The coronavirus crisis has marked a major turning point for ESG and impact investing
As global stock markets suffered their steepest setbacks since the global financial crisis, with trillions of dollars wiped in the first quarter, investors poured €30bn (£27bn) into sustainable funds across Europe while the wider universe was hit with €148bn in outflows, according to data from Morningstar.
Funds that have excluded oil majors and other fossil fuel intensive businesses such as airlines and cruise ships have avoided some major pitfalls and pulled ahead of traditional equity funds.
The Baillie Gifford Positive Change Fund has returned 16.4% in the four months since the Covid-19 sell-off kicked in on 20 February, finishing third in the IA Global sector behind two other Baillie Gifford funds, Long Term Global Growth Investment and Global Stewardship.
Since its launch in January 2017, Positive Change has generated returns of 153.6%, over four and a half times higher than the average IA Global fund return of 32.9%, and its assets have swelled to £550m. But manager Kate Fox believes the sector’s boost in popularity is not driven by performance alone. The coronavirus pandemic is “shining a brighter light on global challenges”, she insists, such as insufficient access to healthcare and inequalities in wealth and education.
Another obvious area is climate change. A study published in Nature Climate Change found that daily carbon dioxide emissions had plunged by 17% on average during the height of the crisis in early April, as lockdown restrictions kept planes grounded and fewer cars on the road.
“It has been quite striking to see how quickly and obviously our environment has benefited from the sharp decline in human and economic activity,” Fox explains to ESG Clarity‘s sister title Portfolio Adviser, “be it clearer waters in Venice, or people in northern India being able to see the Himalayas for the first time due to clearer air.”
Long-term returns and making a positive contribution are complimentary
The core philosophy for Positive Change hinges on the idea that delivering attractive long-term returns and making a positive contribution to society are “complimentary, not contradictory” objectives, says Fox.
The idea for the fund came from Lee Qian, one of Fox’s co-managers. Growing up in China in the 1990s, Qian observed first-hand the profound impact businesses had in transforming the country’s economic fortunes and widening access to services such as healthcare and education.
Qian and Fox run the portfolio alongside Julia Angeles, Kirsty Gibson and Will Sutcliffe. The team have come up with four themes to help them articulate how businesses are delivering positive change: social inclusion and education; environment and resource needs; healthcare and quality of life; and what they call the “base of the pyramid”, addressing the needs of the world’s poorest populations.
Many of the fund’s holdings are at the forefront of tackling the global challenges thrown up by the coronavirus crisis.
Genomics giant Illumina, the fund’s third-largest holding, obtained the first sequence of the coronavirus that emerged in Wuhan, China, back in January, which is being used to detect Covid cases. Another holding, Moderna, has been busy developing a vaccine for the virus and is currently in its final stage of testing. Meanwhile, tele medicine business Teladoc has been facilitating doctors’ appointments online or over the phone during lockdown.
Google parent company Alphabet and ASML and TSMC, which make chips used in laptops, tablets and other electronic devices, have also been making lockdown life easier by keeping people connected and making remote working possible.
All six firms were held in the fund prior to Covid-19. In keeping with the Baillie Gifford house style, Positive Change invests in companies that have the potential to double over a long-term horizon of five years.
Other asset managers may be greenwashing
The team have made few changes to the portfolio during the coronavirus sell-off, but they did initiate a holding in Beyond Meat, a Los Angeles firm that specialises in plant-based meat substitutes. Fox says she has been “heartened” by the portfolio companies’ response to the pandemic.
“The companies we invest in are prioritising their employees, their customers and their role in the communities in which they operate at the moment,” she says. “We are not putting pressure on them to cut costs in the short term to protect the bottom line for the next set of quarterly numbers.”
However, she does worry that other asset managers may be engaging in greenwashing, and pumping out ESG and impact products simply because they spy an attractive commercial opportunity.
Fund groups from Legal and General Investment Management to Vanguard and Fidelity have been called out when their high-profile funds were found to contain exposure to ‘sinful’ sectors such as tobacco, gambling and defence.
“The risk of greenwashing would undermine this type of investing,” says Fox, “which would be really detrimental, to my mind, to savers, society and the planet”.
The Positive Change team prefers an inclusionary rather than exclusionary bottom-up stockpicking approach. Portfolio decisions are driven by rigorous analysis and reporting, which is an area where Fox thinks other green managers may be falling short.
Tesla gets top marks for clean energy and tackling climate change
Fund managers have “years of experience of financial reporting, but not on reporting on something as subjective as impact”, she says. The team’s Impact Report, published annually, provides specific examples of investments that have made positive contributions to the UN’s 17 Sustainable Development Goals (SDGs) but also points out where companies are missing the mark.
Tencent succeeds in addressing the SDGs of reducing poverty and industry innovation but has marks against it for promoting good health and well-being due to its vast online gaming empire.
Tesla has drawn controversy over alleged health and safety violations and the antics of its mercurial chief executive Elon Musk, who infamously tweeted about taking the company private when shares hit $420 (£339), but it receives top marks for promoting affordable and clean energy and tackling climate change.
The electric car company is Positive Change’s largest holding at 7.9% of the portfolio. In the current Covid climate, Tesla has continued to see its star on the rise as demand for traditional gas-guzzling cars plummets. Its shares have risen by 331% in the last year to $966 a pop.
Fox says the team continues to be “really excited” about Tesla from an investment perspective and its potential to deliver positive change.
“Tesla really has been a catalyst for bringing electronic vehicles into the mainstream,” Fox says. “We think it’s got a strong competitive advantage in its brand, in its technology and its software focus. And we can see the number of [car] models are proliferating, it’s expanding its manufacturing footprint, and it’s done a remarkable job managing to scale manufacturing in China, for example, in quite a short turnaround time.”