Sustainable investing in the spotlight

(IFA Magazine)
www.ifamagazine.com

 

IFA Magazine talks to Ama Seery, ESG Analyst, Janus Henderson Global Sustainable Equity Fund about the principles and practice of sustainable investing


 

IFAM: How important do you think sustainable investment strategies will be for investment funds going forward? Is this just the latest fad or is it set to become a core element of the investment selection process for fund managers and advisers alike?

AS: I will never say that responsible investing is a fad. Our fund is almost thirty years old so to us the approach is just good investment sense.  Of course, we are very happy that more and more people are seeing that now and putting their money behind these strategies too.

Looking ahead, I think that more importance than ever before will be attached to sustainability, especially because the issues that this seeks to address are becoming more acute. On a regular basis we are seeing the impacts of climate change on our TV screens and in our lives. As this becomes more and more prevalent, investing sustainably is going to make more sense.  It’s here to stay.

IFAM: What are the investment objectives of the GSE fund?

AS:  Within the fund, we seek to try and address sustainable development as well as incorporating innovation and long-term compounding growth. Our aim is to invest in a way which allows sustainable development, promotes innovation and delivers healthy returns for our investors. The way we do this is we look to invest in companies which provide a positive impact for the environment and society whilst at the same time allowing us to stay on the right side of disruption. That means not investing in certain areas which we think will be disrupted in the future. We have a ‘do no harm’ mentality, and by this I mean that we don’t want to be invested in areas which harm the environment and society. Now, more than ever, we feel that this approach will provide our clients with consistent growth over the long-term. We can see this evidenced over the last ten years in our strategy as we have consistently outperformed our benchmark over that period.

IFAM: In your opinion, what makes the fund different? What do advisers need to know about the fund when doing their investment research?

AS: One of the biggest things which makes us different is our longevity in this space.

This is not a fad. We are not jumping on any bandwagons. We’ve been doing this for almost 30 years and as a result it has informed our investment process. When we started investing sustainably back in 1991, this was only a few years after the Brundtland Report. This report was created by a UN Commission back in 1987 and describes sustainable development as meeting the needs of the present without compromising future generations ability to meet their own needs. This is the most widely used definition of sustainable development. Our entire investment philosophy is based on this foundation. Over the years we’ve added to our philosophy with all the additional refinements of this definition. This includes what is known as the triple bottom line – sometimes called the 3Ps – people, planet, profit.   It can also be expressed as environment, society and economics. The triple bottom line informs our investment process which has environmental and social impact themes as well as having environmental and social avoidance criteria. We’ve also gone on to include another refinement which results from the UN Sustainable Development Goals (SDGs), particularly with regards to enhancing our reporting. We produce an annual sustainability report in which we are able to show the portfolio’s contribution to the UN SDGs not in a traditional mapping sense but showing the actual percentage contribution to each goal. I think that this is a key differentiator for us and our fund.

 

Another factor is transparency. The annual sustainability report is provided to clients but we also produce a quarterly positive impact report. In this, we provide details of all our holdings along with justifications as to why they have met the standards to be included in the impact category. We also report to our clients based on our voting and engagement on a quarterly basis. Our investment criteria and principles are easily accessible for anyone to access and review. Having this level of transparency is important to us.

The team approach is firmly embedded here and is a unique aspect of how we work. From my own experience as a sustainability professional, for the last twelve years, I’ve never done a piece of sustainability work where I haven’t brought in other people from different backgrounds to enhance what I’m doing. That’s how we work at Janus Henderson. For example, the main sustainable investment team is made up of Hamish Chamberlayne who is Head of SRI, co-portfolio manager Aaron Scully who is based in Denver, Colorado, and me. Between Hamish and Aaron, they have almost 40 years of investment experience but the fact that they operate from two different locations and two sets of different investment experiences is a big advantage. Aaron tends to focus on our US holdings with Hamish concentrating more on Europe and Asia Pacific holdings.

When I do sustainability analysis I don’t do it alone. I usually do it in conjunction with the sector experts and the Governance and Responsible Investment (GRI) team in Janus Henderson. But our knowledge pool can be even wider than that. For example, we hold Nike and Adidas in our portfolio. Recently I found out that one of our sales team is actually an expert in sneakers! So we have actually brought him into the analysis process and included him in the company meetings. His input is helping to inform our investment process which is great.

Another relevant area is that we also collaborate with other people outside of Janus Henderson. As an example of this, one area which I’ve been looking a lot at is cobalt in the Democratic Republic of Congo (DRC). I’ve worked with a children’s rights charity on this and they have people working on the ground in DRC. Normally, such a charity would be worried about reputational risk in working with finance professionals but they’re making an exception for us because they see that we are trying to do some good.

Finally, we are positioning ourselves as thought leaders in the space. For example, I held a webinar about our SDG reporting methodology. As part of that I discussed how we measure the portfolio contributions to each of the sustainable development goals.  Not only are we coming up with new metrics on how to measure impact but we are also sharing those ideas with the community.

IFAM: Could you explain the criteria which you use to exclude or include particular companies within your fund selection process?

AS: There are many facets to this process. Firstly, we have ten positive impact criteria in total. Five of these are environmental and five are social and we use these to determine whether a company is having a positive impact.

The way we do that is to look at the company’s products and/or services. We want to see that at least 50% of the company’s revenues are positive impact. After that we have exclusionary criteria – where we seek to avoid environmental and social harm. Within that we have the traditional “sin” sectors such as alcohol, armaments, pornography, gambling, tobacco etc. These will all be avoided as well as us having exclusions on human rights, modern slavery and corruption criteria. We also have some rather unique avoidance criteria around fossil fuels. For example, we won’t invest in fossil fuel extraction and refining and seek to avoid fossil fuel power generation. We don’t invest in nuclear power, or contentious sectors like airlines and fast-food. We uniquely have exclusions on animal testing, fur, intensive farming, and meat and dairy production. We also exclude chemicals of concern. These include substances banned by WHO or companies creating products with an ozone depleting potential.

You might think that all this might narrow our investment universe, but it is not narrow at all. As society has been shifting, our investible universe has got bigger every year. A good example is that our fund’s benchmark – the MSCI World Index – has approximately 1600 underlying companies. Our investible universe not far from that size.

IFAM: How do you manage risk within the fund and ensure that a broad asset allocation strategy results?

AS: For us, risk management is a multi-faceted approach. One of the important elements is the construction of our investment universe. Because we’re not investing in areas which do environmental and social harm, we are minimising the risk of disruption to the portfolio. A good example of this is the tobacco industry – an industry where quite a few businesses have been in decline. That’s because they’ve been disrupted by changes to smoking habits as well as increasing legislation. It makes sense as a first risk management measure to only be invested in winners and not to be invested in companies at risk of future disruption.

IFAM: Is there anything we can draw from the coronavirus situation regarding how sustainability strategies have reacted?

AS: In general, we’ve seen that a lot of sustainability strategies have been more resilient during the market downturns. This has been the case with our own strategy which has outperformed its benchmark. That is not to say that we wish for downturns of course, far from it.

Within our own strategy we’re looking at how best we can deal with the current situation of this global pandemic, its implications and impacts.  Many commentators are suggesting that pandemics could reoccur in the future. We are looking into how we position future holdings to deal with future pandemic situations so that we invest in environmental and social solutions. In terms of what we do and how our investment strategy works, the current situation doesn’t change things for us. It just heightens the importance of why we are sustainable investors.

 

 

0

Like This