Staying the course – WHEB remains committed to sustainability investing

Market Review

For the month overall, the MSCI World Index rose 4.5%. This positive performance was driven by the release of strong US growth data, fuelling hopes for a ‘soft landing’ rather than recession. However, this optimism was slightly tempered at the end of the month when the US Federal Reserve noted that a March interest rate cut was unlikely. The European Central Bank kept rates on hold at its January meeting and re-iterated its commitment to remain data dependent.

In the global market, Japan was the best performing region by some margin, continuing the strong performance seen last year. In terms of sectors, Communication Services and Technology were the best performing while Materials and Real Estate were the laggards. Technology’s outperformance was mainly driven by semiconductors and a ‘chip rally’ – primarily in stocks exposed to artificial intelligence. Cleaner Energy stocks struggled during the month, given their interest rate sensitivity. Large-cap stocks outperformed small and mid-caps globally.

Fund Review

The Fund was up 0.2% for the month with strong performance from individual holdings including Lonza (Health) and Autodesk (Resource Efficiency). Lonza reported encouraging 4Q23 results, especially in the Biologics segment, and confirmed its medium-term outlook which was taken positively. Autodesk announced price adjustments for FY25. Architecture billings also showed good development in December, which is a key leading indicator for the firm.

The largest detractor from investment performance at a thematic level was Environmental Services.  TOMRA was the largest negative within it, reversing the gains from the previous month. TOMRA is a Norwegian company leading in recycling solutions, including reverse vending machines.  The long-term trend towards a more circular economy is very clear, but in the short term Tomra does experience cyclical swings.

Cleaner Energy also underperformed, largely due to weakness in solar names SolarEdge and First Solar. Many Cleaner Energy stocks have growth characteristics, which fare better in a low-rate environment.

Outlook

Following the fall in inflation, sentiment in global equities is more positive with markets expecting that the central bank tightening phase is nearing its end.  This environment should be more supportive for the generally smaller and more growth-orientated impact stocks we invest in.  Our faith in the sustainability-led growth drivers and competitive advantages of the companies themselves is as strong as ever.

Staying the course – WHEB remains committed to sustainability investing

In 1970 Walter Mischel, a professor of psychology at Stanford University conducted a famous experiment now known as the ‘Stanford Marshmallow experiment’. The experiment involved offering children a choice between one immediate reward in the shape of a single marshmallow, or two marshmallows if they waited for a short period of time.

Some children were unable to contain their impatience and immediately ate the marshmallow. Others managed to withstand the pain of waiting by creating distractions such as talking to themselves, inventing games, and even trying to fall asleep (as one successfully did). In the end, the second group had their patience rewarded with the two marshmallows.

Last in, first out

It currently feels like a similar experiment is taking place in financial markets.  Only a few years ago asset managers were falling over themselves to tap into what were seen as lucrative markets for new ‘ESG’ and sustainability labelled investment funds. We called this the ‘ESG stampede’ as asset managers launched and sought to rebrand existing funds. In 2020 alone, more than 250 European funds were rebadged as sustainable.

Since then, high interest rates have dampened returns for the mid-cap growth stocks many sustainability fund managers had focused on. ESG has also become a lightning rod for politicians keen to rile their base with the spectre of ‘woke capitalism’.  At the same time, regulators have begun to flex their muscles and demand higher regulatory standards for what constitutes sustainability. In so doing, they have increased compliance costs for fund providers.

Perhaps it is to be expected that the pain of waiting for future rewards is too much for many asset managers. Two years on from the ESG stampede, managers are now franticly reversing out of this market. Data reported in late January showed that at least US$10bn had been withdrawn from ESG-focused funds in 2023. Another recent headline claimed ‘Groups slam brakes on sustainable fund name changes’ in response to slowing demand and higher regulatory costs. A colleague attending a recent fund management conference reported that one very large fund manager has decided ‘not to bother’ to label any of their ESG-badged funds as sustainable under the FCA’s Sustainability Disclosure Requirements (SDR).

Avoiding the distractions

We view this as largely short-term noise. We know that a large proportion of end investors want to invest in a way that generates a financial return while also supporting positive change in the world. The FCA’s Financial Lives survey, for example, found that 81% of adults surveyed would like the way their money is invested to do some good as well as provide a financial return.^. The proportion that feels this way may well be diminished during a cost-of-living crisis. It is also likely to vary by gender and age. But research shows again and again that across all periods and in all groups a substantial proportion of those paying into pensions and savings products want to see positive impact.

We also know that the underlying issues that people care about such as inequality, climate change, ill-health and destruction of the natural environment remain profound challenges for the world. Done well and with integrity, sustainability investing is part of the solution to these challenges. What is more, investors can benefit from the value created by companies in these growing markets.

Sorting the wheat from the chaff

Not everyone is being distracted by the current challenges facing the sustainability investment market. In contrast to many of our asset management peers, clients can trust WHEB to remain totally committed to sustainability impact investing. It is our whole focus and is embedded in our business mission and legal structure. Our approach is to invest in the companies that are most aligned with sustainability. These are companies that derive their growth from solving sustainability challenges. Companies that sell products and services that reduce greenhouse gas emissions or cure life-threatening diseases. We believe companies that enable sustainability will also themselves benefit from growing markets for the products and services that they sell. As owners of these companies, we also help them to maximise their positive sustainability impact by mitigating any negative impacts that they may have.

Like the children in the Stanford marshmallow experiment, our ambition and expectation are that our clients will end up with two marshmallows. A double dividend made up of good financial returns and a positive impact on the world around them.