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Stewardship: investing in ESG leaders
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Impact investing: directly supporting solutions
Sustainability overview: interview with Louise Kooy-Henckel
s the climate emergency has become ever more acute, and as investors’ financial incentives have become increasingly aligned with tackling it, so the range of approaches to sustainable
investing has expanded. Yet while there is certainly a need for investors to cut through the noise, diversity and choice is no bad thing.
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“Net zero commitments are set to revolutionise the world of long-dated real assets”
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SUSTAINABLE INVESTING
This material and its contents may not be reproduced or distributed, in whole or in part, without the express written consent of Wellington Management. This information is intended for marketing purposes only. It is not an offer to anyone, or a solicitation by anyone, to subscribe for units or shares of any Wellington Management Fund (“Fund”). Nothing in this document should be interpreted as advice, nor is it a recommendation to buy or sell securities. Investment in the Fund may not be suitable for all investors. Any views expressed in this document are those of the author at the time of writing and are subject to change without notice. Fund shares/ units are made available only in jurisdictions where such offer or solicitation is lawful. The Fund only accepts professional clients or investment through financial intermediaries. Please refer to the Fund offering documents for further risk factors, pre-investment disclosures, the latest annual report (and semi-annual report), and for UCITS Funds, the latest Key Investor Information Document (KIID) before investing. For each country where UCITS Funds are registered for sale, the prospectus and summary of investor rights in English, and the KIID in English and an official language, are available at www.wellington.com/KIIDs. For share/unit classes registered in Switzerland, Fund offering documents in English, French, Swiss French can be obtained from the local Representative and Paying Agent — BNP Paribas Securities Services, Selnaustrasse 16, 8002 Zurich, Switzerland. Wellington Management Funds (Luxembourg) and Wellington Management Funds (Luxembourg) III SICAV are authorised and regulated by the Commission de Surveillance du Secteur Financier and Wellington Management Funds (Ireland) plc is authorized and regulated by the Central Bank of Ireland. The Fund may decide to terminate marketing arrangements for shares/units in an EU Member State by giving 30 working days’ notice. In the UK, issued Wellington Management International Limited (WMIL), a firm authorised and regulated by the Financial Conduct Authority (Reference number: 208573). ©2022 Wellington Management. All rights reserved. As of 1 August 2021. WELLINGTON MANAGEMENT FUNDS ® is a registered service mark of Wellington Group Holdings LLP.
Indeed, investors are now being offered such a broad range of approaches that everyone should be able to find one which suits their particular needs and objectives.
The sustainability spectrum
Impact | Stewardship | Climate | Sustainable thematic
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Past performance is not a guide to future performance. The value of investments and the income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested.
Wellington Management has four main sustainability approaches, each with a very different flavour. Its impact funds invest in companies which are directly seeking to solve societal and environmental problems. Its stewardship funds look at companies – in a wide range of sectors – which are balancing the interests of all their stakeholders. The Wellington Climate Market Neutral Fund seeks to long and short the likely winners and losers from the climate transition. And its sustainable thematic approach focuses on structural trends as countries move from a “growth-at-all-costs” outlook to a greater emphasis on sustainability.
he growth of responsible and sustainable investing is changing the shape of the investment industry and could prove critical in
supporting the transition to a lower carbon and more socially just world.
For Professional Clients only
Climate investing: identifying the winners and losers
Sustainable thematic investing: no more ‘growth at all costs’
For Professional investor use only, not suitable for a retail audience.
But does it need to watch its step?
In this exclusive Spotlight guide, we’ll look at all these funds in more detail and how the team at Wellington approaches them.
The views expressed are those of the authors, are given in the context of the investment objective of the portfolios and are subject to change. Other teams may hold different views and make different investment decisions. This material and its contents are current at the time of writing and may not be reproduced or distributed in whole or in part, for any purpose, without the express written consent of Wellington Management. While any third-party data used is considered reliable, its accuracy is not guaranteed. Forward-looking statements should not be considered as guarantees or predictions of future events. Past results are not a reliable indicator or future results. This information is provided for informational purposes only and should not be viewed as a current or past recommendation and is not intended to constitute investment advice or an offer to sell or the solicitation of an offer to purchase shares or other securities. Holdings vary and there is no guarantee that a portfolio has held or will continue to hold any of the securities listed. Wellington assumes no duty to update any information in this material in the event that such information changes.
Below investment grade: Lower-rated or unrated securities may have a significantly greater risk of default than investment-grade securities, can be more volatile and less liquid and involve higher transaction costs. Capital: Investment markets are subject to economic, regulatory, market sentiment and political risks. All investors should consider the risks that may impact their capital, before investing. The value of your investment may become worth more or less than at the time of the original investment. The Fund may experience high volatility from time to time. Concentration Risk: Concentration risk is the risk of amplified losses that may occur from having a large percentage of your investments in a particular security, issuer, industry, or country. The investments may move in the same direction in reaction to the conditions of the industries, sectors, countries and regions of investment, and a single security or issuer could have a significant impact on the portfolio’s risk and returns. Credit Risk: The value of a fixed income security may decline due to an increased risk that the issuer or guarantor of that security may fail to pay interest or principal when due, as a result of adverse changes to the issuer's or guarantor's financial status and/or business. In general, lower-rated securities carry a greater degree of credit risk than higher-rated securities. Currency Risk: Active investments in currencies are subject to the risk that the value of a particular currency will change in relation to one or more other currencies. Active currency risk may be taken in an absolute, or a benchmark relative basis. Currency markets can be volatile, and may fluctuate over short periods of time. Emerging Markets Risk: Investments in emerging and frontier countries may present risks such as changes in currency exchange rates; less liquid markets and less available information; less government supervision of exchanges, brokers, and issuers; increased social, economic, and political uncertainty; and greater price volatility. These risks are likely greater relative to developed markets. Equities: Investments may be volatile and may fluctuate according to market conditions, the performance of individual companies and that of the broader equity market. Interest Rate Risk: Generally, the value of fixed income securities will change inversely with changes in interest rates, all else equal. The risk that changes in active interest rates will adversely affect fixed income investments will be greater for longer-term fixed income securities than for shorter-term fixed income securities. Leverage Risk: Use of leverage increases portfolio exposure and may result in a higher degree of risk, including (i) greater volatility, (ii) greater losses from investments than would otherwise have been the case had leverage not been used to make the investments, (iii) margin calls that may force premature liquidations of investment positions. Hedging: Any hedging strategy using derivatives may not achieve a perfect hedge. Leverage: The use of leverage can provide more market exposure than the money paid or deposited when the transaction is entered into. Losses may therefore exceed the original amount invested. Liquidity: The Fund may invest in securities that are less liquid and may be more difficult to buy or sell in a timely fashion and/or at fair value. Long/short strategy: The Fund could encounter higher losses if its long and short exposures move in opposite directions at the same time and both in an unfavourable way. Manager: Investment performance depends on the investment management team and their investment strategies. If the strategies do not perform as expected, if opportunities to implement them do not arise or if the team does not implement its investment strategies successfully, a fund may underperform or experience losses. Small and mid-cap companies: Small and mid-cap companies’ valuations may be more volatile than those of large cap companies. They may also be less liquid. Investment in China: Changes in Chinese political, social or economic policies or securities law and regulations may significantly affect the value of the Fund. Chinese securities may be subject to trading suspensions which could impact the Fund's investment strategy and affect performance. Chinese tax law is applied under policies that may change without notice and with retrospective effect. Shanghai-Hong Kong stock connect: Allows access to certain China A Shares listed on the Shanghai and the Shenzhen Stock Exchanges, securities could be recalled from the scope of the program which could restrict the Funds ability to implement its investment strategy effectively. The program is subject to quota limitations which may restrict dealing on a timely basis. Trading is subject to China A Share market rules, foreign shareholder restrictions and disclosure obligations and changes to laws, regulations and policies in China may affect share prices of securities held. Short selling: A short sale exposes the Fund to the risk of an increase in market price of a security sold short; this could result in a theoretically unlimited loss. Sustainability: An environmental, social or governance event or condition that, if it occurs, could cause an actual or potential material negative impact on the value of an investment.
investment risks
The value of investments can fall as well as rise and capital is at risk.
The value of investments can fall as well as rise and capital is at risk. This material and its contents may not be reproduced or distributed, in whole or in part, without the express written consent of Wellington Management. This information is intended for marketing purposes only. It is not an offer to anyone, or a solicitation by anyone, to subscribe for units or shares of any Wellington Management Fund (“Fund”). Nothing in this document should be interpreted as advice, nor is it a recommendation to buy or sell securities. Investment in the Fund may not be suitable for all investors. Any views expressed in this document are those of the author at the time of writing and are subject to change without notice. Fund shares/ units are made available only in jurisdictions where such offer or solicitation is lawful. The Fund only accepts professional clients or investment through financial intermediaries. Please refer to the Fund offering documents for further risk factors, pre-investment disclosures, the latest annual report (and semi-annual report), and for UCITS Funds, the latest Key Investor Information Document (KIID) before investing. For each country where UCITS Funds are registered for sale, the prospectus and summary of investor rights in English, and the KIID in English and an official language, are available at www.wellington.com/KIIDs. For share/unit classes registered in Switzerland, Fund offering documents in English, French, Swiss French can be obtained from the local Representative and Paying Agent — BNP Paribas Securities Services, Selnaustrasse 16, 8002 Zurich, Switzerland. Wellington Management Funds (Luxembourg) and Wellington Management Funds (Luxembourg) III SICAV are authorised and regulated by the Commission de Surveillance du Secteur Financier and Wellington Management Funds (Ireland) plc is authorized and regulated by the Central Bank of Ireland. The Fund may decide to terminate marketing arrangements for shares/units in an EU Member State by giving 30 working days’ notice. In the UK, issued Wellington Management International Limited (WMIL), a firm authorised and regulated by the Financial Conduct Authority (Reference number: 208573). ©2022 Wellington Management. All rights reserved. As of 1 August 2021. WELLINGTON MANAGEMENT FUNDS ® is a registered service mark of Wellington Group Holdings LLP.
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“Their return profiles may vary but they're all looking to outperform their markets,” explains Louise Kooy-Henckel, director of sustainability in EMEA. “None of them comes from a place of philanthropy. I underscore that because it's very important that we deliver to our clients.
But what unites Wellington’s approach to all of them is that the firm is seeking to deliver strong returns.
ustainable investing is very much an umbrella term. It ranges from ESG integration and engagement through to stewardship strategies, and then on to climate investing, sustainable thematic investing and finally impact investing.
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“Return profiles may vary but all the approaches are looking to outperform their markets”
‘Investing with a sustainability lens can really shine a light on interesting opportunities’
Louise Kooy-Henckel, director of sustainability in EMEA, outlines Wellington’s unique business model and why sustainable investment doesn’t necessarily mean accepting lower returns
The four dimensions of Wellington’s approach to sustainability
“Investing with a sustainability lens can really shine a light on interesting opportunities and find companies off the beaten path. Those companies that are prioritising and embracing sustainability can potentially increase in value, reduce business risk and develop competitive advantages over their peers in doing so.
“We are firmly in the camp which believes that just because companies are focused on doing good, that doesn't mean they're not doing well financially.”
But Wellington’s focus on sustainable investment isn’t an evangelical endeavour. The firm is responding to and anticipating demand, with investors increasingly focusing not just on climate but also on sustainability more broadly. “There is really strong momentum to implement more sustainability across their portfolios and I think a strong recognition that this is making their investments more resilient to climate and other sustainability-related risks.”
Despite having over $1trn of assets under management, Wellington remains a private partnership. It isn’t owned by an investment bank or an insurance firm, and only does asset management. Kooy-Henckel believes this allows it to take a very long-term investment horizon, which is particularly important when it comes to sustainable investing.
Wellington also has a unique internal structure. It is a research and investment-led house with dedicated, centralised resources not only for equities and fixed income but also for ESG and sustainability. There is no CIO, and the firm is a community of investment boutiques, which fosters a wide range of approaches. This means Wellington can offer a blend of different approaches to suit the objectives of individual clients and how far they have progressed on the sustainability journey.
Long-term view
“We don't have a top-down view that says to every portfolio manager: ‘This is how you are going to be embedding or integrating ESG or sustainability into your portfolio,’” explains Kooy-Henckel. “Instead, we have taken a bottom-up approach and are working with every portfolio manager to understand how ESG and sustainability is best integrated in a way that is intrinsic to their investment philosophy and process.”
explore our summary of the forces now shaping the market
“The move to quantify everything could really be dangerous if it ends up removing that human layer of judgment”
Royal London Asset Management is one of the longest-established responsible investors in the industry. So, what does its experienced team think are the most fruitful paths and potential dead-ends in the latest market developments?
who has lived with a teenager knows that fast maturation comes with challenges and a few wrong turns.
he world needs responsible and sustainable investing to mature and grow so that it can drive beneficial change more quickly. But anyone
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For Mike Fox, Head of Sustainable Investments, the overarching positive change in the last few years is that “responsible and sustainable investing has an influence and cultural acceptance it simply never used to have.”
Researching reality
“Sustainability analysis is on its way to becoming a lot more numeric versus qualitative,” says Fox, “though it’s a change we don’t always agree with philosophically.” Hamilton Claxton explains: “I'm a sociologist by background so my starting point is that not everything that can be measured matters, and not everything that matters can be measured.”
Fox thinks there is a danger that numbers will take priority over more subtle word-based judgements. “Words are inconvenient because they're unstructured – you can't spreadsheet them and they can mean different things,” he says. “If you're trying to come up with a low-cost, scalable solution, words are a nightmare – you just want a set of data to crunch and create a sustainable portfolio around.”
Stricter regulatory definitions and disclosure rules are now arriving, but the team wonder if these could prove to be a double-edged sword. “The challenge is whether the regulators can really capture all the nuances of sustainability within those narrow regulatory definitions,” says Hamilton Claxton.
This momentum is reflected in the changing conversations Wellington is having. Where before many of the key concepts were new, now the emphasis has shifted to due diligence.
Ed Dixon Head of ESG, real assets at Aviva Investors
Recent legislation in the UK mandates pension trustees evaluate and report on climate risks and opportunities. It is likely that pension schemes with over £5bn in assets will have to report in line with the recommendations from the Task Force on Climate-related Financial Disclosures (TCFD) from October 2021. This is particularly pertinent when it comes to real assets, with the long-term investment commitments easily lasting until 2030 and beyond.
For Dixon, his attraction to this sector has been fuelled by a decade-plus long green career. He joined Aviva Investors in 2019 as head of ESG, Real Assets and brought with him a wealth of experience from the private sector. He had held senior sustainability roles at commercial development company Landsec, construction firm Mace and retailer Marks & Spencer. In addition, Dixon is a graduate of the Sustainability Leadership Programme at Harvard.
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“We can engage with companies over the long term to positively influence them, and our portfolio managers have a time horizon where they can be much better aligned with the capital allocation perspectives of the companies or the issuers that they invest in.”
To complement this bottom-up approach, there is a strong emphasis on collaboration. Each team brings its own particular focus or expertise and shares it across the firm. “We can have growth investors talking to value investors, for example,” says Kooy-Henckel. “We can have a sustainable-thematic portfolio manager speaking to a growth portfolio manager to see how that fits in with their approach. And our climate research can feed into any of our portfolios.”
What all of the teams share is Wellington’s values. Kooy-Henckel talks passionately about authenticity and integrity, and how these values have acted as a “true north” to guide the firm’s sustainable investment journey. Wellington has itself committed to carbon neutrality across its global operations by 2022 and has entered into an agreement with an energy provider to offset the firm’s entire electricity footprint in the US, including its employees’ home usage, with renewable energy.
Meeting expectations
“There is no doubt that there is a real challenge for asset owners to get under the bonnet and understand what they're investing in,” says Kooy-Henckel. “There is such a lack of common standards in the industry.”
Recent legislation such as the European Commission’s Sustainable Finance Disclosure Regulation has come in no small part due to the feeling that some asset managers are only paying lip service to this agenda. “There's definitely this concept of greenwashing, and some investors are sceptical of what they are being presented with by the large, mainstream asset managers in particular,” she says. “We are very aware of that, hence our commitment to approach sustainability with authenticity and a high degree of integrity.”
With this comes a demand for better data. “I think there is an expectation of full transparency about asset managers' stewardship and engagement practices. And there's an expansion of this focus to all asset classes. It's definitely moving from just equities on to fixed income and how ESG is embedded into companies on the private side.”
Sustainability around the world
Different investors are at different stages of the sustainability journey, and the same is true of different regions around the world. “There is no doubt that Europe is at the forefront here,” says Kooy-Henckel. “Our European clients are heavily engaging with us on these topics. Most want to integrate some level of sustainability in to their portfolios. There's a very strong emphasis on climate.
“In other parts of the world, these are just emerging practices. We are seeing clients in Asia being much more interested – again they have perhaps more of a focus on climate. Many clients in the US are also beginning to understand this much better now.
“Even within Europe, we see nuances. Our clients in the UK are often very keen for us to engage with companies to improve and influence, whereas many clients in the Nordics have hard exclusions from their portfolios.”
to mitigate risks and enhance returns
1. INTEGRATED RESEARCH
to help clients align values with financial goals
2. Innovative strategies
to advance sustainable business practices and outcomes
3. Influential engagement
to foster a more sustainable future
4. Impactful industry leadership
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Louise Kooy-Henckel, director of sustainability in EMEA, and Paul Skinner, investment director, explain how Wellington’s impact investment funds seek a positive social and environmental impact as well as an attractive return
(1) Moody’s
Sources.
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Louise Kooy-Henckel: Impact investing is an area where we’ve been a real innovator and an early mover. In the equity portfolio, we're looking to identify and invest in companies that are directly seeking to solve some of the big problems in society and the environment, as well as to deliver an attractive financial return.
That dual objective – generating returns and also delivering a positive change – is the same both for the equity and for the fixed income fund.
The equity portfolio has delivered 2.6% above global equity markets (annualised) since inception, which is above the objective we had initially set.
Tell us about Wellington’s relationship with impact investing.
Paul Skinner: Philosophically the bond investment comes from the same place as the equity fund, but we've got a different opportunity set. We invest across the fixed income spectrum, which allows us to address a diverse and comprehensive range of social and environmental impact themes. For example, within the securitised sector, we can address the issue of affordable housing by investing in agency mortgage-backed securities. We can have a really powerful impact by being able to accurately locate the area that we're helping and the level of deprivation or low income that we're addressing.
LKH: First, we want the majority of the company or issuer’s products or services to be aligned with one or more of our impact themes (see above).
Secondly, we're very focused on the concept of additionality. This means the company or issuer must be addressing an unmet need. We want to invest where it really makes a difference, for example to help an underserved demographic or support a unique technology.
The third thing is whether we can measure the impact the investment is having. That means thinking up front about a key performance indicator that we want to follow through the life of the investment.
How do you define what does and doesn’t count as an impact investment?
I think that's something that sets these two portfolios apart in the market, because not everybody looks at additionality and not everyone is measuring impact sufficiently.
PS: We're welcoming the increased regulation governing nomenclature: the labels people are allowed to give certain issues or bonds. We've seen a massive increase in the green and sustainable bond universe; issuance of sustainable debt in 2020 was about $500bn whereas last year it was closer to $1trn. (1) But you have to question the credibility of how some proceeds are used.
Is it a challenge to scrutinise the impact of these opportunities?
We spend a lot of time on the fixed income side interrogating issuers as to how we can be sure the capital is going to the right place. For example, last year Italy issued a green sovereign bond. We were initially very concerned to know exactly how the proceeds were going to be used. In our dialogue with the debt office, they agreed to have an independent assessor track the use of proceeds, which gave us the comfort we needed to invest in that bond. As a large, fixed income investor, we feel that we have a great opportunity to work with the sell-side community and share best practices on issuance within the sustainable debt world.
LKH: Impact investment within the equity portfolio is a potential return enhancement. It gives investors exposure to disruptive, innovative companies that are targeting large and underserved markets where demand is really growing. It also gives them diversification through exposure to companies and themes that tend to be underrepresented in more traditional equity strategies.
How does impact investment complement a wider portfolio?
The third point is value alignment. We’re investing in companies which are addressing critical social and environmental issues, and clients may have certain objectives that they’re looking to target.
PS: Fixed income is a complementary return source. It's beneficial to put it into a wider mix of risk assets such as equities in order to provide potential income and increased downside mitigation. Fixed-income impact investments fulfil those roles, among others.
LKH: Our most recent addition in equities has been within the financial inclusion theme. We've invested in one of the biggest financial institutions in Puerto Rico.
Can you give examples of recent impact investments?
Puerto Rico is a poor country; it has been hurt by extended periods of economic recession, natural disasters and now Covid. Some 44% of the population is considered to be in poverty. (2) So, the recovery requires access to financial services to facilitate growth and to aid those particular parts of society as well. The financial institution that we have invested in is focused on local areas, very small businesses, but also subprime consumers.
PS: One that crossed from equity into fixed income was a Spanish wind energy company. Our impact equity team have been invested for some time, but the company came out with its first ever bond issuance last week. The close collaboration between Wellington’s equity and fixed income impact investors meant that we were already confident that this company was making a real difference.
Affordable housing
Clean water and sanitation
Sustainable agriculture and nutrition
Health
Safety and security
Education and job training
Digital divide
Financial inclusion
Alternative energy
Resource efficiency
Resource stewardship
wellington management's impact themes
Wellington Global Impact Bond Fund - Article 9 (SFDR)
Sources. Fund - Wellington Management, Morningstar. Index - Bloomberg. Figures are USD, class S Acc USD Hdg, net of fees. Category is Morningstar EAA Fund Global Bond - USD Hedged. The Morningstar category contains funds with similar investment universes, however, the funds contained within will have various and different risks, risk factors, objectives, charges, benchmarks, weights and SRRIs (among other factors). The Morningstar category is not the fund's benchmark. The information provided here should not be viewed as, and is not warranted to be, a comparison of like-for-like investment strategies. Target benchmark is Bloomberg Global Aggregate TR Hdg USD. Data as at October 2021. Fund launch date: April 2019.
Past results are not necessarily indicative of future results and an investment can lose value.
Wellington Global Impact Fund - Article 9 (SFDR)
Sources: Fund - Wellington Management, Morningstar. Index - Bloomberg Figures are USD, class S Acc USD Hdg, net of fees. Category is Morningstar Global Flex-Cap Equity. The Morningstar category contains funds with similar investment universes; however, the funds contained within will have various and different risks, risk factors, objectives, charges, benchmarks, weights and SRRIs (among other factors). The Morningstar category is not the fund's benchmark. The information provided here should not be viewed as, and is not warranted to be, a comparison of like-for-like investment strategies. Target benchmark is MSCI AC World Net. Data as at December 2021. Fund launch date: December 2016. Fund returns shown are net of USD S Acc fees and expenses and assume reinvestment of dividends and periods of greater than 12 months are annualised. Fund returns shown are net of actual (but not necessarily maximum) withholding and capital gains tax but are not otherwise adjusted for the effects of taxation and assume reinvestment of dividends and capital gains. Index returns do not incur management fees, transaction costs or other expenses associated with investing. Periods greater than one year are annualised. If the last business day of the month is not a business day for the Fund, performance is calculated using the last available NAV. This may result in a performance differential between the fund and the index.
(2) www.census.gov/quickfacts/PR, 2019
Four of the members of Wellington’s impact team (l-r): Virginie Pelle, Campe Goodman, Louise Kooy-Henckel, Paul Skinner
“Impact investment gives investors exposure to disruptive, innovative companies”
Stewardship is about how companies balance the interests of all their stakeholders in the pursuit of long-term profit. It is also about how they aspire to improve outcomes for people, the planet and profit in their corporate strategy, even when the core business of the company is not ESG related.
How do you define stewardship?
Portfolio attributes
“Once an investment is made, a constant process of engagement and improvement is necessary to ensure assets meet rigorous criteria”
Wellington Global Stewards Fund - Article 9 (SFDR)
Sources: Fund - Wellington Management, Morningstar. Index - Bloomberg. Figures are USD, class S Acc USD Hdg, net of fees. Category is Morningstar Global Large-Cap Blend Equity. The Morningstar category contains funds with similar investment universes; however, the funds contained within will have various and different risks, risk factors, objectives, charges, benchmarks, weights and SRRIs (among other factors). The Morningstar category is not the Fund's benchmark. The information provided here should not be viewed as, and is not warranted to be, a comparison of like-for-like investment strategies. Target benchmark is MSCI AC World Net. Data as at December 2021. Fund launch date: January 2019. Fund returns shown are net of USD S Acc fees and expenses and assume reinvestment of dividends. Fund returns shown are net of actual (but not necessarily maximum) withholding and capital gains tax but are not otherwise adjusted for the effects of taxation and assume reinvestment of dividends and capital gains. Index returns do not incur management fees, transaction costs or other expenses associated with investing. Periods greater than one year are annualised. If the last business day of the month is not a business day for the Fund, performance is calculated using the last available NAV. This may result in a performance differential between the fund and the index.
Capital at risk. For professional investors only. Not suitable for retail audience.
Yolanda Courtines, equity portfolio manager, outlines Wellington’s stewardship strategy and reveals which companies she believes are particularly strong stewards
We chose six engagement themes back in 2019 with the intention of keeping them for at least two years and then reviewing. They are climate change, which everyone across the industry is doing; social and financial inclusion, which is important for us as a mutual and also through some of our exposures to financial services in the bond space; the circular economy, which is new to us as a theme and which will also help us tackle things like biodiversity; corporate governance; diversity; and innovation and technology in society.
Can you tell us about your key engagement themes and how you approach them?
The technology in society theme offers all sorts of tricky issues that Mike Fox, our Head of Sustainable Investments, and I talk about a lot. At what point are technology companies part of the problem and not part of the solution? How might AI algorithms affect people's ability to get insurance or their human rights? Our approach to this theme is not wholly developed but it is something we are committed to tackling.
Which theme is looming larger on your radar now than a year ago?
We believe a really good steward will have a strong management team, a durable governance structure, thoughtful allocation of capital and resources, a long-term orientation and consideration of all stakeholders in the pursuit of profit. Although consideration of stakeholders is the most underappreciated when it comes to driving more sustainable returns.
That doesn't mean that we never divest if at some point we're not seeing progress. We've divested companies that weren't embracing a robust climate strategy that we thought was appropriate for their business and their risks, or that weren’t managing and allocating capital in a way that seemed responsible or sustainable. We hold companies to account on material topics that we believe will differentiate leaders over time, like supply-chain oversight, including sustainable sourcing and fair labour practices.
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When a company has those elements, in our opinion, you get the flywheel effect where a company moves from delivering a higher return on investment over one or two years to achieving that high return year in, year out. Companies enhance their high returns as strong stewards. They are investing in talent so that they build capacity for innovation into the future, they’re investing in reducing their environmental footprint and lowering their carbon or water intensity, which could make them more resilient in the long-term, and they’re also investing in the community, which builds goodwill and helps attract talent.
Real assets are directly responsible for a large proportion of the carbon dioxide in the atmosphere. For example, direct emissions from buildings, power and transport account for 60% of all emissions in the UK¹. As a result, the decarbonisation efforts create huge opportunities for investors, from financing new building projects, to investment in green building materials, to allocating to renewable energy grids.
“If you imagine an infrastructure or long-dated real estate investment, that could be a 20-year commitment,” Dixon explains. “If we say we're going to be net zero by 2040, then this is a timescale in real assets and private market investing that we need to consider right now.”
The move to net zero will create new investment opportunities in areas such as carbon capture and storage technologies, renewable energy infrastructure, electric vehicles and financing green projects, to name a few. For example, according to a report by PwC³, around £40bn per year will need to be invested in new low carbon and digital infrastructure over the next decade. Another report from ShareAction found that investing in decarbonising real estate today could save the industry $1bn.
Aviva Investors’ net-zero real asset commitment
Global focus
The strategies take advantage of a number of market inefficiencies, the first of which is short-termism. On average, investors turn over stocks every 10 months, while we look to hold companies for 10 years. The fact that we're focused long term means we're ensuring that a company's business model is built with a long-term view towards innovation, investing in moats that aim to preserve the company’s returns over time rather than focusing on the next quarter's earnings.
The Global Stewards Fund has been running for nearly three years now, while the European Stewards Fund launched in September last year. What differentiates these funds from others on the market?
The second inefficiency that we’re taking advantage of is the market’s difficulty in valuing the more qualitative aspects of ESG. ESG is not something that can easily be indexed or analysed from a quantitative perspective, so the ability to do deep analysis on ESG data from the bottom up and to be very inclusive in terms of our portfolio strategies is a big differentiating factor.
Beyond that, we're very intentional in terms of portfolio construction. We’re not looking to have a growth bias or a tech bias, which you often find in ESG funds. We look to be very selective and hold a very high bar for stocks we are willing to own. We can build a portfolio that is balanced in terms of its sector exposures, and which really focuses on stock-specific risk and return. We're looking to build long-term alpha streams from strong stewardship and high returns on capital.
The last differentiating element is the access to Wellington's platform. We have a dedicated team of 34 investment team members across sustainability, ESG and climate research as well as 53 global industry analysts and 39 credit analysts who engage with companies and research proxy issues within their coverage from a stewardship perspective. They have built long-standing trust with the companies that they cover, and that ensures we have the goodwill to not only be able to access management teams but boards as well. That means we can have a really high-level and deep two-way dialogue with companies on strategy and execution.
Where do you set the boundaries for a company to be included in one of the funds?
We run concentrated portfolios and hold a high bar for inclusion. Every stock must meet two criteria: high returns on capital and best-in-class stewardship. We focus on returns on capital as we believe that metric is the best judge of a good business. And while we prioritise ESG leaders, we are cognisant that there's no such thing as a perfect company and that ESG is not a static concept, so we're constantly engaging on different topics and pushing the agenda forward to hold managements to account.
Microsoft absolutely stands out for their approach to net zero. They have committed not only to mitigating their current carbon footprint but to removing all the carbon they have emitted into the atmosphere all the way back to their founding in 1975. That's a very noble agenda. They integrate this strategy in their own operations and also work very closely with their suppliers to ensure that their entire supply chain improves its carbon footprint as well.
Can you give examples of companies which are particularly effective stewards?
Elsewhere, Michelin are extraordinarily thoughtful about their tyre business and how they manage risks around deforestation, rubber sourcing and labour. They also manufacture their tyres to be more durable, which reduces waste. While that may suggest they sell fewer tyres, durability gives Michelin pricing power and brand power, and it helps win market share, while being better for the planet. That’s a win-win for both returns and stewardship.
The examples shown are presented for illustrative purposes only and are not to be viewed as representative of actual holdings. It should not be assumed that any client is invested in the (or a similar) example, nor should it be assumed that an investment in the example has been or will be profitable. Actual holdings will vary.
average holding periods for global stockS
Source. The World Bank | For illustrative purposes only. Past results are not necessarily indicative of future results. Actual results may vary significantly. Wellington has reviewed the above research and believes the findings are still valid even without the inclusion of more current data. The Fund is expected to have a low turnover, expected holdings periods are an estimate, cannot be guaranteed and may change. | Chart data: 1979 – 2018
Number of Years
Wellington Global Stewards Fund (expected holding period)
“There's no such thing as a perfect company and ESG is not a static concept, so we're constantly engaging on different topics”
Net zero commitment
High active share
Low turnover
Active engagement
Article 9
Wellington Emerging Market Development Fund - Article 8 (SFDR)
Sources. Fund - Wellington Management, Morningstar. Index - Bloomberg. Figures are USD, class S Acc USD Hdg, net of fees. Category is Morningstar Global Emerging Market Equity. The Morningstar category is not the Fund's benchmark. The information provided here should not be viewed as, and is not warranted to be, a comparison of like-for-like investment strategies. Target benchmark is MSCI AC World Net. Data as at December 2021. Fund launch date: October 2015. Fund returns shown are net of USD S Acc fees and expenses and assume reinvestment of dividends. Fund returns shown are net of actual (but not necessarily maximum) withholding and capital gains tax but are not otherwise adjusted for the effects of taxation and assume reinvestment of dividends and capital gains. Index returns do not incur management fees, transaction costs or other expenses associated with investing. Index returns are shown net of maximum withholding tax and assume reinvestment of dividends in line with the index providers methodology. Periods greater than one year are annualised. If the last business day of the month is not a business day for the Fund, performance is calculated using the last available NAV. This may result in a performance differential between the fund and the index.
But climate investing requires us to focus on a lot more than just extreme weather. We also need to assess the impact of rapidly evolving regulations, consumer preferences, technology, clean energy, insurance, housing, demographics and data, which permeate sectors globally. Efforts to mitigate and adapt to climate change are fuelling the creation of disruptive technologies such as electric vehicles, agricultural technology, renewable energy and enabling technology.
direct impact on people, companies and capital markets.
ineteen of the 20 hottest years on record have occurred since 2000. (1) The increasing severity of heat and other physical climate risks — such as drought, wildfires, water scarcity, hurricanes, flooding and poor air quality — is having a
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“Not all companies will be able to respond to the risks or the opportunities equally, in the same time frame or at a reasonable cost”
Alan Hsu, portfolio manager, introduces the Wellington Climate Market Neutral Fund and explains why climate change presents opportunities to go both long and short
This transition to a greener future will take an enormous amount of capital. But the capital will not be evenly distributed, as companies that are better prepared to react to climate risks and opportunities are likely to take a greater share.
We believe that most companies have some degree of climate exposure, which creates both risks and opportunities for their business models. That said, due to their varying degrees of exposure to physical climate risks and carbon emissions, not all companies will be able to respond to the risks or the opportunities equally, in the same time frame or at a reasonable cost. This will create relative climate winners and losers on which to take long and short positions.
Market failures
My starting point is that not everything that matters can be measured
Hamilton Claxton says that a parallel trend is also now clear. “The conversation is moving on from ‘what is the financial ESG risk of my companies or my funds’ to ‘what is their direct impact on sustainability’, in addition to any financial risk implications,” she says. This shift is changing the approach of the Responsible Investment team – who work not just with Fox’s sustainable funds but across RLAM’s investment universe.
“We're thinking more broadly about how we can research, describe and measure the direct impact of large corporations on the world,” she says, “and we’re looking at new information in new ways.”
“In those broker conference calls,” she says, “I told companies that we can now buy algorithms and data sets that are scanning presentations, marketing documents, and news releases relating to your company to tell us what the sentiment is on your company, in real time.”
the new Aviva Investors Climate Transition Real Assets Fund. Mark Meiklejon, head of real assets global investment specialists at Aviva Investors, explains that pension schemes are increasingly looking to achieve their return objectives while also meeting explicit ESG targets set by trustees and the regulator.
“There is a huge impetus to invest in real assets, since you get this perfect storm from a scheme point of view because of the low correlation [to other asset classes], higher inflation protection, and higher return potential,” he says. “It’s a key thematic from a client perspective, being able to access a product that can help with both [returns and ESG commitments].”
In practice, this means the vehicle is daily priced, but traded monthly, with a limited amount of redemptions available in every six-month period. Since redemptions are staggered, Aviva Investors believes it will be able to match inflows and outflows more easily, avoiding the sorts of problems experienced by open-ended property funds in the UK over recent years.
Targeting assets that help accelerate the transition to net zero is a key aim for the fund, which seeks to reach net zero by 2040, while also adhering to explicit social goals and reporting carbon savings year-on-year. The real asset sector holds multiple opportunities for the fund to achieve these targets.
“With real assets, it’s the built environment, so we can directly contribute to carbon savings in the market by developing infrastructure assets to help that transition,” explains Meiklejon.
A liquid structure
Meiklejon believes the fund’s structure makes it a perfect vehicle for pension schemes. The vehicle is structured as a UK Non-UCITS Retail Scheme (NURS) and will be a Fund of Alternative Funds (FAIF), investing into underlying asset-class specific Luxembourg RAIF vehicles, some liquid assets and forestry. The fund has been seeded with approximately £425m which, combined with the ability to leverage up to 50% of loan to value, will generate approximately £950m of investment capital to deploy.
The emphasis of the strategy is, however, multi-faceted, with the fund one of the first of its kind in the industry to offer investors direct investment in nature-based solutions. For example, real asset investments will be supplemented by proactive “afforesting” – planting new forest to generate not just an investment return, but also a direct carbon benefit.
Initially planted within the UK and expanded into Europe later, Meiklejon explains this is a “relatively small part of the portfolio, but the carbon efficiency is very significant”.
The market often doesn’t adequately distinguish between these winners and losers, and instead assigns a halo effect to some companies based on a supposed climate advantage. We call these companies “false positives”. We believe their high valuations will not last, as they don’t actually offer a sustainable competitive advantage or business model.
Conversely, we also see opportunities among companies that are perceived to lack climate purity but which, in our view, are well on their way towards cleaner, greener business models. These companies, which we call “false negatives”, may go on to become relative climate winners.
We believe that climate change is a particularly suitable area for long/short investing because it is causing dispersion among companies between relative value and price that will grow as evidence of climate risk mounts over time. This creates an ever-expanding set of opportunities to generate returns on both long and short positions.
The Wellington Climate Market Neutral Fund (SFDR Article 8) was launched on 1 October 2021. It seeks absolute returns, investing long and short in companies globally, based on the assessment of relative-value opportunities between climate-advantaged companies and climate-disadvantaged companies.
Assessing relative value
Long positions are established in companies with a strong or improving position on climate mitigation (addressing the causes and minimising the possible impacts of climate change) and/or climate adaptation (aiming to reduce the negative effects of climate change or helping communities adapt to the impact of climate change). Short positions are established in climate-disadvantaged companies that have a relatively weak or weakening position on climate mitigation or climate adaption.
Importantly, the Fund does not simply take a “long clean technology, short traditional energy” approach. Rather, we invest in a range of climate-oriented themes, such as property risk, sustainable transport, clean technology and China’s energy transition. Our investment process seeks to identify a broad set of climate-advantaged and climate-disadvantaged companies in order to diversify exposure across individual themes and across the stocks within each theme.
Wellington’s partnership with the renowned Woodwell Climate Research Center provides leading scientific insights on climate change, some of which inform investment themes in our Fund.
Research and insight
Alongside that, our sustainable investment research team and global industry analysts provide detailed sector and valuation expertise on companies across the climate continuum. The long/short approach aims to provide flexibility that may protect capital during periods of market rotation and volatility and at times when traditional sectors (such as energy) rally and new sectors (such as cleantech) underperform. Market neutrality can also help to drive portfolio diversification, with a low correlation to traditional risk assets.
We believe the Fund’s opportunity set is much broader than that of many other impact, thematic or long-only climate funds because companies transitioning their business models to be more climate friendly are also included in our opportunity set. Yet these companies have often been intentionally overlooked by funds because they do not meet certain thresholds today.
(1) NASA/GISS - Data series began in 1880
Source.
“The long/short approach aims to provide flexibility that may protect capital during periods of market rotation and volatility”
(1) The ten point plan for a green industrial revolution - GOV.UK (www.gov.uk)
This prompted us to focus on the high-level structural changes that were occurring across these markets and, by association, the themes that contributed to them. Put that alongside our belief that ESG factors are linked to a company’s long-term performance, and you have the essence of the sustainable thematic approach.
and into more of a long-term pattern of development?
ight or nine years ago, we were seeing a huge period of growth for emerging markets. But the question that arose from that was what would happen next. What would happen when countries moved away from “growth at all costs”
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Dáire Dunne, equity portfolio manager, recounts the history of sustainable thematic investing and why it provides an effective lens for delivering returns
Here in the present day, we see three key structural trends as countries emerge from the growth stage. The first is about social evolution: they are trying to provide much greater access to basic services like health care, education and financial services. The second is about sustainability: they are trying to get more out of the resources they have and placing much greater emphasis on things like waste management, recycling and energy efficiency. And the third is economic progress: they are focusing on increasing efficiencies through technology, innovation and institutional reform.
At their heart, all of these structural changes are about sustainability. They’re about trying to create much better, more efficient, more effective economies with what you have rather than by simply increasing the size of industry or wasting resources.
We usually invest into anywhere between eight and 10 different themes.
Themes
Data doubts
More broadly, the availability of sustainability data is gradually improving and there is increasing pressure from investors and regulators to use that data to back up claims about sustainability.
“But we're buying companies that exist in the real world,” he says, “and to think that you can entirely numericise those companies during the sustainability analysis and attribute no value to the words that provide context to the sustainability numbers is, I think, profoundly wrong.”
Name game
Words, however, can themselves be a problem at the point of sale. “We're at this really messy part of the market’s evolution,” says Hamilton Claxton, “where there's lots of ‘funny’ marketing going on – clients are confused, some fund managers are confused – and regulators want to get their arms around that for good reason.”
For long-term investors such as pension funds, this creates an opportunity to marry their long-term liabilities with their sustainability goals, particularly given the rigorous reporting requirements on climate risks coming into force in the UK³. The engagement approach can help pension funds mitigate future ESG risks resulting from climate change, public controversies, and regulation.
The percentage that had increased their focus in the previous five years
Companies that want to enhance all three of these structural changes will often screen well against ESG factors. So this style of investing is a natural fit for the sustainability agenda, even though it has been around a lot longer than the more recent trends.
To give you some examples, digital connectivity is interesting on the social evolution side. This is about giving people across the world access to digital services. Phenomenal amounts of money have been placed into the marketplace in countries like Indonesia, where there have been efforts to connect up all the various islands.
Within sustainability there is energy efficiency. One stock that we have in the portfolio at the moment is a producer of electric motorcycles and scooters. If you think about the images of cities in emerging markets with mopeds and motorbikes zipping around everywhere, then you can see the benefit of taking these petrol-driven versions off the road. Doing so is going to have a phenomenal impact on the ability of these countries to meet their net-zero targets.
Finally, if you look at economic progress, then robotics tends to be one of the more exciting themes. Robots are being used to provide security in buildings; they’re being used to provide entertainment to residents in care homes. They are becoming much more integrated into society and are delivering many positive benefits.
The principles of sustainable thematic investing can just as easily be applied to developed markets as they can to emerging ones, though the opportunities are particularly significant in our emerging market strategy. This strategy has had significant outperformance against its benchmark over the last six years – annualised at just over 4%.
A key feature is that whilst this strategy has a benchmark, we’re not thinking about that when we come to produce the portfolio. We’re thinking about the themes. A lot of investors have a portfolio that has a very close tracking error or relationship to an index, but this is very backward looking. If you look at what sits in an emerging markets index, for example, it’s very focused on heavy industries and high polluters that have been the winners in the past but are not necessarily the winners for the future.
By extension, we make sure that we’re not trying to optimise the portfolio for the highest ESG or the lowest carbon at the present time. Companies we invest in may have high ratings now, but if they don’t then we look at why and what they’re doing about it. We then actively engage with those names. If we don’t see changes then they come out of the portfolio, but that’s a better place to be than not even having the discussion, and it ensures we are positioned for their future performance.
A thematic strategy for long-term opportunities
What’s exciting is that we’re so early in this significant change across the world. These structural changes and themes will take decades to unfold. Even though the themes may not change that much at the top level, the way we build them out is constantly evolving as technology and other factors come to fruition. We see a significant positive runway ahead of us.
portfolio themes
“This style of investing is a natural fit for the sustainability agenda, even though it has been around a lot longer than the more recent trends”
forces of structural change
Drivers of Wellington Management's sustainable thematic strategy
“We need to be protecting ourselves against downside risk, looking at those poor-performing assets from a financial and a non-financial perspective, and exiting from those to maintain performance for our clients,” he says.
