How do you think about sustainability at your company? How do you set your priorities?
Magnetic north is the positive impact of the products and services that companies make. Is the product or service delivering a positive impact or not? If it is then it is a candidate for investment, if not then it isn’t. Our strategy is focused on nine key problems facing society today – ranging from the need for carbon reductions in energy generation and transport, to the need to find alternatives to long-lived plastic packaging to the challenge of education and healthcare. Companies that are selling products and services that tackle these challenges are the companies that we are interested in. And by extension companies that are causing these problems such as the fossil fuel industry, or companies making food and drink that are high in sugar and salt are clearly not going to be in our investment funds.
Can you talk through a stock that you hold that typifies what you are looking for when you invest and why?
Sure – a UK company that we invest in and actually came to present at our annual conference is a business called Croda. One of the few remaining British speciality chemicals businesses. They supply speciality chemicals that are primarily derived from biological materials (plants and wool) and have a dramatically lower carbon footprint than competing petrochemical based chemicals. They are hugely innovative and have developed products that range from materials that help to make COVID and other vaccines more effective through to products that are used in agriculture to improve crop yields while reducing the use of persistent or toxic chemicals that have traditionally been used. So the products clearly help to solve key social and environmental challenges, but the way the company operates is also very sustainable with demanding targets aimed at reducing its own environmental footprint.
What’s the best question you’ve been asked by a client on this subject?
The best questions are often the simplest and a regular one that we get is to ask how the money invested in our strategy has a positive impact. We’ve done a lot of work on this because the mechanisms aren’t very straightforward. In reality when an investor puts money into a fund like ours, we use that money to buy shares on stock exchanges around the world in the companies in our portfolio. As I’ve said, these companies sell products and services that have a positive impact on key social and environmental problems. By investing in them we support them and encourage them to do more – we vote at their shareholder meetings and meet with management to encourage them to ensure their products and services are creating a positive impact. We also measure this impact – in terms of the number of patients being treated with their therapies, or the carbon emissions that are avoided through the use of their products. Investors in our strategy don’t ‘own’ this impact – it doesn’t mean they can go and fly round the world and buy a gas-guzzler – but it does mean that they are supporting this positive impact that is happening in the world.
There’s a lot of talk about the social benefit of investing sustainably – but can you give some colour on what your business sees as the economic benefit?
Ultimately these are investment products and they have to generate a competitive return. Nobody is going to buy a coat that is produced sustainably but that doesn’t keep you warm. By the same token, investment products need to generate a return. Actually we believe that companies that sell products and services that have a positive impact are very well placed to generate a good return for their investors. As economies around the world commit to eliminating their carbon emissions and becoming more sustainable we expect demand to increase for the products and services that our companies supply. Our key focus is on products and services that are commercially available and that work, but have yet to achieve mass adoption. Products typically follow what is called an S-curve in adoption. We try to find companies that have products that are at the end of the flat bit of the S at the bottom of curve and are approaching a tipping point with growth accelerating. Good companies that can turn this growth into profits is a core way of investing. Because we focus on sustainability we tend to see these opportunities before other investors.
What was your view of the recent SDR and fund labelling consultation paper?
We are very much in favour of SDR which we see as a key step in providing greater clarity to fund selectors on what different fund strategies are trying to achieve. It also makes it much more difficult to greenwash – to pretend you are investing sustainably when you aren’t. The proposals weren’t perfect and we have been very involved in advising the FCA on how to improve the proposals. We also think it is a really significant piece of legislation for IFAs. It is inevitable we think that advisors will be required to ask clients about their interest in sustainability as part of their fact-find (arguably it already is) – sustainability it here to stay and we believe will continue to grow in importance in the overall market. Understanding how the FCA is planning to structure the market is pretty important for all market participants we think.
In comparison to the EU, is there anything you wish the FCA had included but did not?
In general we think the SDR is a step forward from the SFDR – we do though hope that they converge – at least in terms of the types of data that the two regimes need. It is also really important that the definitions that they use are consistent. As an impact investor, for example, we need them to agree on a definition of what ‘impact investing’ is. Ideally this would be based on the great work – that we have supported – that groups like the Global Impact Investing Network have been doing.
In 3 years’ time, what would you hope that the UK sustainable market looks like?
Given where the underlying economy is going – with ever greater focus on carbon and sustainability – I think it is inevitable that sustainability is even more firmly embedded than it is today. I hope we are having fewer debates about why we are talking about sustainability and more interesting conversations about how we are investing sustainably.
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