3D four star fund Triodos Sustainable Equity: the 3D Investing perspective

During Good Money Week Blue & Green Tomorrow launched 3D Investing’s 5-Star rating system which allows advisers and investors to pick out the best of the best from the socially responsible investment universe. To find out more read the B&GT Guide to Sustainable Investment or visit 3Dinvesting.com. Today we take a look at the Triodos Sustainable Equity Fund.

Triodos is known as a real pioneer in sustainable investing, chiefly through its banking operations. The quality of the social research, transparency of communications and the ethos of the fund are second to none. Although the fund is a relatively recent launch in the UK, it has been available in the Netherlands since 2000. Since launch in the UK, the fund has marginally outperformed its benchmark.

Over the longer term, the original share class has also outperformed the world index. The social impact of the fund is relatively modest when compared with the Triodos Sustainable Pioneer Fund and the fund is exposed to companies which some investors may regard as controversial. Despite this, we have a very high level of confidence in Triodos’ ability to manage sustainability issues and most importantly, the fund provides exposure to a diverse range of larger global companies.

Investment Strategy & Fund Composition

Almost half of the fund is invested in North America with around 15% in the UK and the majority of the remainder in Europe. The style is very much one of investing in large global companies, with a focus on the consumer, healthcare, information technology and insurance and investment companies.

Ethical Approach & Suitability

Minimum ethical standards are applied to the fund, and in particular, coal, nuclear energy, unconventional gas and oil (5% threshold), and components of weapons are avoided. However, a few potentially controversial stocks are held including Diageo (alcohol), Starbucks (tax avoidance) and 3i (unscreened investment).

The reasons for holding these stocks are well made and sustainability analyses are also used to enter into a dialogue with companies. In order to stimulate companies to improve their sustainability performance, Triodos Sustainability Research uses this dialogue to raise awareness, convince others and to motivate change.

All companies have to meet one of two criteria:

1) Companies derive over 50% of their revenues from sustainable products or services that contribute to a clean earth, healthy living or climate protection themes.

2) Companies that do not provide typically sustainable products or services are analysed based on sustainability themes that cover environmental, social and corporate governance issues. The top 50% of the companies in a particular sector are eligible for investment.

SRI Capability & Management

Triodos is known for its ethical banking operations in Western Europe but it has been developing its investment management offering to include listed equity investments since the early 1990s. The fund is offered by Triodos Bank direct to its retail customers and is advised by Triodos Investment Management, a wholly owned subsidiary of the bank that is now responsible for €2.6 billion in assets under management.

It is one of the leading exponents of sustainable, thematic investing, with a wealth of expertise and resources at its command. Triodos constructs the investment universe from which its chosen fund manager selects stocks and is particularly rigorous in assessing companies and understanding the concerns of investors. The level of transparency is exceptionally high with all stocks being profiled, and not only those held, but also each potential investment in the investment universe. Furthermore, the engagement activity is fully documented by way of engagement and proxy voting reports and these are not just confined to corporate governance, but look at other wide ranging ethical issues.

Social Impact

The fund invests in companies that provide social and environmental solutions, but the overall flavour is that of a best of class approach, necessitated by the focus on large global companies. Despite this the fund does hold a significant proportion in solutions based companies, mainly healthcare, renewable energy and environmental services.

Risk Management

The fund is well diversified with more than 85 holdings. The average market capitalisation is more than £15 billion, which would generally indicate a lower level of risk than more thematic global funds, and this is borne out by a level of volatility that is lower than other global thematic funds. The underlying holdings are held in locval currencies and this risk is unhedged which introduces an extra level of risk reflected in our rating.

Transparency

Triodos is exemplary in the level of transparency and communication of its engagement and investment strategies. The reasoning for inclusion of each holding is made publicly available, as are the results of any sustainability analyses and dialogue with companies. Triodos actively seeks to improve the sustainability performance of its holdings through active dialogue and it benchmarks company performance on a range of sustainability issues to identify areas of strength and weakness. Triodos then aims to convince investee companies of the need for change and will work with them to achieve this.

Financial Performance & Management

The fund is managed by Delta Lloyd, a boutique fund manager in the Netherlands. Delta Lloyd adopts a distinctive style, generally investing in 25-35 companies in which it holds substantial positions and has a close relationship.

The objective is to invest in shares which the manager considers to be worth 30 – 50% more than the current market capitalisation, giving them a valuation safety margin.

In the case of the Triodos Fund, more stocks are held to reduce stock specific risk. The fund is measured against the MSCI World Index. The UK share class was only launched in 2013, since when the fund has outperformed the benchmark index. The original share class has fairly consistently beaten the benchmark since launch in December 2000.

In accordance with the Financial Services and Markets Act 2000, Blue and Green Communications Limited does not provide regulated investment services of any kind, and is not authorised to do so. Nothing in this magazine and all parts herein constitutes or should be deemed to constitute advice, recommendation, invitation or inducement to buy, sell, subscribe for or underwrite any investment of any kind. Any specific investment-related queries or concerns should be directed to a fully qualified financial adviser.