Analysis

Women fund managers share innovative ESG investment themes to watch

Digital technology, carbon pricing and 'follow the women' highlighted in this International Women's Day special

International Women’s Day is not just about highlighting and improving gender diversity, but also celebrating the role women play in their sector, their achievements, skills and expertise.

For this article, ESG Clarity asked women fund managers the following question:

Looking at your portfolio, what do you believe to be the most innovative ESG investment theme or stock for investors to keep an eye on over the next few years?

Technology and the ongoing management of lifecycle carbon emissions

Deirdre Cooper, co-head of thematic equity and co-portfolio manager of the Global Environment Fund: 

“The World Economic Forum estimates that global construction accounts for 38% of total global emissions and that buildings equivalent to the size of Paris are being built every week. It is also estimated that c.40% of the world’s extracted raw materials are consumed by the construction industry, and that it is responsible for over a third of the waste generated by the developed West. These statistics only serve to highlight the urgent need to decarbonise such a high emitting industry if we are to come close to meeting the goals of the Paris agreement.

Digital technology has the potential to provide enormous efficiency and energy management solutions to the construction industry, which currently ranks amongst the lowest industries on the McKinsey digitisation index (meaning that it has historically been slow to benefit from digitisation). Specialised 2D and 3D digital modelling can greatly facilitate the design and construction of buildings and is increasingly being adopted.

The technology – which includes Building Information Modelling (BIM) – can be used to gather, analyse and visualise the operational cost and environmental impact of a building in a way that has not previously been possible. It allows the building to be optimised prior to construction. By creating a “digital twin” of the building, the same technology can then transform the ongoing management of lifecycle carbon emissions. It is clear that such technology will play a critical role in decarbonising a sector that is highly inefficient today and lacks other effective solutions.

Engagement and the energy transition

Fatima Luis, senior fixed income portfolio manager at Mirabaud Asset Management

As part of our climate bond strategy, the focus is on the energy transition journey as one route towards a lower carbon economy. High emitters have a key role to play in the energy transition and the road to net zero, and therefore must be a part of the solution.

Within Mirabaud’s engagement framework, conversations with companies in energy-intensive industries are prioritised, encouraging and assisting them to reduce their carbon footprints and improve climate accountability. It is important regularly monitor the trajectory of holdings to ensure they align with the long-term vision. Engaging with companies allows us to address material issues that define the climate challenges of today.

Balancing our expectations to manage fossil fuels with energy security and the economic feasibility of available sustainable technologies is crucial but ambitious. Nonetheless, the relationships built with company representatives, the topics tackled and the forward-thinking outlook developed during our dialogue meetings defines our position as an asset manager. Simply ignoring these companies will not encourage the change and evolution that is needed but leaves us ready to address relevant market-wide and systemic risks.

Since the launch of our climate bond fund in June 2021, we have engaged with companies in the energy, utility, industrials and airlines sectors to establish an initial dialogue, improve our understanding on their climate strategies, and set our expectations going forward.

Environmentally friendly cement production

Jane Andrews, founder and chief investment officer at BambuBlack Asset Management:

Alternative energy sources are replacing fossil fuels, however some materials are harder to replace such as cement, required for construction and infrastructure. Cement production accounts for around 8% of global CO2 emissions and is the second most consumed substance on Earth after water.

Australian-listed Calix has a vision to develop environmentally friendly solutions for carbon reduction, advanced batteries, waste water, aquaculture and crop protection. Calix’s breakthrough LEILAC technology enables carbon capture during cement production, thereby reducing lime’s impact on the environment and without requiring significant additional energy. Calix is therefore uniquely placed to reduce carbon emissions of the largest industrial C02 producing process globally.

Controlling the cost of carbon

Megan Brennan, portfolio manager of the Sarasin Tomorrow’s World Multi-Asset Fund at Sarasin & Partners:

The need to tackle climate change is disrupting the investment landscape as we know it, leading to the creation not only of innovative technologies but also policy tools. One market that we see as attractive in the race to reduce emissions is European Carbon Credits, where we think the EU policy commitment to reduce emissions (and in the process tighten the market for credits) will lead to a higher carbon price over time.

The European Carbon market works on a cap and trade system, which means that a maximum amount of emissions is set by the scheme and a corresponding number of carbon permits is either auctioned or freely allocated to mandatory participants (such as utilities). This incentivises emitters to reduce their carbon footprint, as they have to pay for excess emissions, and in turn a higher carbon price makes decarbonisation technology more commercially viable.

While the price of carbon can be volatile, we estimate that it needs to be well above today’s price to encourage European producers of chemicals and steel to adopt abatement technology. As European households have been impacted by rising gas prices, there has been political pressure to intervene in the market to control the cost of carbon.  In reality though, when compared to gas prices, carbon prices are a small contributor to electricity prices and we do not think that this is significant enough for policymakers in Europe to undermine their key tool for achieving their climate ambitions.

Investing in best-in-class stewards

Yolanda Courtines, equity portfolio manager at Wellington Management:

A focus on stewardship and all stakeholders will be key in long-term investing and the future of ESG investing. We like to define stewardship as investing in companies that prioritise people, the planet and profit. The best stewards balance their impact on people, the planet, and profits to build long-term advantage:

  • Companies lower turnover, build loyalty, enhance culture, and benefit from diversity when they invest in people, including employees, suppliers, customers, and the community at large.
  • Companies positively impact the planet and build resilience when they shrink their environmental footprint, consider finite resources, and engage proactively on climate change.
  • Companies boost profit when they are disciplined capital allocators – balancing shareholder returns today with investment in innovation, business, and people for tomorrow.

Finding companies that balance all three is difficult but rewarding and while no company is perfect, some are much more long term focused than others, who are trying to make a quick profit. Investing in best-in-class stewards means investing in companies that are focused on being Paris-aligned, ensuring no slavery in their supply chain, understanding their raw material sources, and creating long-term, sustainable, profit.

Focusing on the revenues of tomorrow – not historical data

Samantha Lamb, head of fixed income at GIB Asset Management:

Over the next few years, we will see a shift in mindset from thinking about what a business does today, or has done in the past, to what that business will contribute to a more sustainable tomorrow. Many ESG rules currently focus on previous year percentage of revenues to determine inclusion or exclusion from an investment universe. ESG ratings rely on historic data to calculate operational performance.

However, these data metrics do not give the full picture, so increasingly we will look to where companies are spending their capex and what their product mix will be in five and 10 years’ time. We may exclude a utility from our investment universe because over 30% of their power generation comes from coal, however they may be investing all of their capex in renewables. Other industries are just at the beginning of their transformation journeys, such as auto manufacturers, who are investing tens of billions in transforming their businesses with commitments to electric vehicles being as much as 40% of product mix by 2030.

Therefore, we will start focusing on the revenues of tomorrow to ensure we identify the resilient businesses that are making the right strategic investment decisions to be on the right side of history.

Understanding a diverse world

Rayna Lesser Hannaway, portfolio manager at Polen Capital:

One company that stands out to us is Endava, an IT services company that is helping its customers with digital transformation.

Endava can help an organisation reimagine and reinvent itself by helping it catch up to the changing preferences and behaviours of its customers in the digital world. It can help companies futureproof their organizations – a must for any business to succeed. We also appreciate the firm for its thoughtful and responsible approach to diversity, equity, and inclusivity – making sure all its employees feel respected, included, supported, and connected to its culture.

This is something the investment team at Polen Capital are committed to: diversity of thought is critical and it can only be achieved by having a diverse team. Diversity drives better outcomes for our shareholders by making us better at digging into the companies and making sure we are looking at them from all points of view. Our companies serve a diverse world, and we need to make sure we understand it.

Becoming self-sufficient in energy consumption

Francisca Wiggins, manager of Atrato Onsite Energy (ROOF):

Energy costs have surged in the UK in recent months, with price instability likely to remain for the next decade. The use of innovative onsite rooftop solar generation could be one answer to combatting the energy crunch whilst delivering clean, green energy to corporates and dependable dividends for investors.

Many large UK businesses have committed to achieving carbon neutrality. Whilst there are various options for the procurement of green electricity via the National Grid, onsite generation is the only way businesses can ensure that the electricity they consume has been generated from a zero-carbon source. Corporates, such as the UK’s major supermarkets, can and should look to harness innovative solutions, such as utilising the enormous unused space on their roofs. Through the installation of rooftop solar panels, companies can bypass the grid and realise green energy efficiencies and crucial cost savings.

While investors seeking exposure to renewables typically head towards largescale projects, the meaningful monetary and environmental benefits of more innovative solutions should not be ignored. A cleaner and sustainable future can only be attained if corporates become self-sufficient in their energy consumption, rather than focusing on delocalised carbon offsetting, they must look to use all the assets at their disposal – including the one over their heads.

Biggest ESG investment theme? Follow the women

Annachiara Marcandalli, partner at global investment firm, Cambridge Associates:

Some investors think ESG’s rise will lead to tedious reporting without meaningful change. I disagree, change is here and it is happening before our very eyes.  Just as the pandemic catapulted workers out of their cities and into virtual meetings, climate action and ESG integration are propelling women to the heart of investment decision making. Based on my experience, the majority of the investment talent in stewardship, engagement and ESG integration is female.

There is a stark difference in the gender composition of finance professionals in ESG integrated firms versus the asset management industry at large. I frequently find myself in women-only meetings with empowered senior directors or partners. It is women chairing the global organisations working collaboratively to help us achieve net zero (for example the IPCC or CDP).

UK regulators have set targets to encourage more women and racial diversity in boardrooms. FTSE 100 companies proudly declare that women represent 40% of their leadership – and they hope for that number to rise to 50% in the next decade. You do not need to set any of these targets when you are talking about ESG experts.

Biggest ESG investment theme to look out for? If you believe that sustainability will be at the heart of more resilient returns you should follow the women.

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Natalie Kenway

Natalie is global head of ESG insight for ESG Clarity and has been an investment journalist for 16 years. She won Editor of the Year at the Aviva Investors Sustainability Media Awards 2021, and was Winner...