'Sustainability Approach'

[Simpo Two]

A global tech fund I'm invested in has decided to adopt a 'Sustainability Approach' and 'Firmwide Exclusions'.

There follows a list ranging from fossil fuels, nuclear weapons, tobacco, fur, alcohol, intensive farming, nuclear power etc, which are limited to 5% of revenue. Firmwide exclusions (ie 0%) are various weapons. The data comes from ESG data providers and anything that doesn't make the grade is disinvested.

My question is how this is likely to affect the performance of the fund compared to if it stayed the same. Will it be reduced because they are limiting their options?

[LooneyTunes]

The obvious question is how they decide who is in/out and which data providers they use.

There won’t be much pure tech in the categories you mention but if they’re screening based on ESG firms pedalling their latest certification then you could find some in “good” sectors excluded?

[Simpo Two]

LooneyTunes said:

The obvious question is how they decide who is in/out and which data providers they use.

There won’t be much pure tech in the categories you mention but if they’re screening based on ESG firms pedalling their latest certification then you could find some in “good” sectors excluded?

Well that is my thought. Herewith an OCR'd grab of the letter; what do we think?

Appendix 1: Sustainability Approach Disclosure
Sustainability Approach
The investment Manager uses a fundamental, bottom-up investment approach to identify companies which benefit from long-term secular themes including (but not limited to) those which promote environmental and social characteristics. Such long-term themes include payment digitisation, internet transformation, resource optimisation and process automation, next generation infrastructure and smart cities. The Investment Manager believes these secular themes are often under-appreciated and could provide attractive end markets into which well-positioned companies can grow. Companies that the Investment Manager believes may be facing potential environmental or societal issues are subject to active engagement, the exercise of voting rights, and the proposal of action plans (where appropriate), in order to identify sustainability risks and help influence remedial change.The Investment Adviser applies screens to avoid investing in companies involved in the following activities:
Excluded Activity Exclusionary
Criteria
Controversial Weapons
See Firmwide Exclusions policy
Fossil Fuels
<5% of revenue
Nuclear Weapons
<5% of revenue
Tobacco
<5% of revenue
_ Fur 1 .
<5 %_of revenue
Alcohol
<5% of revenue
Civilian armaments
<5% of revenue
Chemicals of concern
Any involvement
Intensive fanning
<5% of revenue
Nuclear power
<5% of revenue
Gambling
<5% of revenue
Pornography
<5% of revenue
Animal testing (excluding medical testing)
<5% of revenue
Failure to comply with the UN Global Compact Principles
Any breach
(which cover matters including, human rights, labour, corruption, and
environmental pollution)
Exclusionary screens are applied using third party data at the point of investment and are monitored on a continuous basis. If an investment becomes ineligible based on exclusionary screens it will be divested within 90 days.
Exclusionary screens are applied to direct investments and single name derivatives but are not applied to other derivatives or investments through collective investment schemes. The investment Adviser may invest in companies that would be excluded by the screens described above if the investment Adviser believes, based on its own research and as approved by its ESG
Oversight Committee, that the third-party data used to apply the exclusions is insufficient or inaccurate.

Appendix 2: Firmwide Exclusions
Firmwide Exclusions
Presently, investment is not permitted in entities involved in the current manufacture of, or minority
shareholding of 20% or greater in a manufacturer of Controversial Weapons, namely:
- Cluster munitions
- Anti-Personnel mines
- Chemical weapons
- Biological weapons
Classification of issuers is primarily based on activity identification fields supplied by our third-party ESG data providers. This classification is subject to an investment research override in cases where sufficient evidence exists that the third-party held is not accurate or appropriate. In any scenario where a portfolio position is identified as not meeting this exclusion criteria for any reason (legacy holding, transition holding, etc.) the portfolio manager shall be granted 90 days to review or challenge classification of the issuer if appropriate. After this period, in the event an investment research override is not granted divestment is required immediately under normal market trading circumstances.


Simpo's only thoughts pending further enlightenment::
1) Investing in weapons to help plucky brave Ukraine beat the nasty Mr Putin could be construed as very ethical...
2) Amusing that in the OCR process, the word 'corruption' got corrupted!

Edited by Simpo Two on Friday 1st July 21:18

[Derek Chevalier]

Simpo Two said:

My question is how this is likely to affect the performance of the fund compared to if it stayed the same. Will it be reduced because they are limiting their options?

I don't think you will find a definitive answer on this.

https://www.trustnet.com/news/13296852/esg-investo...

"However, Ian Lance, manager of the Temple Bar Investment Trust, said that in many cases ESG funds were just a proxy for growth funds, which was where their problems began."


https://www.evidenceinvestor.com/esg-strategies-do...

"The above findings should not lead to questioning whether ESG strategies can offer substantial value to investors. Instead, they suggest that investors who look for value-added through outperformance are looking in the wrong place — ESG strategies should be considered for the unique benefits they can provide, such as hedging climate or litigation risk, aligning investments with norms and making a positive impact on society. In addition, investors get an added benefit by employing ESG strategies that tend to tilt toward factors with higher expected returns (specifically, profitability and investment) "

[Simpo Two]

Thanks Derek.

Regarding 'In addition, investors get an added benefit by employing ESG strategies that tend to tilt toward factors with higher expected returns (specifically, profitability and investment)' how would we know if this fund is tilted towards 'profitability and investment'? Isn't that what all funds are supposed to be? Otherwise there is little point...

It just seems to me that by denying themselves investment options, returns can only be affected negatively.

[LeoSayer]

Simpo Two said:

Regarding 'In addition, investors get an added benefit by employing ESG strategies that tend to tilt toward factors with higher expected returns (specifically, profitability and investment)' how would we know if this fund is tilted towards 'profitability and investment'? Isn't that what all funds are supposed to be? Otherwise there is little point...

It just seems to me that by denying themselves investment options, returns can only be affected negatively.

All funds have an investment mandates and restrictions that deny them investment options and potentially reduce returns eg. by geography, asset type, liquidity of holding, amount of cash held etc.

ESG criteria are an additional factor added to meet client demand which may or may not reduce returns. I'm sure everyone, if asked, has their own criteria about what they don't want to be invested in and would happily forgo returns by taking that approach. Clients may believe that investing in (for example) green energy projects may lead to better returns than traditional energy.

A sustainability approach doesn't necessary mean no oil companies for example. Tesla recently dropped off an ESG index whilst some oil companies remained because they scored better. A sustainability approach could also mean holding a poor-scoring company with potential and using voting and engagement tactics to influence the direction.

The EU is quite far ahead in terms of introducing a disclosure regime so that investors can find out how green a fund is using standard templates. See (the terribly named) SFDR Article 8 and 9 funds. The UK is a few years behind with the SDR regime.

[R33FAL]

I would definitely look into it i.e. investing in ESG mandates doesn't necessarily mean you perform better (on the contrary usually worse), especially now. It tends to be a way for asset managers to try to increase assets under management (think pension fund, endowment money)

[Simpo Two]

R33FAL said:

I would definitely look into it i.e. investing in ESG mandates doesn't necessarily mean you perform better (on the contrary usually worse), especially now. It tends to be a way for asset managers to try to increase assets under management (think pension fund, endowment money)

Thanks. It's impossible to know which way it will swing but your post makes good sense. The company is Janus Henderson and whilst I can switch or redeem my shares at any time without charges, I then have the issues of (a) either route will give a CGT liability (b) what else to invest in. And so the most tempting, or is it the easiest, or the most logical, is 'do nothing and se what happens'...

[Derek Chevalier]

Simpo Two said:

It just seems to me that by denying themselves investment options, returns can only be affected negatively.

Cliff Asness (well respected in the investment markets) agrees.

https://www.aqr.com/Insights/Perspectives/Virtue-i...

"Put simply, if two investors approach an asset manager, one who says “just maximize my return for the risk taken” and the other who says “do that but subject to the following constraints,” it is simply false and irresponsible for the asset manager to assert that the second investor should expect to do as well as the first, except in the case where those constraints are non-binding (and therefore not relevant). Even in that case, it’s still irresponsible to say that the second investor should expect to do better."

[Simpo Two]

Derek Chevalier said:

Simpo Two said:

It just seems to me that by denying themselves investment options, returns can only be affected negatively.

Cliff Asness (well respected in the investment markets) agrees.

https://www.aqr.com/Insights/Perspectives/Virtue-i...

"Put simply, if two investors approach an asset manager, one who says “just maximize my return for the risk taken” and the other who says “do that but subject to the following constraints,” it is simply false and irresponsible for the asset manager to assert that the second investor should expect to do as well as the first, except in the case where those constraints are non-binding (and therefore not relevant). Even in that case, it’s still irresponsible to say that the second investor should expect to do better."

I can see it now - 'Simpo v. Janus Henderson'. I don't fancy my chances...

They do give the option to move 'free', but as said, I'd get a CGT liability.

Of course it may be that companies who make 'sustainable' things will do very well because the public is sucking up the green agenda, so I might be ahead. But I think the motive was to attract more investors by pandering to fashion - and therefore make JH more money. They should have launched a new fund, not changed the old.