Sustainable Outperformance

As we start to see the first signs of normality appear and the virus fog starts to lift, the world remains in turmoil with protests and riots spanning the globe. Not only must there be a global change in how we treat the environment, we also need a global change in the way we treat people. We must now band together to tackle both. In this environment of uncertainty and unrest we have seen the stock market recover strongly, but it is yet to be proven if this is sustainable.

Amongst all the chaos we have seen some signs of hope in the form of the EU Recovery plan.  In this month’s commentary, Ty Lee shares his view on the EU recovery plan and the green strings attached to that. With 25% of the recovery spending set aside for green investments it sounds quite promising.

We are also pleased to announce the sixth edition of our Impact Report will be launched next month.

As we continue to set standards for our own business, we recently published an article on How we plan to achieve net-zero carbon emissions by 2025. Please have a read and join us in this pursuit.

This month WHEB was featured in a new study launched by the Responsible Investment Association Australasia (RIAA). The study shows the exponential growth impact investing is experiencing in Australia. Managing Partner, George Latham, also was also interviewed in Responsible Investors ESG Leaders video series.

Top Holdings (alphabetically)

Cerner United States Health Care

Danaher United States Health Care

Ecolab United States Materials

Intertek Group United Kingdom Industrials

Keyence Japan Information Technology

Linde United Kingdom Materials

Orpea France Health Care

Steris United States Health Care

Thermo Fisher Scientific United States Health Care

Varian Medical Systems United States Health Care

For the month ending 31 May 2020, the Fund returned 6.2%¹ compared to the MSCI World Net TR Index (AUD unhedged) which returned 3.4%.

Global stock markets continued to rally in May in anticipation of a V-shape economic recovery. The rally was further supported by recent stimulus measures from countries around the world, with cyclical sectors demonstrating a relatively strong performance.

Several stock markets are now at around the same levels they were at the start of the year. There has been a lot of commentary about how this doesn’t match the economic outlook after the pandemic. We think there is good reason to be cautious.

Our Resource Efficiency and Sustainable Transport themes were the best performers, followed by our Safety theme.

The performance of the Resource Efficiency theme was lifted by two companies we’ve held for a long time. Roper was the best contributor in the theme. It is a market leader in several niche markets spanning several sectors including water management, healthcare imaging technology and laboratory information systems. This diverse portfolio and strong balance sheet demonstrated its resilience during this volatile period.

Kingspan was another strong contributor in the theme. It is a leading supplier of building insulation materials that reduce energy consumption in residential and commercial buildings. It is likely to benefit from the recent recovery plan proposed by the European Commission. The recovery plan proposed to increase the building renovation rates from below 1% today to 3%. This will drive demand for insulation products over the long term.

Our Sustainable Transport was another positive contributor. This was due to the strong performance of JB Hunt. It provides logistics and transportation services in the US. Its main service is providing ‘intermodal’ services that maximise the use of rail in transporting goods. The intermodal rail volumes have recently stabilised, which helped to support the stock.

Norma was another positive contributor in the Sustainable Transport theme. It sells connecting systems for use primarily in cars and in water treatment. They are included in systems that help reduce harmful emissions. Recent car sales data in Europe indicated tentative signs of a recovery in the sector. The sentiment around the automotive sector also turned more positive as various governments proposed stimulus measures to support the sector.

Our Safety theme also performed well this month. Intertek was the major contributor. It provides testing, inspection and certification services to the consumer goods industry. It also tests the safety of food, healthcare products and electrical goods. The global pandemic has had a net negative impact on its business due to a sudden decline in global trade. However, Intertek’s recent trading update posted growth which was much better than markets feared. There will be increasing testing demand as companies focus on the resilience of their global supply chains.

The major detractors to our performance were our two Hong Kong listed holdings. These are China Water Affairs and China Everbright International. This was largely due to the political unrest over Hong Kong’s autonomy. The local Hang Seng index plunged more than 5% on the day as the Chinese government planned to impose new security laws. Investors fear the proposed security laws will undermine the city’s future as an international financial centre.

We welcome the ‘green’ recovery plan proposed by the European Union this month. The plan supports several trends that we have been bullish on for many years. They include vehicle electrification, building energy efficiency and renewable energy. WHEB’s strategy will clearly benefit from these supportive policies.

Recovery plan for Europe…and the environment

‘Never waste a good crisis’. In response to the COVID-19 pandemic, the European Union has proposed a €750 billion recovery plan to repair the economic and social damage. But this recovery plan has green strings attached. 25% of the recovery spending is set aside for green investments.

This is consistent with the EU’s ambition to use the European Green Deal as its future growth strategy. The European Green Deal is a longer-term roadmap for transforming the EU into a sustainable economy. With this promising backdrop, there are several areas that particularly interest us in the recovery plan.

One of the critical areas of focus in the plan is on building energy efficiency. This is unsurprising: according to the European Commission, energy use in buildings accounts for roughly 40% of total energy consumption in the EU. To combat climate change, we need to boost building efficiency technologies. The critical areas are insulation, heating, ventilation and air conditioning (HVAC) and lighting. This includes improving the existing stock of buildings. The European Commission aims to increase renovation rates from below 1% today to 3%.

In the recovery package, the Commission prioritises public buildings. We actually see more energy savings opportunities in residential buildings. We have already seen a spike in household energy use during the pandemic as more people work from home. This is likely to endure, in our view, as more people work from home post COVID-19. So the economic and environmental case for improving residential building efficiency is stronger than ever. Happily, energy efficiency in residential buildings is not totally neglected in the recovery plan. “Green” mortgages may be offered for private residential buildings to encourage renovation.

After the outbreak of COVID-19, one might wonder about the prospects for rail investments. Will people still have confidence in getting on public transport? How can a railway operator make money with all these social distancing measures in place? The EU is not deterred. The environmental case for rail is too strong to be written off. According to the European Environmental Agency, rail accounts for 0.5% of total transport emissions. Contrast this with road transport, which accounts for 71.7%. This explains the strong support for rail in the form of a €40 billion package, focused on key corridors where passengers and freight transport can be shifted to rail.

Given those huge emissions from road transport, we have long been bullish about the shift towards electric vehicles. Unsurprisingly, the recovery package also includes incentives to promote the adoption of EVs. It includes €20 billion on EV purchase incentives and funding for 2 million charging points by 2025. To put it in context, these 2 million charging points are more than the estimate of 1.2-1.3 million required by 2025 according to the green campaign group Transport and Environment.

Nevertheless, the recovery spending is only half of the story. To maximise the positive environmental impact, the European Commission plans to raise taxes from polluting industries to finance the recovery plan. It has proposed a series of new EU taxes. They include a carbon border adjustment mechanism, and a tax on non-recyclable plastics.

The recovery proposal is not set in stone. EU leaders will meet on 18-19 June to discuss the proposal. All 27 member states must also agree to the EU budget and the recovery fund. If it survives these negotiations, the EU’s green approach to stimulate its economy is unquestionably very welcome. However, we have yet to see similar responses from other key countries like China, India and the USA.  Climate change is a global issue. It needs a global response.