Sustainable investment solutions: four case studies in responsible investing

I’m Sam Slator from FundCalibre and today I’ve been joined by Harry Waight, a portfolio manager on the CT Responsible Global Equity fund. Thanks for joining us today, Harry.

[00:10] It’s my pleasure. Thanks for having me.

Now one of the differentiators of this fund is the amount of engagement that you do with companies, trying to get them to have better outcomes, et cetera. Perhaps you could talk to us about some recent engagement and what the successes have been from that?

[00:28] Yeah, absolutely. So you know, as you suggest, one of the most important parts of this strategy is that engagement work that we do. And that’s kind of both because we think that our clients want their money to be used to actually generate positive real world impact. And also because it’s often when we actually can get clients to go through … or companies rather, to go through a moment of positive ESG inflection, that you actually get some of the performance tailwinds associated with responsible investing. So, you know, we do engage very extensively on this strategy, typically with kind of two thirds, three quarters of the companies in the fund in any given year. 

And one recent successful engagement outcome came with the pharmaceutical business, AstraZeneca [plc], who have a great oncology business and have a great track record of actually driving good access to medicine. And in Q1 2023, AstraZeneca participated in and completed the Workforce Disclosure Initiative. That’s basically a platform that companies can use to disclose all sorts of valuable information about conditions, training, risks and opportunities faced by their workforces. Now we’ve been asking AstraZeneca to actually do this for a while because it’s often when companies can start to measure and quantify issues that face their workforces, that they can then start to take proactive steps to actually improve their human capital management. And we as investors are also actually better able to give them specific asks and encourage them to do specific things because we are better informed about what they’ve actually been doing with their workforces. 

So, it was super gratifying to see AstraZeneca do this and, because we could actually draw a line between our engagement efforts and their positive actions, we could register a milestone of effective change with them as a consequence of that engagement. So, that’s where we can draw a relationship between our engagement ask and a company’s positive action off the back of that.

When it comes to the environment, you’ve got some restrictions on the type of companies that you can and can’t invest in. What companies would you avoid and what positive environmental traits do you look for?

[02:37] Yes, obviously this is a screened strategy and some of those screens are environmental in nature. So for example, we would exclude companies that generate any of their revenue from the mining and sale of thermal coal, or extracting or producing oil and gas. We’d also exclude, for example, a company whose main business line is the operation of commercial airlines, for example. And again, that’s because of the environmental impact of this. 

But what has become more and more important to us over the years, is not just excluding businesses but actually investing in companies that are coming up with solutions to profound environmental challenges. So, businesses that are thriving by being problem solvers, and one of the key sustainability themes that we actually try to channel in this strategy is the energy transition. And we own a number of really good businesses that play that theme.

One example that I’d give is Schneider [Electric SE]. So, Schneider is a leader in energy management and automation solutions, especially for the physical infrastructure space, so buildings, industrials, data centres, stuff like that. So, basically helping that physical infrastructure to decarbonise. Now that’s an enormously important task because I think, a recent report that I was reading suggested that 39% of global energy carbon-related emissions came from buildings. So, Schneider’s work to help those buildings be more energy efficient and more automated is a really, really important part of the fight to reduce emissions. And they have a target in fact to help their clients, to help their customers, reduce and avoid 800 million tons of CO2 through 2025. So, I think this is an example of, you know, what we’ve attached more and more importance to over time, which is just not only excluding companies that have certain or violate certain screens that we have, but actually, positively looking for companies who are solving challenges, be that in the environmental space or in the social space.

And there’s a few themes in this fund, one of which is automation. How do you apply that theme and ultimately use it to drive investment selection?

[04:43]Yeah, so I think in general when I’m thinking about generating new ideas, I’ll often ask myself, you know, what are some profound social or environmental challenges in the world? What are sustainable solutions to those challenges? And what are the best companies in the world providing some element of that sustainable solution? 

So, if we think about two challenges that we’ve all become more and more aware of in recent years that have both [been] solved by automation … so, challenge one could be supply chain fragility. So, if you think back to early 2020, you had people sent home from their places at work, sent home from their offices, sent home from distribution centres, sent home from warehouses, factories, and you had a whole swathes of the global economy knocked out of action, you had whole pieces of global supply chains dislocated? And it started with shortages of everyday items like toilet paper and toothpaste. But years down the line, we’re still dealing with the repercussions of that supply chain fragility in the form of multi-decade high inflation rates or inflation levels, and higher backdrop rates to combat that inflation. 

So, we’re all more aware of supply chain fragility than we would’ve been previously. And what is a solution to that supply chain fragility? Well, automation clearly is, because robots don’t cough, they don’t shake hands, they don’t get sick, they’re anti-fragile if you like. So I think, you know, challenge – solution; the challenge [is] supply chain fragility, the solution [is] automation. 

But in an even greater societal challenge, a more profound and long-term one, is the looming demographic crisis brought about by lower and lower birth rates. So, you know, birth rates have been dropping around the world since the 1950s, but in certain developed markets in recent years, they’ve hit rates that are basically unheard of in demographic history. So just to cite one example, the most extreme example, you take a country like South Korea, the birth rates in 2022 dropped to 0.78 children per family. That is the lowest birth rate in any peacetime society ever. 

But China perhaps is even more important because of the size of the country. So, the population in China is forecast to shrink by over 600 million people before the end of this century; so, that’s losing almost twice the current population of America. And this is happening at exactly the same time that life expectancies are increasing through better healthcare, and this creates the risk of a dangerously inverted population pyramid. And the consequence of that will be obvious, but you know, severe challenges to economic growth, to the provision of social services, healthcare and retirement benefits. 

So, what is a solution to that? Well again, automation is a solution because robots can replace human labour where there is a scarcity of it; working on production, welding, painting, moving boxes around a distribution centre or indeed all sorts of white collar roles can be automated as well.

So, we want to be downstream of what we believe is one of the most exciting growth trends in the world, that of automation. And we play it through a number of different companies. But one very interesting one is Keyence [Corporation], a Japanese automation company, it’s a machine vision business. It makes lasers, scanners, barcode readers. You can kind of think of it as being like the eyes of the automation industry, and its products can be found in most major geographies across most major end markets. 

For example, you might find its scanners looking at seatbelts to make sure that they fit properly so that if a person is in a car crash, their lives will be saved on the road. Its products can also be found scanning the tops of pill packets to make sure they haven’t been tampered with. You know, also sorting different products, for example, fish, lobsters, crabs in a seafood factory could be sorted by size, colour, claw size. All of that work could have been previously done in a very labour intensive way, by people at significant costs. 

So, we’ve actually owned Keyence on this strategy since the late 1990s. We bought it when it was well under 10 billion dollars in market cap. It’s now over 120 billion dollars in market cap. It’s a phenomenal business. But coming out of Covid, we believe the future has never been brighter for this business. It’s setting quarterly revenue records and it’s seeing extraordinarily strong demand for its products and services. And this should only continue because it is solving very, very vital societal challenges around demographics and around supply chain fragility.

And it feels remiss of me not to mention the weather! We’ve finally had a little bit of sun here in the UK. It’s been very hot this weekend, but we’ve already got warnings of flash flooding, heatwaves, et cetera. We had very little snow over the winter. Are you invested in any companies that are actually looking to solve climate problems as well?

[09:22] Yeah, absolutely. So, as I sort of mentioned a bit earlier, we are invested, for example in a company like Schneider, right? So they help reduce CO2 emissions and thereby minimising the global warming process that’s actually driving heat waves and droughts in the first place. 

But we’re also invested in other companies that actually help the world be more efficient with resources, including water. So, an example of this would be Xylem [Inc.]. So, Xylem is the world’s largest pure play water company. It helps its clients actually collect, transport, use and then recycle water with a minimum of wastage. And its technology is incredible. It’s at the leading edge of all sorts of water-related issues. 

So, for example, it makes a machine, a kind of robot, that can actually swim through water pipes to detect areas of structural weakness within those pipes, which can then be addressed and strengthened before that pipe actually springs a leak. And therefore, you know, water wastage is prevented and costs –  significant costs – are saved for water utility providers. 

And actually the numbers associated with this business are pretty amazing. So, a few that I like: in 2021 Xylem actually helped prevent 500 billion gallons of polluted water from flooding into communities. And the year before that Xylem actually helped its clients reuse more than a trillion gallons of water. So, that’s the equivalent of about, or almost 2 million Olympic swimming pools. So, this is a fantastic business that’s having a really important impact to preserve and protect an increasingly valuable and sadly increasingly scarce resource – water. 

And, you know, that kind of goes back to what I talked about earlier, which is that, you know, we don’t want to simply avoid certain spaces, certain companies – we really do want to proactively seek out companies that are changing the game by providing solutions to major environmental and social challenges, be those climatic or water-related challenges.

Certainly [there’s] some fascinating companies in the portfolio. That was very interesting. Thank you very much.

[11:27] Thank you very much.

And if you’d like to find out more about the CT Responsible Global Equity fund, please go to FundCalibre.com.