1. 18
investmentweek.co.uk 12 December 2016
Sustainable
Investing
Fund managers from this year’s Sustainable Investment Conference
explain how they place sustainability at the heart of their
investment process and identify the key stocks and themes driving
their funds
Sustainabilityoutlook:The
trendsshapinginvestor
strategiesin2017andbeyond
CHARLIE THOMAS
head ofstrategy, environment
andsustainable investment,
co-manager, Jupiter Global
Ecology Diversified fund
Whatwasthereasoningbehind
thefund’slaunchthisyear?
The Jupiter Global Ecology Diversified fund
is one of the first funds globally to apply
multi-asset thinking to environmental and
sustainable solutions investing.The fund
offers rare access to the depth of opportunities
now available to investors looking to
capitalise on the associated structural growth
themes,as well as making a positive impact
with their investment.
Not only has the sustainable equity
universe matured in the time we have
been managing money in this area,but
there has been a rapidly growing pool of
opportunities for example in green bonds,
where the universe already exceeds $1trn.
Marrying the two asset classes in a diversified
portfolio creates the potential to generate
capital appreciation and income.The fund is
managed by a team of experts who look for
the best place to invest on the capital structure
and have a focus on limiting fund drawdowns.
Whichstocksorsectorshavestoodout?
The fund has exposure to companies or
projects that we categorise in three main
areas: environmental infrastructure, resource
efficiency and demographics.
MIKE
APPLEBY
investment
manager,
Alliance Trust
Investments
How do you identify long-term
themes and trends in which to invest?
We use many sources (knowledgeable NGO’s,
our advisory committee, industry experts and
brokers) as well as our collective knowledge
gained in over a decade of investing to help
understand the big shifts we see happening in
a given industry.
We see many interesting opportunities
arising from trends we see happening in the
future.For example,in efficient lighting,
healthy eating,education,cyber-security,
insurance,and sanitation – a total of 23
different investment themes spread across
many industries which are broadly involved
in increasing resource efficiency,improving
lifestyles,or making systems more resilient.
Do you actively avoid any sectors or
asset classes across the fund range?
We do not invest in weapons, tobacco and
have limited exposure to pesticides and fossil
fuels. The exclusion that most meaningfully
affects performance, sometimes in a positive
manner and sometimes in a negative manner,
is being underweight resources – particularly
primary fossil fuel extraction.
Over the medium term, we see very volatile
commodity prices mean the net effect of this
is broadly evened out. For example, during
the supercycle in commodities (2002-2008)
as a headwind, which was largely reversed as
commodities sold off severely in 2008-2009
and 2014-2015. Also, we invest in companies
that are involved in resource efficiency who
benefit from higher commodity prices.
Our medium-term performance is
competitive against conventional competitor
funds and supports our ability to generate
competitive investment returns through the
commodity cycle.
VICKI BAKHSHI
Head of governance and
sustainable investment, BMO
Global Asset Management -
Responsible Funds range
The fund range employs an ‘invest,
avoid, improve’ philosophy. How does
this work in practice?
We are transparent about how we implement
the ‘invest, avoid, improve’ philosophy,
and publish full details of our exclusionary
criteria, which cover both controversial
products such as weapons, tobacco and
gambling, and ‘conduct’ areas such as labour
and human rights. We are helped in deciding
the criteria by our Responsible Investment
Advisory Council.
Increasingly, we find investors want more
information not just on what is excluded,
but on what type of companies are within
the portfolio and the positive influence these
companies have.
We have published Impact Reports for two
of our funds, giving information on the ESG
and carbon profile of the portfolios, as well
as how companies fit into a range of positive
investment themes.
Howdoyouchoosewhichcompaniesto
engagewithanddoesitreallymakea
difference?
Every company in our responsible range
has to meet our minimum ethical and
sustainability standards. But no company
is perfect, and where we see room for
improvement, we will engage.
Our engagement may be triggered by
a number of factors. For example, during
our research to determine whether
companies meet our criteria, we may
identify areas for engagement.
We make use of third-party ESG data,
and assess companies with lower scores to
determine whether this indicates a need
for engagement.
We vote all companies in-house
according to our own corporate
governance guidelines. Where there are
controversial issues such as on pay, we
will communicate this to the companies
we invest in.
We track the outcomes of engagement
as ‘milestones’. In 2015 across our global
engagement programme we achieved 241
milestones, ranging across governance
improvements, to positive momentum
in labour standards, human rights or
environmental management.
Events
Investment Week's Sustainable Investment
Conference took place on 17 November
at One Whitehall Place London. For more
information go to: events.investmentweek.
co.uk/sustainableinvestmentconf
The first has come into the spotlight recently,
with the election of Donald Trump expected
to result in a large increase in spending on
infrastructure projects.While the fund should
be well-placed to benefit from these steps,
sustainable infrastructure has a number of
structural dynamics that should underpin
growth for years to come.Citigroup estimates
there is a need for c$58.6trn in infrastructure
spending over the next 15 years,to help bring
basic services such as electric power,clean
water and basic sanitation to over a billion
people,and accommodate a forecast 20%
global population increase in the next 20 years.
We see fixed income and bond-like equity
vehicles as natural avenues for financing
private and public initiatives to meet these
infrastructure needs.
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2. MARC-
OLIVIER
BUFFLE
senior product
specialist,
Pictet Water
fund
Can you explain the investment
strategy on the Pictet Water fund?
Globally, challenges linked to water scarcity
and deteriorating quality are steadily
increasing. Decades of underinvestment
in water infrastructure by public entities
have lead to inefficient and outdated water
services. In this context, the role of the private
sector is growing rapidly.
The Pictet Water fund aims to capture
investment opportunities across the entire
water value chain, with particular focus
on water supply, water technology and
environmental services.
From an investment universe of 800
companies, the Pictet Water fund invests
in the 50-80 most promising companies
helping to solve the world’s water scarcity and
pollution challenges.
We believe that companies that are able
to provide solutions to the global water
challenge are likely to present attractive
opportunities over the long term.
The fund is unconstrained by region or
market cap, giving managers the flexibility
to select the most compelling investment
opportunities from the water industry.
Since its launch in 2000, the Pictet Water
fund has showcased returns superior to that
of global equity indices while displaying
lower volatility, combining the growth of the
water industry with the defensive nature of
water related stocks.
We expect our water strategy to benefit
from higher infrastructure spending as a
result of the US election. In fact, in the days
following 8 November, construction and
infrastructure components-related stocks
in the Water fund have benefitted strongly.
At the same time, as long-term investors,
the recent market volatility proves useful to
opportunistically increase positions where
we have high levels of conviction.
Canyouhighlightafewkeystocksthat
havecontributedtoreturnsthisyear?
Xylem, a US water technology company and
one of our top holdings, has been a main
contributor of performance year to date with
a stock price increase of over 40%. Xylem
manufactures water treatment systems, water
quality analytics and water pumps. It also
recently acquired a company specialising
in water meters, a key aspect of sustainable
water infrastructure.
Stantec,a construction and engineering
firm domiciled in Canada but very active in
the US,has also been a main contributor to
performance in 2016;the stock increased 25%
since 8 November.
Sustainable
Investing
19
12 December 2016 investmentweek.co.uk
NEVILLE WHITE
head ofSRI policy and
research, the Amity fund
range, EdenTree Investment
Management
What could be the impact of climate
change factors on investors’
portfolios?
Climate change risk for investors will come
from multiple sources. These include physical
(extreme weather events), technological
(smart grids and technologies that move
away from a reliance on fossil fuels) and
regulatory (carbon taxes, transition subsidies
and capital diversion).
The risk to investors arises from assets
becoming potentially ‘stranded’ as the
transition to a low carbon economy
accelerates with implementation of country
obligations under the COP21 Paris agreement.
Companies that have not planned for this
transition or build scenarios around ‘no
material change until the mid-century and
beyond’ or are predicated on a continued
dominance of fossil fuels,will be the most
exposed to capital diversion and falling values.
To avoid irreversible and catastrophic
climate change,the world has coalesced
around keeping global temperatures to within
two degrees of pre-industrial warming.To
achieve this,a combination of mitigation and
adaptation will be required where ‘business as
usual’ will no longer be enough.
WhathaveEdenTreebeendoingto
carbonfootprintyourfunds?
At EdenTree we have put climate change at
the heart of our responsible and sustainable
investment proposition for clients.We
commissioned portfolio carbon footprints
of all of our Amity equity funds in order to
understand embedded carbon risk.
While all the funds have been below
their respective benchmarks in terms of
carbon intensity,we have used the results in
order to engage intensively with the largest
contributors to emissions within the fund
and to inform fund managers so that they can
take the results into account when making
portfolio decisions.
We became a signatory to the Paris Pledge
and a member of the Institutional Investors
Group on Climate Change in order to add
our voice to public policy initiatives. We have
published two Expert Briefs on the subject for
clients and will publish a major update on all
our work in early 2017.
KEITH DIXSON
head of international
development, Candriam
Investors Group
What aresome myths about
sustainable investing and
how can they be dispelled?
Sustainable investing origins stem from
socially responsible investing initiated by
religious institutions where values were
aligned with investment goals, eg, alcohol or
tobacco or countries such as Iran or Sudan.
This exclusion approach led to perceptions of
forgoing returns as a consequence of taking a
moral or ethical stand.
As socially responsible investing has
evolved into sustainable investing we
have developed additional lenses from
which to identify new investment themes,
opportunities for generating alpha and ways
to evaluate global,interconnected risks.A
systematic ESG analysis framework becomes
an important asset to assess the quality of
business operations necessary to support
long-term value creation,and therefore more
mainstream.
Sustainable investing is not about doing
things that are good or bad,but whether steps
companies are taking are compatible with
sustainability for long-term performance.
Whatdoyouidentifyaskeydriversfor
thissectorintheyearsahead?
At the micro level,the changing demographic
landscape with the millennials and females
becoming more active investment decision-
makers.At the macro level,with a changing
regulatory landscape.But most visible in
the widespread endorsement of UN PRI (UN
Principles for Responsible Investing Initiative)
– where signatories agree to implement
a set of six principles incorporating ESG
into investment decision-making and
ownership practices – will drive awareness.
Mainstreaming of sustainable investing may
bring accusations of ‘greenwashing’ by die-
hard sustainable investment practitioners,but
it will also bring a diversity of approaches and
the potential for critical mass in the space that
should lead to innovation and true impact.
Global societies are facing pressure from
environmental degradation and social
inequality.In many cases,companies are
seen as having contributed to these problems.
The public has formed expectations that
have guided the corporate sector’s increased
involvement in contributing to social and
environmental solutions.This ranges from
the urgency of understanding,stress-testing
and hedging climate risk to the supply chain
and the impact businesses have on their
immediate and broader communities,and the
potential costs associated with poor decisions.
Ultimately, culture and conduct are ever
more important in how the financial system
fulfils its mandate of facilitating sustainable
economic growth. Economic motives are
among the key drivers of companies’ social
sensitivity and investors can have an impact
by evaluating a company’s investment in
ESG and understanding the implications on
firm value.
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