154. Investing for a cleaner, healthier and safer world

5 October 2021 (pre-recorded 21 September 2021)

Below is a transcript of the episode, modified for your reading pleasure. Please check the corresponding audio before quoting in print, as it may contain small errors. Please remember we’ve been discussing individual companies to bring investing to life for you. It’s not a recommendation to buy or sell. The fund may or may not still hold these companies at your time of listening. For more information on the people and ideas in the episode, see the links at the bottom of the post.

[INTRODUCTION]

Sam Slator (SS): I’m Sam Slator from FundCalibre and today I’ve been joined by Mike Appleby, who’s investment manager and part of the team that runs the Sustainable Future funds at Liontrust. Thanks for joining us Mike.

Mike Appleby (MA): Thank you very much for having me.

[INTERVIEW]

[0:15]

SS: So, the team’s identified three megatrends for the Sustainable Future range, which are better resource efficiency, improved health and greater safety and resilience, or in sort of simple words, cleaner, healthier, and safer. Perhaps we could just touch on each of these in turn, starting with better resource efficiency? I think one of the areas of specialty is improving the efficiency of energy use. Can the world actually thrive on a hundred percent renewable energy though? I should imagine cutting fossil fuels and nuclear all together as a bit of a fantasy particularly sort of short to medium term?

MA: Yeah, well, there are a lot of things that are going to happen right the way across our economy for us to be able to transition to an ultra-low carbon economy, which is what we need to do to make sure that we don’t experience runaway climate change. And one of the areas that everyone talks about a lot, and it’s really important, is the amount of renewable electricity on the grid and you’re right, it will take time for the amount of renewables to replace fossil fuels, but there’s a definite trend we’re seeing that this is happening. And this has been accelerating because the economics of wind and solar in many areas, they are the cheapest form of electricity generation.

So, if we look in the US no coal has, no new coal-fired power stations have been built for over six years, and this is really to do with the economics. There’s no way that that can compete with the electrons coming from those renewable sources. But if we woke up tomorrow morning and the entire planet’s electricity had been replaced with renewables, we would have reduced global emissions by about one quarter. And so ,within that resource efficiency we’re looking at the other areas of the economy – the other 75%, if you like.

And so there are themes like energy efficiency which is really about reducing the amount of energy we waste and therefore reducing consumers’ energy bills, but obviously reducing emissions at the same time as well. And so we see a lot of really interesting opportunities there to use energy more efficiently, and there are companies that are investing in projects or making products and services that help their clients use energy more efficiently and that’s a big area of focus for us.

[3:08]

SS: So would that include sort of transport and the infrastructure around transport with that resource efficiency?

MA: That’s absolutely right. So, within transport we are looking at really trying to not only just reduce emissions, but improve local air quality and also try and encourage people to have active transport, so cycling, walking, et cetera. And so but within transport, we see in terms of passenger cars, a huge shift as the internal combustion engine days are essentially numbered and it becomes replaced with alternative for drive trains, such as electric vehicles.

[3:56]

SS: And perhaps moving onto improved heath, what kinds of companies do you hold here? Is it sort of healthier lifestyles or healthier foods?

MA: Well it’s a bit of both. So we are looking at the way in which we treat disease and a huge amount is spent on treating the disease burden and that’s expected to increase. And this is aside from the Covid pandemic. And so what we’re looking for is we’re looking for companies that can innovate and come up with better ways, smarter ways, to treat people that get better patient outcomes, but also in a cost effective manner. So that’s one area. So, for example, there are companies such as IQVIA – this is a US listed company. They are all about testing drugs through phase one, two and three, and they’re really, really good at this. And they’re able to leverage data and it uses some artificial intelligence as well to design these drug trials in a way that they’re effective and take a lot less time to be able to find out whether a drug is effective or not. So that’s an example of accelerating how new treatments can come to the market.

But it’s not just about treating the symptoms. It’s about having a healthier life as well. So, we’re looking for companies whose products and services can help improve our diets or improve the amount of exercise or make it easier for us to do exercise, because that’s really critical in reducing the amount of money we’ve got to spend on fixing the side effects of particularly obesity, which is a big problem all the way around round the globe. So, in terms of healthier foods, there are companies that are able to take existing often, fairly unhealthy recipes that we all buy in the shops and transform them to reduce the amount of fat and salt in them, make them healthier  -while still maintaining that taste and texture. So that’s an area we see huge growth in.

And then the other one is about encouraging us or making it easier for us to do exercise. And we have some low-cost gyms that provide access to people that couldn’t afford to go to a gym, you know, historically it was incredibly expensive to join a gym as much as a hundred quid a month, I’m told. But now you have some very clever companies that are able to provide that service for more like £20 a month. And that opens up that the benefits of exercise to a huge number of people that otherwise couldn’t enjoy that. And the health benefits that come from that. And, as a result, we believe that companies like that are going to experience increased demand over a long period of time, because they’re essentially providing a product and service that we need. So, treating both the symptoms, but also trying to sort out our lifestyles as well. Two areas that we look at within that healthier theme.

[7:39]

SS: And then lastly thinking about the greater safety and resilience, I mean this could cover a huge range of things I should imagine, but we noticed that actually the financials fit into this theme as well. Could you sort of explain that link a little bit further please?

MA: Yeah. So, financials are often viewed as part of the problem, and I’m not suggesting for a moment that any financial company we think is super sustainable, but we believe that there are some areas of finance, you know, we need a healthy finance system if we’re going to be able to make this transition to a more sustainable world. And there are things like simple utility banking and the provision of mortgages, et cetera, which are very useful, but also a lot of these things require investment. So ,we’re looking for companies that are providing and lending capital either to those SMEs, those smaller businesses, or that are helping us do those things where we need to spend money like decarbonisation. So replacing a natural gas boiler with a heat pump or an alternative is not free. And it’s critical that we have a finance system that’s able to lend and allow people and the economy to make the investments that are required. So that’s one area.

The other one we really like insurance and being able to spread risk and being able to… if something happens to your house, it not be the end of your world essentially, but be able to spread that risk through insurance. So those are a couple of themes that we see within the finance sector that are important, but I would stress that doesn’t mean that every financial company is great and should be in a sustainable fund, but there are those that are providing those things that I’ve just talked about, that we think are going to be key in getting us to where we need to get to in the decades to come.

[9:47]

SS: Another area is digital security, which is an ongoing issue. I think Apple was in the news recently with the flaw in its new iPhone update that allowed an Israeli spyware company to infect its product. So where are the opportunities here? Is it in technology or AI or something else?

MA: Well, a lot of it is in tech and it’s all becoming blended together with AI. So, there are companies, for example, that sit that have bits of kit that sit in the network and are able to spot changes happening that shouldn’t necessarily be happening and flag up potential risks. And there are companies like Palo Alto that are involved in this. And there are lots of other opportunities as well within secure payments that help us enable to reduce the amount of fraud that goes on. So, lots of opportunities as more and more of our world goes online, it’s critical that that’s kept safe. And there are a number of different ways to play it – mostly through software that can help protect us from those threats.

[11:00]

SS: And just finally, across the range there’s quite a lot invested in US companies. Is that a result of the fact that Biden’s come in now and he’s more on board with climate change plans or have these companies managed to be innovative despite all the politics in the US?

MA: Yeah. Well, people talk a lot about the politics in the US and, clearly, it’s very positive that Biden’s come in with a lot more progressive view, particularly on climate change, than his predecessor had. But it’s not just about who’s at the top and what they’re saying. So, for example, despite Donald Trump’s insistence that renewables were, you know, not something that he liked, more renewables were installed in the US during his tenure than any other president hitherto. And a lot of that is about economics driving this, but also at the state level, and individual companies, all around the world, are really getting behind this and seeing it as a competitive advantage to be able to offer the world what it needs in trying to move to a more sustainable area. So, yes, we haven’t necessarily changed the position of our portfolio as a result of Biden getting into the White House, but it’s clearly a positive in terms of the direction of travel for regulations and particularly more support around the energy transition.

SS: You’ve touched on some very fascinating themes there, thanks for sharing with us.

MA: Thank you very much and thanks for probing and asking those questions.

SS: And if you’d like to find out more about the Liontrust Sustainable Future range, please go to fundcalibre.com and don’t forget to subscribe to the Investing on the go podcast via your usual channels.  Thank you.