By Hamlin Lovell, NordicInvestor
An active and selective approach
“The ecology strategy has been an impact strategy for 30 years. Its DNA to focus on solutions environmental and sustainable challenges and was very innovative back when it started, when very few funds were active in this niche” says Jupiter’s Head of Environment & Sustainability, Charlie Thomas, who manages the Global Ecology Growth SICAV.
Teresa Mary “Tessa” Tennant, who founded the Merlin (now Jupiter) Ecology fund in 1988 – and was also one of the first female fund managers – sadly passed away last year but her legacy lives on, not only in Jupiter’s investing, but also in the organisations she helped to found and lead: UK Social Investment Forum (UKSIF); the Association for Sustainable and Responsible Investment in Asia (ASrIA) and the Carbon Disclosure Project (CDP). Just before she died, Tennant was awarded an honour from the British Government – an OBE (Order of the British Empire) – for her services to sustainable investment.
Reflecting on the early brochures she authored, “the essence and focus remains the same, even if the words have changed. The biggest change is that we now have in the region of 1,200 companies to invest in worldwide, up from 300 when I started running the strategy in 2000”, says Thomas. Jupiter’s approach starts with negative screening out of companies including tobacco, armaments and those involved in animal testing, but then goes much further in whittling down the universe to those making a positive impact through solutions.
The other striking change is that impact investing has moved from a niche into the mainstream, as the vast majority of policymakers recognize threats such as climate change. Thomas sums up the three drivers for solutions as being Policy, Progress and People.
Policy responses are palpable, seen in both positive and negative incentives, and have started to address how the industry describes itself. “A proliferation of 12 or more labels – such as impact investing, solutions, thematic investing, ESG, sustainable and ethical investing – has caused confusion and inhibited the market”, says Thomas, who welcomes steps towards creating a consistent and official taxonomy in the EU’s sustainable finance initiative to combat so-called “greenwashing” whereby some fund managers may only have a superficial commitment to ESG. The EU’s Technical Expert Group (TEG) is expected to announce further details in April. Thomas is pleased to see EU politicians committed to channeling more capital into the sector: as much as EUR 150 billion of investment per year will be needed to meet targets on carbon emissions by 2030.
Advances in energy efficiency, solar and wind power technology are one example of the progress being made. Renewables are now the cheapest source of electricity in many places. Some firms are being transformed in a matter of years, such as Denmark’s erstwhile oil and gas utility Orsted, which is now a leading offshore wind utility.
And the importance of people is seen in demographic change: as 90% of the next one billion people to enter the middle class will be in Asia, the pressure on scarce resources, such as water, will be immense. When people enter the middle class and acquire a washing machine, their water usage can quadruple. Having started as a very European-centric approach, Jupiter’s focus first shifted West – with 40% of the book now in North American companies – and is now turning East. Thomas anticipates a growing proportion of investments will be found in Asia, where companies are raising their game on corporate governance and environmental matters.
Financial and non-financial criteria
“Jupiter’s approach blends financial and non-financial features of companies in a reasonably exhaustive process of looking at their individual features”, says Thomas. Three areas stand out: technology or product perspectives; management strategy appraisal, which generally involves meeting managers of mid-cap companies, and financial assessment, to ensure companies have to capital structure to thrive and grow throughout the cycle. This last point is particularly topical now as the unwinding of central bank QE policies means companies can no longer take for granted cheap and easy capital. It is also especially germane to Jupiter’s strategy, which has a long term, private equity mentality, and often holds companies for six or seven years. Indeed, some firms have been in the portfolio for over 25 years.
Forestry is one example where environmental criteria are outweighed by financial ones: it is clearly beneficial to plant trees that inhale carbon, but Thomas is concerned about the cyclicality of the industry because housing is the main driver of demand for timber.
SDGs and portfolio themes
The UN Sustainable Development Goals (SDGs) do provide a guiding star for many investments but Thomas questions whether all investments can be comprehensively mapped onto individual SDGs, as the latter have broader societal goals.
The three biggest portfolio macro trends are resource efficiency, sustainable infrastructure – including renewables and transport -, and demographics, including housing and energy efficiency.
Thomas can confidently say that 85% of the portfolio is invested in companies focused on ESG solutions, with a high weighting in E and S solutions, such as resource efficiency; demographic pressure on water, food and energy use; carbon emissions; water and carbon savings. Companies include organic and vegan food makers, wind turbine manufacturers, and waste recyclers – such as Norway’s Tomra. Plastics solutions such as recycling and research into new polymers are becoming a fashionable area to focus on now. Fast fashion is clearly resource intensive given that cotton requires vast amounts of water, and one alternative here is wood-based fibres made by Lenzing.
Jupiter holds a range of companies across multiple industries and sectors, and cannot be sure that each investee company is 100% devoted to solutions however. Realistically, companies may have a mix of activities, but the majority of them should be solutions-driven. Though some countries, such as Denmark, are generating 100% of electricity from renewables, this may not be practical everywhere. Therefore, Thomas could contemplate investing utilities that use some gas in their mix of inputs, partly because he recognizes that, given current battery storage technology, the intermittency of renewable power generation means that gas is part of the solution. Thomas might also invest in an auto-maker where the majority of the fleet was expected to be made up of electric vehicles; he has never invested in Tesla due to concerns around governance and other issues (which are shared by some other Jupiter fund managers, such as James Clunie).
Thomas needs to be skeptical and discriminating about new technologies because many do not prove to be commercially viable. Carbon capture has been talked about for years with pilot plants but it did not really materialize in any form. Thomas recalls how fuel cells were also hugely hyped around the TMT bubble in 2000, when some of the cheerleaders for companies with stratospheric valuations projected that 15% of cars might be run on fuel cell technology. In practice, fuel cell powered vehicles currently play a very marginal role, mainly in heavy trucks and off-road vehicles.
Jupiter’s Environmental & Sustainable strategy branched out into multi-asset investment three years ago with the Global Ecology Diversified fund which is co-managed with Rhys Petheram,. Definitions of ‘green bonds’ are contentious and Thomas raises the bar by insisting on additionality – meaning that the bonds are raising fresh and genuinely new capital facilitating projects that would otherwise not have been pursued. Some 20% of the diversified portfolio is in ‘green bonds’ and the Fund also invests in bonds issued by green solutions companies.
The rise and rise of impact investing is giving investors a wider universe of both equities and bonds to choose from, but as an active, high conviction manager, Jupiter is only invested in a small percentage of the universe.