John Morgan of Skandia Investment Group and Simon Gottelier of Impax Asset Management speak with Alex Blackburne about the huge opportunities of investing in undervalued sustainable sectors.
By 2019, it is predicted that the global economy will be double what it was at the turn of the millennium. By 2059, it will be ten times that figure. Something needs to change.
“The current rate of global economic growth is unsustainable”, says Simon Gottelier, portfolio manager at sub-adviser firm Impax Asset Management.
“Furthermore, population pressures within the emerging markets, higher living standards creating high levels of consumption, weak infrastructure, resource scarcity and extremely high oil pricing, particularly volatile commodity pricing, global water shortages and high levels of pollution all create a very substantial and interesting investment opportunity.
“We invest in companies that are responding to those challenges in a positive way, by delivering a service or technology to deal with those challenges, and those are the key positive criteria that we employ when investing the fund.”
In fact, Gottelier manages the Skandia Ethical Fund. Unlike the ethical and sustainable funds that Blue & Green Tomorrow has previously profiled, Skandia does not directly employ the manager. Instead, it uses a sub-adviser to oversee the investment decisions made within the fund.
“We look for the best managers that we can find”, explains John Morgan, head of public relations at Skandia Investment Group.
“In the case of the Ethical Fund, our researchers went out and looked across the world market and came up with Impax.
“The advantage that this approach brings is that if we wanted to hire or fire a manager, it’s relatively straightforward to do.
“It’s our fund and the sub-adviser, in this case, is Impax.”
And the fund has been revolutionised since Impax’s installation as managers of the product.
“One of the big differentiators is that what was previously a global equity fund with a conventional negative screen on it, is now very much a positive thematic product”, Gottelier adds.
“The Impax approach is to look at high-growth, environmental sectors with long term secular growth drivers, and this has replaced that generalist equity approach.
“We believe fundamentally that the sectors in which we invest are growing at a higher rate than the broader conventional economy.
“We think that it is a large attractive sector; we’re talking about aggregate revenues of about £500 billion, with sector earnings growth across our investable universe of around 10 to 20% per annum.”
A third party, called Ethical Screening, is also involved. Although Impax uses a positive screening process to highlight ethical and sustainable sectors, Ethical Screening delves deeper, seeking and subsequently discarding companies that deal in negative practices, such as human rights abuses, manufacture of armaments, gambling, pornography, alcohol and tobacco.
The screening process for the Skandia Ethical Fund has brought up investment opportunities in several emerging global sectors. Some of the fund’s larger positions include stakes in Johnson Controls, a US company involved in buildings energy efficiency hardware and software, and whose founder, Warren S. Johnson, invented the thermostat in 1883. Another large position is in LKQ Corporation, a company that recycles end-of-life vehicles.
Sound Global, an Asian water treatment specialist, crops up as an investment opportunity for the second time in Blue & Green Tomorrow’s profiling of ethical and sustainable funds, having been selected by Clare Brook, manager of the IM WHEB Sustainability Fund last year.
“The company manufactures water treatment facilities to cope with the mass population movements that we’re seeing in the Chinese market”, Gottelier says, highlighting the importance of investment in the company.
“I believe somewhere in the region of 400m people are due to move from rural to urban areas in China in the next 20 years – a number of people greater than the entire population of the US.
“The Chinese Government has allocated approximately $780 billion to water sanitation and water infrastructure investment, and Sound Global is one of the principal beneficiaries of that initiative.”
More generally, Gottelier describes why ethical investment should always be considered when looking to get a foot onto the stock market ladder:
“There is increasingly compelling, empirical evidence that, particularly at board level, well-implemented governmental programmes and the way businesses are managed, have a very direct bearing on company performance”, he says.
“That goes to the core of what this fund is trying to offer, while eschewing traditionally controversial activities in favour of high-growth environmental exposures.
“We would set out our stall of suggesting that in its very core, the negative [screening] criteria within this fund will take you away from a set of specific activities that are material negatives, whilst offering a very attractive set of positive themes that a lot of people can hang their hat on if they want to have exposure to businesses that are doing the right things for the right reasons.”
That’s the main point; the sooner the wider population recognises the excellent work and high degrees of innovation that some of these companies can achieve with investment right places, the sooner they can be propelled into the mainstream agenda.
If you’re not sure where your money is being invested or want to make a difference, let us help you. Fill in our online form and we’ll connect you with a specialist ethical adviser. Or if you’ve been inspired by Skandia’s story, get in touch with them directly.