Investments making it on to Santa’s nice list

Benjamin, our Elf on the Shelf, is back. Tasked with watching over my children’s behaviour in the run up to Christmas – and reporting back to Santa every evening – his all-seeing eyes have proved beneficial in getting teeth cleaned, rooms tidied and generally ‘upping’ the threat level when they don’t do as they are told.

For a total of 24 days, my nine-year-old and five-year-old are having to battle their natural tendencies to irritate, fight, whinge and ignore, and instead be thoughtful, kind and considerate in order to be on the nice list, not the naughty list.

They walk a tightrope every December and, over the past couple of years, they’ve gained a heightened awareness of ‘grey areas’ – developing a knack for turning a wrong into a right.

This got me wondering: what about companies and sectors? Are there any whose behaviour may have been questionable in the past, but that now have redeeming qualities? And what about those that look like angels, but are actually little demons?

I asked for some examples:

Energy: both naughty and nice

Graeme Anderson, a portfolio manager at TwentyFour Asset Management, told us: “Our view is capital markets should support rather than shun a company if it has a credible plan to improve in a key area or areas. An example of this is UK energy supplier SSE, which took its usage of coal as a production input from 59% in 2013 to 5% in 2018. The company was aiming for zero by 2025 and is on track to achieve it next year, a result that would have been made more difficult had capital markets shunned SSE in 2013.

Martin Foden, head of credit research at Royal London Asset Management, added: “First Hydro Finance 9% 2021 bond is a good example. It is an unrated, off-benchmark bond issued by a subsidiary of French company, Engie SA. As an electricity generator with some non-renewable capacity, the parent company may have a poor Environmental, social and governance (ESG) rating. However, its subsidiary, First Hydro, generates hydroelectric power in Snowdonia and has a far better sustainability assessment. In addition, the bonds are secured, with strong covenants and ring-fenced assets and cashflows.”

In contrast, Trent Koch, one of the managers working on First State Global Listed Infrastructure, says his team screens out Japanese electric utilities from their universe. “In March 2011, an earthquake and tsunami caused widespread devastation on Japan’s east coast, including a meltdown at the Fukushima Daiichi Nuclear Power Plant. This event changed Japan’s energy future forever.

“Japan had 54 nuclear reactors operating at the time but within a year, this had been reduced to zero. Today, more than eight years later, just nine nuclear reactors have reopened. Nuclear power remains a deeply contentious issue within Japan with many people opposed to their reopening.

“Nuclear can play an important role in producing low carbon emitting electricity. We just think it is too risky when positioned on perhaps the most earthquake prone country on the planet. We screen out the Japanese electric utilities from our “core infrastructure” universe owing to their highly volatile earnings and reliance on nuclear energy to generate power.”

Clothing: nice list

Lesley Duncan, manager of ASI UK Ethical Equity gave the example of Boohoo. “Boohoo has responded to ESG engagement in a number of ways. It enables recycling of clothing through a third party on its website, has introduced a sustainability range that uses recycled materials, and has invested into technology which helps reduce the environmental impact of garments destined for landfill.

“In a similar vein to seeing improvements on the environmental side, we have also engaged on Boohoo’s labour management in general. For example, they have invested in a new state of the art distribution centre in Burnley, which has helped reduce the level of manual labour, but also provides better amenities for staff. We have been reassured that they have their own audit offices in the Leicester factory area to ensure that regular audits are conducted and standards are maintained. We have also been invited to visit their factories in Leicester in January to confirm this for ourselves.”

Packaging: nice list

Smurfit Kappa is a holding in BMO Responsible Global Equity. Manager Jamie Jenkins, said: “This European packaging company is in the energy-intensive business of paper production, and has total emissions of over 3 million metric tons of CO2. It set itself a target to reduce its CO2 emissions per ton of paper by 25%, which it met three years early. At a more strategic level it has clearly set out its focus to design its operations around a closed- loop economy which is recyclable and biodegradable. The company should be well-positioned to take advantage of society’s shift away from plastic packaging.”

Watch our video interview with Jamie

Tobacco: naughty list

Graeme Anderson also gave the example of British American Tobacco: “In September 2018 we met with British American Tobacco at an investor conference, and spent time questioning management on the different aspects of their product range. We were concerned around two key areas; nicotine addiction as a continued issue even in new products, and the sharp uptake of e-cigarettes by youths in the US.

“We did not feel that the message expounded by BAT at the meeting – broadly that the addictive nature of nicotine was not a big issue for the FDA, nor a factor in youth uptake – could be correct. We felt the company was in denial. We worry about the probability of long run research into these new products in the next several years, potentially bringing to light new health risks arising from the chemicals used and leading the sector into further controversies and costs.”

Construction: both naughty and nice

“We have begun to conduct a thematic engagement with our UK construction sector/house-builder holdings on the issue of Modern Slavery and human trafficking,” Neville White, head of RI policy and research at EdenTree, told us.

“We have identified nine companies for this engagement (some of which are holdings in EdenTree Amity UK): Berkeley Group, Landsec, Morgan Sindall, Bellway, Inland Homes, British Land, Great Portland Estates, Taylor Wimpey, and Urban & Civic. We also wrote to Galliford Try, which has since been sold.

“The aim of the engagement is to understand the impact of Modern Slavery policies and practices, the level of due diligence conducted with respect to direct employees and those in the supply chain/business partners/contractors etc. We are particularly interested in establishing whether low reported instances of Modern Slavery/trafficking in supply chains and among contractors’/sub-contractors’ labour forces are the result of strong policies and due diligence (i.e. the policies have ensured that there are no instances), or indicate that methods of identifying and reporting instances of Modern Slavery are insufficiently mature to be able to show they are occurring. By drawing attention to potential shortcomings and best practice, we hope to contribute meaningfully towards improved management of these risks.”

Listen to our sustainability podcast with Neville

The views of the author and any people interviewed are their own and do not constitute financial advice. However the knowledge that professional analysts have analysed a fund or trust in depth before assigning them a rating can be a valuable additional filter for anyone looking to make their own decisions. Before you make any investment decision make sure you’re comfortable and fully understand the risks. If you invest in fund or trust make sure you know what specific risks they’re exposed to. Past performance is not a reliable guide to future returns. Remember all investments can fall in value as well as rise, so you could make a loss.