders.

With $120trn of investment into renewable energy required by 2050 to meet climate targets, the investment opportunity is huge.

Schroder ISF Global Energy Transition will not invest in companies with any exposure to fossil fuels or nuclear power, as defined by MSCI. Source: Schroders – 30 June 2020.

The Schroder ISF Global Energy Transition fund is a high-conviction fund comprising 30 to 50 companies, diversified by geography and sectors, targeting long-term, sustainable capital growth underpinned by a theme that will run for the decades ahead.

A proprietary screening tool uses financial and descriptive metrics to build a bespoke focus list of companies most exposed and actively contributing to the sustainable energy transition.

The team then creates and maintains detailed financial models for focus list companies and uses a combination of DCF valuations and a bespoke GARP score to rank companies.

A proprietary sustainability classification directly impacts valuations.

Storebrand Global Solutions: AA 3D Rating

Storebrand has long been a pioneer in the world of Responsible investment, something which is evident in its operations, resources, both human and technical, and policies.

Indeed, Responsible investment is embedded into this organisation from the top down, with a high level of training and understanding shared across all staff, led by the expertise of the eight strong Sustainability team.

ESG analysis has long been integrated into the group’s investment processes, underpinned by the prowess of the proprietary sustainability scoring system.

This has been in use since the late nineties, a history to which few groups can attest and is comprised of two main building blocks – ESG risks and UN SDG opportunities.

Launched in 2015, the fund not only benefits from Storebrand’s heritage and extensive resources in this space, including the expertise of the Sustainable investment team, but also from the management of Philip Ripman, a credible and experienced sustainable investor.

The fund seeks to invest in companies whose core products and/or services either already are providing or are transitioning to provide solutions to help in the achievement of the UN SDGs, and this is evidenced by the holdings.

NNIP Green Bond: not rated

This fund is one of a growing number of fixed interest funds to invest wholly in high quality debt, whereby the proceeds are invested in projects with a demonstrable positive environmental impact.

Issuance of green bonds has been strong and looks to remain so, both from corporates and governments.  The performance of green bonds has mirrored that of comparable indices making them highly attractive given their environmental benefits.

NNIP is an acknowledged leader in green bonds with a dedicated green bond team, supported by nine Responsible investment analysts.  An in-house team assesses the bonds to ensure that they meet the Green Bond Principles and avoid controversial sectors.

This assessment includes a check that at least 90% of the proceeds of green bonds are allocated to one of the following themes: renewable energy, energy efficiency, pollution prevention, sustainable water, green buildings or low carbon transport.

Pictet Clean Energy: under assessment

Like the Schroder Global Energy Transition fund, the Pictet Clean Energy fund is invested in different parts of the energy transition, not only including the supply of renewable energy, but extending to demand reduction of fossil fuels, enabling technologies and infrastructure.

These are all areas that will benefit from European green stimulus.

A quarter of the fund is invested in e-mobility, where Pictet expects annual sales of electric cars to surpass internal combustion engine sales by around 2030 in Europe.

John Fleetwood

This is just one of multiple inflection points which are happening all at the same time, with new manufacturing methods and a complete transformation of the energy landscape coinciding with a similarly transformative shift in the transport industry.

This fund is positioned to take advantage of these opportunities.

This article was written for Expert Investor by John Fleetwood, director of responsible and sustainable investing, Square Mile Investment Consulting and Research.