The Games of the XXIII Olympiad are now well underway; where the finest athletes from around the world gather to compete in the spirit of fair play. With the theme of gold medals in mind, our research team have taken a look at some of the funds punching above their weight in our Academy of Funds. They bring you the titans of the sustainable investing universe that have been awarded a 3D Gold medal for their sustainable investing characteristics.
Key points:
- Square Mile’s 3D fund research analysis is a threefold framework of ‘Doing Good’, ‘Avoiding Harm’ and ‘Leading Change’.
- Funds with an explicit sustainable mandate are assessed on how closely they adhere to these three principles. Only the very best in class sustainable funds will be awarded a 3D Gold medal.
While the connection between the Olympics and investment may seem tenuous, the ethos on which the Games are based aligns closely with the promise of sustainable investment solutions. There is a growing recognition amongst investors that their savings can be a powerful force in helping create that better world. This is done by supporting businesses whose products and services offer solutions to the grave challenges face by the environment and society, whilst shunning those that are harmful.
Who is doing good, avoiding harm or leading change?
At the heart of Square Mile’s 3D fund research analysis is a threefold framework of ‘Doing Good’, ‘Avoiding Harm’ and ‘Leading Change’, and funds with an explicit sustainable mandate are assessed on how closely they adhere to these three principles.
Their portfolios are also submitted to a forensic screen at an individual holding level, determining their exposure to social and environmental solutions whilst identifying any controversies. Only the very best in class of these funds will be awarded a 3D Gold medal – those that 3D deem to be true Olympians of sustainable investment.
M&G Positive Impact Fund
The M&G Positive Impact Fund is one such a sustainable Olympian. Its Gold medal was awarded based on its strong performance across the three elements of the 3D framework and its significant alignment with 3D solutions. Manager John William Olsen and his team dedicate considerable time to ensure that investee companies deliver measurable, material impact. In addition to which they apply a negative screen, to reassure investors that their capital will not be invested in any harmful industries. Their rigorous stock selection process also ensures that a firm’s fundamentals are robust, helping the fund achieve its aim of capital appreciation. The fund’s inherent positive impact focus and its concentrated portfolio of fewer than 40 typically large cap global stocks, mean it is likely to have a high active share, and therefore look and behave very different from its benchmark. Further merit goes to the fact that the fund has strong reporting processes, including its Impact and Engagement reports, which provide ESG metrics and holdings justification.
Montanaro Better World Fund
The Montanaro Better World Fund is another global equity strategy which has been awarded a 3D Gold medal. Its investment team apply proprietary tools and scoring methodologies to identify high-quality companies whose products or services can demonstrate their positive impact on society and the environment. The resulting portfolio boasts an impressive depth of impact and alignment towards environmental and social solutions with minimal exposure to controversial practices. There are three stages to the investment process underlying the fund: impact, quality and valuation. As well as a firm’s environmental or social impact, the managers assess the intentionality of management, additionality of the product or service, and its impact risk. The revenue streams are analysed for their alignment to the UN Sustainable Development Goals, condensed into six key themes: Environmental Protection, Green Economy, Healthcare, Innovative Technology, Nutrition, and Wellbeing. Each potential holding must generate at least 50% of its revenues from any one of these themes. The team aims to identify the highest quality, profitable businesses, with typically simple business models and a niche focus in growth markets. They are also expected to be market leaders with high operating margins, high returns on capital, and trusted management teams.
Goldman Sachs Green Bond Fund
Another 3D Gold medal winner within the European fixed income market is the Goldman Sachs Green Bond Fund. This income-oriented strategy focuses on issuers committed to addressing environmental challenges, with all holdings submitted to Goldman Sachs’ proprietary analysis and aligned with the International Capital Market Association’s (ICMA) principles. In aggregate, the portfolio has a very significant exposure to companies that 3D classifies as environmental solutions, with only a small exposure to controversial activities and practices. With one of the longest track records within its peer group, this fund is a pioneer in making green bonds, and the societal change that they can affect, more accessible to investors. To be eligible for investment, a green bond must align with all four Green Bond principles defined by the ICMA, providing a robust screen. The credit team also considers an issuer’s ESG profile relative to its sector average, excluding all those with serious and structural issues, helping to eliminate greenwashing. These considerations, alongside a combination of top-down macro analysis and bottom up issuer selection, have succeeded in delivering long-term outperformance.
WHEB Sustainability Fund
The WHEB Sustainability Fund has also been deemed worthy of a 3D Gold medal, excelling in its alignment to the 3D ‘Do Good’, ‘Avoid Harm’ and ‘Lead Change’ framework. Underlying the fund is WHEB’s firm-wide philosophy that holds that companies which have a positive effect on society or the environment will ultimately enjoy structural growth and relatively resilient profitability. The fund, therefore, has an impressive exposure to companies which 3D classifies as solutions to environmental and/or social challenges, with minimal exposure to negative practices. It aims to provide capital growth through a portfolio of between 40 and 60 global companies which provide solutions to sustainability challenges and trade on reasonable valuations. All investments are framed within nine themes - Cleaner Energy, Sustainable Transport, Resource Efficiency, Environmental Services, Water Management, Well-being, Health, Safety and Education – and a stock can only meet one these themes if at least 50% of its revenue or profits are derived from it. The team also excludes unprofitable stocks, those with a market cap below $200m, and those not listed on main primary markets. Furthermore, reporting is exceptional, with the fund’s impact and the group’s stewardship reports evidencing both impact and change through investments and engagement.
Baillie Gifford Positive Change Fund
The final strategy on the Gold medal podium is the Baillie Gifford Positive Change Fund, which seeks to grow investor capital while backing companies globally that deliver a more sustainable and inclusive world. It has a significant exposure to companies classified by 3D as solutions, and the team continues to develop their already strong engagement and voting processes with the production of a Positive Conversations report, one of the strongest engagement reports in the market. The fund applies a well-defined investment process which places a strong emphasis on both returns and a firm’s positive impact over the long run. Beyond a USD $1bn minimum market cap prerequisite, the fund is free to consider a wide opportunity of around 9,000 stocks. All ideas are generated from the bottom up, both analysts and investment managers must champion any new idea that they propose and frame it within four impact themes: "Social Inclusion & Education", "Environment & Resource Needs", "Healthcare & Quality of Life" and "Base of the Pyramid". If a company does not tackle one of the challenges presented by these four impact themes, it is discarded. It must also meet Baillie Gifford’s growth criteria of having the ability grow and double their share price over five years. A company’s impact is then assessed through three lenses: "Intent", "Product Impact" and "Business Practices", and is assigned a proprietary impact score. At this stage many controversial companies are excluded, negating the need for exclusions-based analysis. The combination of these elements makes the fund one of the most compelling responsible investment strategies within its peer group.