After a difficult three months, November provided some relief for investors with the MSCI World rising 4.4%. The gains came following data suggesting that inflation is easing across developed markets.  With the Fund gaining 6.7%, we believe this environment should be more supportive for the mid-cap and growth-orientated impact stocks we invest in.

The UK Financial Conduct Authority recently published its ‘Sustainability Disclosure Requirements (SDR) and investment labels’ policy statement. As Seb Beloe discusses in this month’s commentary, it is not an overstatement to say that the SDR will fundamentally change the sustainability investment market in the UK, with its impact likely to affect many other jurisdictions including Australia as they establish their own frameworks for regulating sustainability investments.

Top Holdings (alphabetically)

Agilent Technologies Inc

United States

Health Care

Agilent Technologies is a specialist in the development and manufacture of bio-analytics for the life sciences and chemical analysis industries. The company mission is to advance quality of life. Within healthcare, its analytical instruments are used in the development and testing of healthcare products. Agilent also has a chemical analysis business which makes equipment for monitoring levels of pollutants in the ambient environment and or measuring contaminants in food and the human body.

Autodesk Inc

United States

Information Technology

Autodesk is a global leader in 3D design and engineering software and services. Its products are used by architects, engineers and designers to design, develop and manufacture and operate a vast range of products, buildings and services. Autodesk tools are a critical component in the design and operation of more resource efficient products and buildings. They can deliver significant resource savings, due to their impressive capabilities and critical position in design process. The product brands include Autodesk 360 cloud services, AutoCAD civil 3D and LT, 3Ds Max, Maya, and Revit.

CSL Ltd

Australia

Health Care

CSL develops medical products for serious and life-threatening diseases. Its core business is as a provider of human blood plasma-derived products to treat bleeding disorders, rare and serious infections and autoimmune diseases. CSL also manufactures vaccines and related products, including for flu and cervical cancer, as well as other products that speed up recovery times for patients that have undergone heart surgery, organ transplants and burns. The company provides these solutions across North America, Europe, Asia, Australia as well as other parts of the world.

Ecolab Inc

United States

Materials

Ecolab sells cleaning products and services to restaurants, hotels, hospitals, food and beverage producers and other businesses. The company has a particular focus on energy and water efficiency. Ecolab has developed a range of products and services that help to reduce, and in some cases even eliminate, the use of water in a wide range of industrial applications. In turn, this helps to lower costs through a reduction of energy and water impacts.

ICON PLC

United States

Health Care

ICON is a clinical research organisation (CRO) which provides outsourced development services on a global basis to the pharmaceutical, biotechnology and medical device industries. The company mission is to accelerate the development of drugs and devices that save lives and improve the quality of life. ICON specialises in the strategic development, management and analysis of programmes to support all stages of the of the clinical development process.

Keyence Corp

Japan

Information Technology

The company products include machine visions systems including sensors and measuring instruments that are primarily used in the automation of factories. These components help customers achieve higher levels of efficiency, energy-savings, improved material utilisation and reduced wastage and quality management.

Linde PLC

United States

Materials

Linde Plc produces and distributes industrial gases. The company operates globally supplying oxygen, hydrogen and other gases to a very wide range of downstream markets including into manufacturing industries, petrochemical and electronics industries. The gases are used in a variety of applications including in making manufacturing processes more efficient and in reducing harmful emissions. The company is establishing a strong presence in the green hydrogen market and also sells oxygen and other gases into the healthcare sector.

MSA Safety Inc

United States

Industrials

Founded in Pittsburgh in 1914, MSA originally stood for Mine Safety Appliances. This was changed in 2014 to MSA Safety to reflect the broader range of products the company has developed. Today, MSA still manufactures products such as fixed gas and flame detection systems which are used across industry. They are also a leading manufacturer of self-contained breathing apparatus and fire helmets for firefighters as well as fall protection equipment for working at height.

Thermo Fisher Scientific Inc

United States

Health Care

Thermo Fisher Scientific is one of the largest suppliers of analytical instrument, equipment, consumables and software for healthcare and environmental research, analysis, discovery and diagnostics. The company offers a very wide range of products and services including the equipment needed to analyse samples as well as the variety of containers and other consumables needed to handle them.

Xylem Inc

NY

United States

Xylem manufactures a wide range of products and provides services to the water industry. The company water infrastructure business provides a range of pumps, filtration and testing and treatment equipment to water utilities. The company also supplies commercial, residential markets with water and wastewater systems, and provides measurement and control solutions. Xylem strategy is characterised by the application of intelligent technology to improve water efficiency, in products such as smart meters and intelligent monitoring equipment.

After a difficult three months, November provided some relief for investors with the MSCI World rising 4.4%. The gains came following data suggesting that inflation is easing across developed markets.  If this is true it will support the view that central banks have reached the peak of their monetary policy tightening cycles.  Matching this optimism, the VIX volatility index (which is considered a reflection of investor sentiment) was at its lowest level since before the pandemic. In global equities markets, Technology was the best performing sector while Energy was the weakest.

The Fund delivered a significant positive return during the month of 6.7%. From a thematic perspective, Health and Resource Efficiency were the largest positive contributors with several holdings performing well.  Agilent, a life sciences company, was a major positive contributor.  It posted better-than-expected results and saw signs of stabilisation in order growth.

The largest individual stock contributor was actually from Sustainable Transport, with semiconductor manufacturer Infineon rising after management provided a positive view on growth prospects. During the month, we exited our position in HelloFresh. The company continues to struggle, issuing a profit warning only three weeks after their latest results, which further damaged our confidence in management.

Following the fall in inflation, sentiment in global equities is more positive with markets hoping that the current tightening phase has come to an end.  This environment should be more supportive of the mid-cap and 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.

Three reasons why SDR really matters

Almost a year after the second consultation period closed and two years since the original discussion paper, the Financial Conduct Authority (FCA) has finally published its ‘Sustainability Disclosure Requirements (SDR) and investment labels’ policy statement. It had been rumoured that the FCA was toying with the idea of playing Santa Claus by launching the policy on Christmas Eve. In the end, however, and perhaps in anticipation of the COP28 negotiations in Dubai (or even to coincide with the morning of WHEB’s own annual investor conference) the policy ‘dropped’ on the 28th of November.

After skimming the 200 odd pages of the policy statement, our overwhelming reaction at WHEB was one of relief. As avowed impact investors, the FCA’s original framing of the ‘Sustainability Impact’ label was deeply problematic. The final policy statement however has addressed many of the most contentious points and our intention will be to adopt the Sustainability Impact label at the first opportunity for all our in-scope funds.

It is not an overstatement to say that the SDR will fundamentally change the sustainability investment market in the UK, which will undoubtedly guide policy makers in other jurisdictions. In this regard, we feel that it is prudent for Australian investors to have at least a basic understanding of this regulation as it is likely to influence the Australian Sustainable Finance Strategy Several organisations have already produced very useful summaries of the detailed policies in the statement. But beyond the details, we believe the SDR will have three strategic impacts. These will affect not just the UK market but many other jurisdictions as they establish their own frameworks for regulating sustainability investments.

Maturing of the market

The most visible change that SDR will bring is a clear differentiation in the market. Over the decades that sustainability investing has developed, distinct approaches have emerged. The SDR formally recognises these different approaches by providing specific labels for the three main variants: ‘Sustainability Improvers’, ‘Sustainability Focus’, and ‘Sustainability Impact’. A fourth ‘Sustainability Mixed Goals’ has also been included in the final policy covering hybrid funds that offer a mix of the other three.

This differentiation will have a profound impact on the market. Conflating these distinct approaches under generic terms like ESG has for many years confused consumers and created space for greenwashing. The formal endorsement by the regulator of these distinct approaches now gives each a legitimate place in the market and will, we believe, enable each to develop further in meeting specific client needs.

Additionality and causality out, intentionality in

We remain convinced that the narrow concept of additionality as applied to the investors’ contribution in impact is deeply problematic and misses the systemic nature of markets. WHEB have been strong advocates for limiting the importance of additionality in the Sustainability Impact label.

The final policy statement has moved significantly in this direction. For example, while the importance of ‘new’ capital in impact investment is still recognised, critically the policy statement no longer makes it the defining feature of the Sustainability Impact label. Instead, the policy replaces ‘additionality’ as the defining characteristic with requirements to demonstrate investment ‘intentionality’ and provide a corresponding ‘theory of change’ along with measurable indicators of impact.

The requirement to demonstrate ‘causality’ between engagement activities and outcomes has also been removed. It is extremely rare – and probably not even desirable – that companies adapt policies and performance on issues at the behest of a single investor. Instead, the policy now requires detailed reporting on the intentionality of engagement alongside any associated outcomes.

Balancing principles and prescription

We believe that one of the key weaknesses of the European Union’s Sustainable Finance Disclosures Regulation (SFDR) is that it is overly prescriptive in mandating the reporting of specific KPIs. These are often irrelevant to the assets that are held and result in meaningless and sometimes even misleading reporting.

The FCA does a much better job of avoiding this debilitating level of prescription. The principles underpinning the SDR statement are directly linked to the FCA’s obligations to the consumer. Labelled products are required to meet ‘general criteria’ that include setting out the sustainability objective of the product and establishing key performance indicators (KPIs) that the fund needs to report against. Each label then has additional ‘specific criteria’ that products need to comply with such as reporting a theory of change for Sustainability Impact products.

Critically though, and in stark contrast to the SFDR, the detail of the strategy, and the KPIs that are selected, are left to the fund manager to define. This avoids the top-down prescription that has been so painful for the industry and so unhelpful to consumers.

The future of sustainability investment regulation

The SDR is not finished, and it is also not perfect. Discretionary wealth managers still must wait until 2024 to receive proposals governing their activities. We were disappointed to see a 70% threshold applied as the qualifying hurdle for each of the three original labels (we think it should be higher). We have also called publicly for asset managers to disclose all their holdings. We hope that the FCA might make this a requirement as the regulation evolves.

Nonetheless, we see the policy statement and the principles on which it is based as a hugely positive step forward. This is the first major piece of FCA regulation on sustainability investment and in our view will help underpin trust and support authenticity in sustainability fund management.

Regulators all around the world are reviewing their own approaches to the regulation of sustainability investing. We very much hope that they take note of the approach used by the UK and replicate it in their own policy making.

It has taken a long time to get here. It has been worth the wait.

As we move into the final month of the calendar year we will look to deliver a ‘year in review’ in early 2024. Please let us know any questions you would like us to cover, either specific to the sector, Portfolio, or any portfolio holdings below.