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As ESG considerations continue to inform investors’ decisions, Rosanna Burcheri, co-manager of the Artemis Global Select Fund, discusses the merits of investment managers taking a pragmatic approach. This article was originally published in Investment Week on 30th January 2020.
My children started it – complaining about our bottled drinking water
The next thing I'm selling Nestlé, researching green packaging companies and uncovering moral dilemmas that make a mockery of some of the ESG ratings that are increasingly governing our industry.
Sustainable/ESG funds are widely expected to come to the investment fore this year. Many advisers have historically been reticent in promoting these funds - and for good reason.
They are worried about the impact on performance and (justifiably) sceptical about the issue of greenwashing.
They hear fund managers talking up their green credentials and then find an oil stock among the top ten holdings.
Advisers are not the only ones with problems. It can be hard being a fund manager in this space, too.
The ratings challenge
Many of us managing funds dislike greenwashing as much as advisers do - we want advisers choosing funds to be able to do so on a transparent and fair basis. You might expect the ratings agencies to help.
But these are proliferating, and each has different priorities. It transpires that the scores are not as reliable as you might hope either.
My own fund will not invest in oil stocks and, as a result, earns a high carbon-friendly score with one leading agency. Last year we invested in Danish windfarm business Örsted and an Italian electricity distribution company. Both support the renewable energy sector.
We know investors want this. But the result was that our carbon score deteriorated.
We were penalised for being in the energy sector at all (the whole sector being given negative marks). Explain that to a client who wants us to support clean energy providers!
There is a serious risk if you are a fund manager and keen to build your assets under management that you find yourself drawn into managing your fund to tick the ratings agencies' boxes. You can thus lose sight of your primary job - to generate attractive returns.
Sustainability and ethics
Ratings exercises can be a force for good and can herd managers in the right direction, but good managers think outside the tick box.
Personally, I have done some of my best lateral thinking outside the school playground!
My family does not like London tap water. For years we have bought bottled water.
Last year, in the wake of the David Attenborough programmes, my children started to complain about the number of 1 litre plastic bottles we were getting through. They pressured me to review our shopping habits.
We now buy larger (and cheaper) 5 litre bottles and refill the glass bottles we have. We have reduced our plastic consumption in the process.
At the school gate I found we were not alone. Parent after parent began sharing stories of how they were reducing plastic usage and reviewing their consumption of bottled water (and 'plastic' milk).
Around the same time I read an interview with the CEO of H&M, who explained how important it is to pay attention to environmental issues because consumer patterns can change very quickly and take you by surprise.
One of our holdings at the time was Nestlé. I went to the numbers. Anecdotal evidence can help, but nothing beats good data. Around 8.4% of Nestlé's revenue lies in bottled water.
Margins on the water business were surprisingly tight - 8.7% (down from 12% last year). Over the past 12 months sales of water had been slowing. Until last year it had been one of the biggest drivers of organic growth for Nestlé.
This did not seem to undermine the company's overall trend of top-line growth, but the water business faces a host of risks: boycotts, hikes in the cost of licences to access source water, towns banning plastic water bottles and potential improvements in the public water supply in the US.
Nestlé is responding: it has begun selling water in a can and is targeting 100% reusable or recyclable packaging by 2025.
But, added to other concerns, it was too finely balanced an argument for our tastes. We took our profits.
This led us to research the packaging sector in some detail. And here lies another problem with being a sustainable manager - you may want to invest positively in an area, but it can be very difficult to find well-managed companies with dependable products and established markets to meet your demanding criteria.
Tempting though it may be, you should never compromise on quality simply to generate green ratings and please marketing departments.
We found just one company we liked: SIG Combibloc - a relatively small Swiss company working on renewable aseptic carton packs for beverages and food packaging. It now appears in the Mid Wynd investment trust portfolio.
Our research taught us a lot about packaging and plastic in general. One figure that really caught my eye was that making a paper bag uses 20 times more water than making a plastic carrier bag and creates twice the carbon footprint.
The moral of this story is that morality and investing can lead you into a dizzying ethical maze.
Sense and sustainability
We do not hold ourselves up as paragons of virtue. We sold Nestlé on valuation grounds, not on ethical grounds.
Our experience over many years has led us to conclude that the best way to manage money is with sense and sustainability in mind.
Our priority for investors is to make money - the quality of their retirements and family wellbeing depends on it. Sustainability is key.
We can make money consistently only by avoiding companies that harm society and the planet.
But you have to keep it simple. In our experience avoiding tobacco, munitions, oil and gambling covers most bases for most investors.
We believe that even allowing for those exclusions it is possible to still beat the markets over the long term. But tighten the restrictions much further and you make it hard to outperform.
Trying to respond to all the world's ethical dilemmas and trying to tick every single ESG box (and you would be surprised how many there can be) is not good for returns.
Ultimately, it is questionable how good it is for the planet, given the complexity of the arguments. In the end, we believe good managers - and advisers - have to be pragmatic.
To find out more about the Artemis Global Select Fund and the Mid Wynd International Investment Trust and their positioning visit the fund pages at www.artemisfunds.com.
Artemis Global Select Fund
THIS INFORMATION IS FOR INVESTMENT PROFESSIONALS ONLY. IT IS NOT FOR USE WITH OR BY PRIVATE INVESTORS.
The fund is an authorised unit trust scheme. For further information, visit www.artemisfunds.com/unittrusts. Third parties (including FTSE and Morningstar) whose data may be included in this document do not accept any liability for errors or omissions. For information, visit www.artemisfunds.com/third-party-data. Any research and analysis in this communication has been obtained by Artemis for its own use. Although this communication is based on sources of information that Artemis believes to be reliable, no guarantee is given as to its accuracy or completeness. Any forward-looking statements are based on Artemis’ current expectations and projections and are subject to change without notice.
Issued by Artemis Fund Managers Ltd which is authorised and regulated by the Financial Conduct Authority.
Mid Wynd International Investment Trust
THIS INFORMATION IS FOR INVESTMENT PROFESSIONALS ONLY. IT IS NOT FOR USE WITH OR BY PRIVATE INVESTORS.
This information does not constitute an offer, invitation or solicitation to deal in the securities of this fund. Third parties (including FTSE and Morningstar) whose data may be included in this document do not accept any liability for errors or omissions. For information, visit www.artemisfunds.com/third-party-data. Any research and analysis in this communication has been obtained by Artemis for its own use. Although this communication is based on sources of information that Artemis believes to be reliable, no guarantee is given as to its accuracy or completeness. Any forward-looking statements are based on Artemis’ current expectations and projections and are subject to change without notice. Issued by Artemis Fund Managers Ltd which is authorised and regulated by the Financial Conduct Authority. Financial advisers and retail investors: The company currently conducts its affairs so that the shares in issue can be recommended by financial advisers to ordinary retail investors in accordance with the Financial Conduct Authority’s (“FCA’s”) rules in relation to non-mainstream investment products and intends to do so for the foreseeable future. The shares are excluded from the FCA’s restrictions which apply to non-mainstream investment products because they are shares in an investment trust.
