Mike Fox and George Crowdy on sustainable global equity investing
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Sustainable equity investing is having an interesting year, and not just because of pandemic-inspired market volatility. Could the upswing in sustainable investing over the last few years, driven largely by environmental worries, take on a new shape as the recovering world prioritises social cohesion including upgraded health systems and collaborative approaches to problem solving?
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In this guide, Royal London Asset Management’s George Crowdy offers his views while introducing a new global sustainable equity fund – a rare addition to RLAM’s long-established sustainable fund range. Mike Fox, RLAM’s Head of Sustainable Investments, then explains how an independent advisory committee helps him build policy in potentially contentious areas, including sustainable investing in emerging markets and responses to the corona crisis.
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Campe Goodman on how impact bond investors can shift the world into a better trajectory
Sustainable investing is growing fast and one of its newest tools – impact bonds – further increases the opportunities available to investors. By using impact bonds, debt investors can pursue returns while putting their money to work on solving the world’s biggest social and environmental challenges.
In this Focus, Campe Goodman, portfolio manager at Wellington Management, discusses the key issues surrounding impact bonds including how capital can be steered towards the most beneficial projects. He also introduces the Wellington Global Impact Bond Fund, which has the goal of addressing some of the world’s most pressing challenges while seeking to provide strong financial returns.
Mike Fox, Head of Sustainable Investments
RLAM’s Independent Advisory Committee
Royal London Global Sustainable Equity Fund
SNAPSHOT
George Crowdy, Fund Manager
THE INTERVIEW
Should sustainability
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The new fund follows the range’s investment process, “the crux of which is our consistent scorecard approach,” says Crowdy. “50% of the score is given to sustainable factors, 50% to financial,” he says, “and we believe we can find mis-valued opportunities in both dimensions.”
Sustainable scoring
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Crowdy says the crisis may eventually be seen as “hugely supportive of the transition to a more sustainable world,” despite the scale of the human tragedy. That’s partly because “well-governed companies are likely to prove better placed to navigate the economic storm,” but mainly because, “investing in solutions to what the world really needs comes to the fore in times of crisis.”
He thinks the S in ESG – the social side – is taking on a new prominence. “Sustainable brands are made through crises like this,” says Crowdy, who co-manages the new fund with Mike Fox, RLAM’s Head of Sustainable Investments. “People will want to purchase from, and work for, companies who show they really care about their employees and broader society at critical times.”
Social sustenance
sustainable equity fund.
he world is emerging in painful stages from the corona crisis – and starting to think about the shape recovery should take. For George Crowdy, that means 2020 is proving an extraordinary year in which to help launch RLAM’s new global
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Distinctions are anyway blurring: some firms listed in developed markets now make half their sales in Africa and Asia, while some emerging market companies sell mostly to the US. “We just want to invest in the best sustainable ideas, regardless of where they’re listed”, he says.
The new fund has 30-50 holdings, making it a more high-conviction, concentrated portfolio than many competitors. “But it is also a natural evolution of our existing and long-established range,” he says, “so we now have a suite of six funds from 100% fixed income to 100% equity.”
Prior to the launch, he says, “the range’s only 100% equity fund was our predominantly UK equity Trust, Sustainable Leaders.”
Companies must be above average in both to be eligible for investment. “So companies that have a negative impact on the world like tobacco, armaments or fossil fuel extraction are quickly screened out because they don’t score highly enough on the sustainable side”, he says.
Firms with products that make a positive impact don’t get a free pass. “Our sustainable score is split equally between corporate governance (G) factors, and environmental and social (ES) factors that look at the products and services of a company and its operations. So even a renewable energy company needs to be above average on governance to get through,” he says.
go global?
That includes building new forms of corporate collaboration. “It’s been amazing to hear of competitor companies coming together for the benefit of society, particularly in the technology sector, where firms are co-operating to develop COVID-19 contact tracing apps, and healthcare in relation to developing a vaccine,” he says.
There are other potential gains. “We’ve all glimpsed what a low-carbon world might look like from an environmental perspective,” Crowdy says, “and I think a more digital and connected world is here to stay, as is the need for resilient healthcare systems.” This should play to the strengths of RLAM’s new fund: “Our two biggest sector overweights are technology and healthcare,” he says.
But Crowdy thinks the transition to a sustainable economy means much more than building wind turbines. “Had it not been for the development of the cloud and energy-efficient data centres, the vast majority of developed economies would not have been able to function during the crisis,” he says. He argues that companies providing solutions to a range of global problems are likely to have more attractive financials by virtue of higher, more durable revenue growth.
The sweet spot is “finding companies where both products and operations provide positive impact”, he says, citing a sportswear brand that facilitates physical wellbeing but also leads in sustainable manufacturing processes and new forms of recyclable product. He loves the idea of the circular economy, where companies use waste as a production input.
Positive product
Crowdy and co-manager Mike Fox work closely with “RLAM’s wider responsible investment team who particularly help us to look at corporate governance, voting and building the long-term engagement that encourages positive corporate behaviour.”
A diversity of opinion is encouraged. “But we’re all driving in the same direction,” he says, “and our external advisory committee sorts out any principled disagreements.”
Future faith
He says the investment team has a “very flat, collaborative structure where everyone has a completely equal vote as to whether a company is eligible.”
Companies addressing the world’s greatest challenges should be interesting places to invest
George Crowdy, Fund Manager, Royal London Asset Management
George Crowdy tells how the corona storm is reshaping sustainability and why his new fund embraces emerging markets
But just as the virus had no respect for national boundaries, Crowdy argues that sustainable investing must be similarly unconstrained. Many global sustainable equity funds are benchmarked against the MSCI World Index, a developed market index, he says, “but we thought it was more sensible and future-proof to use the MSCI All Countries World Index (ACWI) benchmark which includes emerging markets.” It’s an ongoing journey, “with about 5% of the fund invested in emerging markets, which we expect to go up towards 10%.”
Global gain
That shared direction depends on faith in the future as much as scorecard consistency: “Our team really does believe that companies addressing the world’s greatest challenges should be more interesting, less risky places to invest,” he says.
For professional clients only, not suitable for retail investors. The views expressed are the contributor’s own and do not constitute investment advice.
Impact bond investing is the segment of sustainable investing that channels debt market capital towards solving these challenges. The size of global debt markets means that impact bonds could be a huge lever for change, says Campe Goodman, who manages Wellington’s first impact bond fund.
Boston-based Goodman says that impact investing should address three categories of urgent global challenge:
Planetary priorities
developed economies. Some challenges threaten the planet, others threaten people – three out of ten people in the world lack safely managed drinking water. (1)
he world faces diverse challenges from climate change and rising sea levels to the lack of affordable housing in
Can bond investors help change the world?
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Campe Goodman, portfolio manager
Wellington Global Impact Bond Fund
FUND Q&A
The new fund has 30-50 holdings, making it a more high-conviction, concentrated portfolio than many competitors. “But it is also a natural evolution of our existing and long-established range,” he says, “so we now have a suite of six funds from 100% fixed income to 100% equity.” Prior to the launch, he says, “the range’s only 100% equity fund was our predominantly UK equity Trust, Sustainable Leaders.”
I think a more digital and connected world is here to stay, as is the need for resilient healthcare systems
Royal London
Global Sustainable Equity Fund
Source: RLAM
SECTOR
MSCI ACWI
BENCHMARK
IA Global Sector
25 February 2020
LAUNCH DATE
Mike Fox and George Crowdy
MANAGERS
30-50
TYPICAL NUMBER OF HOLDINGS
Introducing the RL Global Sustainable Equity Fund
Our investment process
Independent Advisory Committee
The investment team works alongside an external Independent Advisory Committee in assessing and monitoring existing and potential holdings within the fund. The committee consists of members from the charity, academic, corporate and investment worlds, each an expert in sustainability and how it is applied in their respective professional environments.
The fund aims to deliver capital growth over the medium term (3 - 5 years) by investing in what the fund managers believe to be the world’s most attractive sustainable investment opportunities. In this concentrated portfolio the fund management team can invest in both emerging and developed markets. Key features: • Truly global sustainable investing • Low carbon portfolio • Established and proven process • Long-term active ownership • Deep and broad internal sustainable expertise • Supported by an Independent Advisory Committee
£50m
£85m
£500m
£1bn
£4bn
£4.5bn
Overseen by an external advisory committee
The fund is the latest stage in the long evolution of the RLAM sustainable fund range
The new fund complements and extends RLAM’s existing sustainable fund range
Managed Income
IA Sterling Corporate Bond Sector
Managed Growth
IA Mixed Investment 0%-35% Shares Sector
Diversified
IA Mixed 20%-60% Shares Sector
World
IA Mixed Investment 40%-85% Shares Sector
Equities
Leaders
IA UK All Companies Sector
Global
The new Global Sustainable Equity Fund
Source: RLAM. For illustrative purposes – reflects approximate percentage asset allocation, weightings may vary.
• Challenge to the investment team • Provides independent oversight • External expertise and experience • Thinking on unprecedented issues • Consultation on differences of opinion
Key inputs:
RLAM's Independent Advisory Committee
advisory committee
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What is the purpose of the Independent Advisory Committee?
If you run a sustainable fund, you face a choice. You can buy in third-party research and effectively outsource decisions about the sustainability of each investment.
Or – like us – you can insource much of the research and take responsibility for those decisions, not least because there is no single definition of sustainability and the decisions are complex. For example, is Google a sustainable company?
The committee meets at least three, sometimes four, times a year and can meet virtually as well. Financial markets move fast, so if everybody internally is in agreement on an investment, we can follow our internal processes.
Do they meet often and see all your investing?
Fossil fuels is a big one. We get asked about that a lot but we say: What exactly do you mean by ‘fossil fuels’? Fossil fuel extraction, power generation, or services companies?
What sort of special issues?
How to invest in emerging markets is the obvious one. Can you really be a global sustainable fund and miss out China, India, and Latin America?
Did the committee help you through special issues in relation to the new global equity fund?
In consultation with the advisory committee, we shaped a policy around each of those areas. The end result, for example, is that fossil fuel extraction is a simple ‘No’ – we don’t own any oil, gas or coal mining companies. However, we will consider power generation utilities that have a bias towards renewables and that are increasing that bias over time.
We sometimes even apply different standards within developed markets. For example, we have a strong preference for diverse boards. But a diverse board in Japan could be one that has a single female member. In the UK we would probably vote against that.
Do you apply different standards in developed versus emerging markets?
Firstly, the crisis offers a proof point as to why we invest in companies that solve rather than cause problems. For example, we own companies involved with the UK testing strategy and the effort to develop effective treatments.
Will the coronavirus crisis change how your team and the committee approach sustainability issues?
Mike Fox, Head of Sustainable Investments, explains the role of RLAM’s Independent Advisory Committee
Can sustainable investing keep on the right track?
If you do the latter, you need some form of independent oversight. Although we are conservative in what we consider for investment, fund managers will be perceived to have inherent biases towards something that is financially attractive but sustainably less sound. So our four-person advisory committee is there to challenge us, help ensure we act in the spirit of our sustainable funds – and offer their wide knowledge and expertise.
However, at the next committee meeting the external advisory committee can comment on those decisions; if they disagree with them, we’ll likely have to take the relevant investment out of the funds. That’s not something any fund manager wants to do, so we don’t play close to the wind in terms of what we put in the funds.
In practice, we focus the committee’s time on the controversial, difficult stuff. That’s either where we can’t agree internally if individual companies meet our sustainable investing criteria; or special issues that there’s no precedent for, so we want the committee to put a framework around how we should be thinking.
So we went to the committee and said that we needed to build a framework around our role as sustainable investors in emerging markets. For example, we asked if there was any argument to say that fossil fuels are more acceptable in developing countries, where more expensive renewables are more difficult to develop? Their answer was no.
Chinese technology is another interesting area. Here I probably would have invested but the committee had a different view. The two key issues here were state censorship and corporate governance, and the latter turned out to be the bigger hurdle. Despite feeling a bit bruised, we listened, and I’m glad we did.
The question is, how much can you move before compromising the values of the fund? That is a subjective judgement – and a great example of why we have an advisory committee.
Secondly, it’s been extremely interesting to see how CEOs and businesses within our potential investment universe have responded. You get a window into the soul of companies at times like these. Some of the good actions we have seen are brilliant but there will also be disappointments.
One member of the advisory committee, Professor Alex Edmans of the London Business School, is a leading thinker on corporate responsibility. We can go back to the advisory committee, describe the spectrum of things we’ve observed and ask: How do you think that compares to what we should be supporting as investors?
Our advisory committee is there to challenge us
Ben Yeoh
(chairman), senior portfolio manager, global equities, RBC
Nicola Parker
charity investment advisor
Alex Edmans
professor of finance, LBS
Tonia Lovell
governance expert
It’s called an advisory committee because it is advisory. But in the 17 years I’ve been here, we’ve not gone against their advice. Ignoring the committee even once would set a difficult precedent.
Could you have overruled them?
