Jupiter Global Sustainable Equities Fund: 3 year anniversary 2018 – 2021
Abbie Llewellyn-Waters, head of sustainable investing, reflects how her and her team’s emphasis on high-quality companies that are committed to a sustainable future is more essential than ever as the Global Sustainable Equities strategy marks its three-year anniversary. With the Covid-19 crisis continuing to grip the world, she takes stock of the period that witnessed turbulence on many fronts from climate crisis to deep social inequality, and analyses emerging issues, opportunities and what the future holds.
The landscape for sustainable investments has undergone a seismic shift since we launched our Global Sustainable Equities strategy three years ago in 2018. The defiance of Extinction Rebellion and the bravery of #metoo triggered initial movement in awareness and action on planet and people. We launched our strategy just as David Attenborough’s footage of an albatross feeding plastic to its young provoked a moral moratorium on single use plastic across the world. Greta Thunberg soon became a household name with her sustained campaign on global warming, laying the groundwork for an address to the UN Climate Action Summit in September 2019 and catalysing greater policy action.
We saw tremors of departure from the shareholder primacy model, with the Business Roundtable in the United States strategically placing all stakeholders on an equal footing with shareholder return. The statement was signed by 181 CEOs, including some of the largest companies in the world. Within two years, the SEC has responded with a much needed dedicated Taskforce to seek misalignment of statement and intent of corporations. Across the water, the UK required listed companies to set out publicly how their directors have considered the interests of wider stakeholders. The European regulator has sought to scaffold trust with new SFDR regulation aimed at the asset management community to enable greater consistency on the application of what is often subjective analysis.
Geopolitical fractures in the period were accentuated by pockets of autocratic uprising across the globe. The deep fault lines of East vs West intensified. Salisbury was firmly planted on the diplomatic map and US-China trade wars heightened. Closer to home, the United Kingdom exited the European Union, creating a more boisterous narrative of protectionism.
In the midst of this journey, 2020 brought a global pandemic that created one of the most significant humanitarian crisis in modern history. Millions have died, economies have been crippled, borders have been closed and social inequality has been accentuated. The most marginalised bear the heaviest toll, both in terms of fatalities as well as economic effect through job loss and hardship.
Within this social emergency, the chilling murder of George Floyd triggered Black Lives Matter protests across the globe, fuelled by inequality and economic isolation. Recent data suggests that progress on the rate of women’s participation rate in the workforce has reversed by decades. It has never been so clear that a more inclusive economic framework is so urgently needed.
Viruses, like greenhouse gases care little for borders. And in the last three years, stark images of koalas clinging to burning bushes, wild fires in the Arctic circle, severe droughts in sub-tropical Taiwan and a deep freeze in Texas have made world leaders sit up and take notice. They have begun to understand that climate change is fast becoming relevant to both the four year democratic cycle and economic resilience. In 2018 the Intergovernmental Panel on Climate Change released its highly influential Special Report on Climate Change, highlighting the advantages of keeping global temperature increases to just 1.5 degrees above pre-industrial levels and the need to reach net zero emissions by 2050 to achieve this goal. Recognizing that huge transformations in technology and behaviour are required, governments and companies alike have subsequently been making commitments to achieve net zero by 2050. The change of guard in the U.S. earlier this year saw the Biden-Harris administration leading the world’s largest economy and second largest carbon emitter once again into the fold of Paris climate accord, and working directly with the world’s largest emitter – China – to tackle the climate crisis.
Addressing biodiversity and natural capital loss is also rapidly moving up the political and social agenda. 50% of global GDP is substantially reliant on natural ecosystems, which are being rapidly depleted; to continue our current living standards we need 1.6 earths. Earth overshoot day – the point at which humanity’s use of ecological resources and services exceeds those the planet can replenish – each year has moved back to August 22 in 2020 from September 23 in 2000.
The past three years have been extraordinary. The UN and the World Bank have warned the pandemic has undone decades of work to reduce inequalities, pushing millions around the world into extreme poverty. Concerns about economic performance following lockdowns caused a financial market rout, prompting governments and central banks to release a wave of stimulus. Interest rates are being held at historic lows and many government bonds are trading in negative yield territory. At the time of writing, government debt levels across the world are at or near levels not seen since World War Two, raising the importance of building back a better, fairer economic system as generations face the consequences of repaying this debt in the future.
If anything, the last three years have amplified and accelerated our philosophy that we need to balance planet, people and profit at the core of our investment decisions in order to best deliver enhanced client outcomes. Environment, social and governance (ESG) integration throughout our investment framework allows us to invest at the intersect of all stakeholders and client engagement has fast moved from ‘why’ to ‘how’.
Our Global Sustainable Equity strategy stayed resilient through the period, bringing into sharp focus why environmental, social and governance issues are inevitably linked to sustainability. We focus on both the sustainability of what a company sells and how it behaves. Centring our fundamental investment research on the issues our expertise tells us are most material to each company, we avoid blanket scoring hundreds of data points to decide whether a company is good or bad. By having a dedicated team that has spent their entire careers specialising in sustainable outcomes we are well positioned to navigate this increasingly complex space as we seek to offer a diversified and liquid alternative to global equities that promotes broader stakeholder interests and balances their needs.
We also don’t just say we do it, we go to great lengths to evidence the broader returns we generate for planet, people and profit in our Annual Impact Report.
Jupiter as an investment house has also continued its decades of commitment to responsible management in the context of broader stakeholders with significant commitments to both planet and people, which is detailed here.
Accelerated environmental agenda
Covid has transformed the way we interact with each other and interact with nature. The world is at the cusp of change and increasingly a regenerative approach to investing will be required.
Net zero has fast become a business critical strategy since the world’s largest nations signed a legally binding agreement in 2015 to cut global warming. Peak warming is overwhelmingly determined by cumulative CO2 emissions. To stabilise temperatures at any level, whether it is 1.5°C above pre-industrial levels (the Paris Agreement aspirational goal), 2°C (Paris Agreement central aim) or even 3°C, net CO2 emissions need to be reduced to zero. Most governments, environmental groups and businesses now understand this. With TCFD reporting becoming mandatory, we have greater visibility on alignment of corporate footprints. Holding a low carbon portfolio that is transitioning to delivering net zero is key for our client outcomes.
We know that carbon is set to become an internalised cost of business, and while the mechanisms are yet to be determined their inevitability is not. Many of the world’s largest emitting countries have committed to become carbon neutral in the coming decades. Assessing company alignment to net zero transition is a disciplined and rigorous stage of our investment framework. We look for credible and deliverable strategies and capital allocation programmes backed up by targets over the short-, medium- and long-term to make this assessment and seek irreversibility of decarbonisation plans; this is particularly important given executive and board tenure are likely to be far shorter than the 2050 deadline. Being at the front of this wave with a low carbon portfolio is a key component of our philosophy of investing in the highest quality companies leading that transition to a more sustainable world. Importantly, we look to achieve this by prioritising emissions reductions rather than off-setting, so as to encourage the fundamental behaviour changes required.
We also expect the impact of biodiversity to be increasingly priced as its value is finally recognised and the policy approach heeds many of the lessons from climate negotiations. We believe natural resources efficiency with a shift to the circular economy will be key structural drivers of the investing landscape over the years to come. With the Taskforce for Nature related Financial Disclosure (TNFD) set to launch in 2023 and the conserving biodiversity COP15 in China later this year, we will have greater visibility on these issues. Initially we anticipate water scarcity to become an increasingly material consideration, as demand for water suitable for human consumption, agriculture and industry continues to increase and supply shrinks. As with carbon, those companies that are managing their impacts on biodiversity today are likely to be the long-term leaders as the policy environment develops and finding water efficient companies is a key input to our investment framework.
COP26 and Global Policy Response
All countries need to play a role in addressing climate change, whether they are part of an industrial world or are still developing. In this context, the deal clinched by the US president’s special emissary John Kerry with China in April despite the ongoing trade war between the top two economies is significant in our view. This alignment of co-operation between the world’s two big emitters could transform the policy landscape significantly for the rest of the world.
China, which is the world’s highest emitter of carbon, plans to reach peak carbon emission by 2030, and net zero emissions by 2060. In April, the Biden administration set a new US target of achieving a 50% to 52% cut from 2005 levels by 2030. The EU plans to cut emissions by 55% by 2030 in comparison to 1990 levels.
The transformed policy landscape, escalated by the ground-shaking court ruling from the Hague ordering Royal Dutch Shell to meet the Paris climate agreement, has illustrated the potential magnitude of the UN Climate Change Conference (COP26). This degree of regulatory, legislative and commercial alignment is unprecedented from a climate change perspective. However, the emergence of new variants of coronavirus may cast a shadow on whether the conference can be held as scheduled in Glasgow in November 2021. The social inequalities highlighted by the coronavirus crisis should also bring to the fore the imperative for a “just transition”, ensuring that the benefits of moving to a low carbon economy are widely shared and that developing economies are properly supported.
We also need to focus on the climate resilience of businesses and integration of physical asset risk is an important investment tool to understand the business continuity and operational resilience of a company, given our five to ten year investment horizon.
Companies leading in the climate crisis
Companies are also taking bold steps to mitigate climate risks. A leading example of this is Unilever, which sells consumer products in 190 countries, wants to decarbonize its entire operational footprint by 2030. Several other companies in the portfolio have also committed to the Climate Pledge to reduce emissions to net zero by 2040, ten years earlier than required for the 1.5 degrees scenario. Investing in companies that are leading this transition positions our clients at the forefront of decarbonisation; the carbon intensity of the portfolio is 76% lower than the benchmark of Scope 1 and 2. In our Annual Impact Report we also detail the Scope 3 carbon intensity of the portfolio.
Running a low carbon portfolio is fundamental to investment returns as in the coming years, companies will have to start paying for the carbon that they produce. This will happen both through reduced cash flows as carbon taxation mechanisms kick in and increased costs of financing as higher carbon businesses are deemed riskier by the financial markets. By preparing for these costs early our holdings should have a competitive advantage over their higher carbon peers, supporting the returns of the portfolio.
Companies are also increasingly having to consider the physical risks of climate change as their frequency and magnitude increases. For example, Unilever stress tests its business against two temperature scenarios and shows that a higher temperature would have a greater impact due to additional costs of water stress as well as disruption to manufacturing and distribution as a result of extreme weather. It also predicts sales would suffer as a result of lower GDP resulting from temperature and weather events reducing economic activity. Knowing this today, the company is able to mitigate many of those risks, including working with its supply chain to eliminate unsustainable practices and improve resilience globally.
One of the challenges that is often under-represented in ESG discourse is gender inequality. To understand whether or not companies are enabling inclusivity, we go beyond representation of women in leadership positions to consider the policies that enable both retention and attraction of women in the workforce. Notably we see strong correlation between inclusivity and economic sustainability. This is particularly relevant today, when the pandemic has had a disproportionate impact on female participation in the workforce, which could become a systemic risk going forward.
There is a correlation between female participation in workforce and a reduction in child poverty. The covid crisis has accentuated inequality issues; to address this, the Biden administration announced a transformational plan of $1.8 trillion in support for American families and children. According to the OECD’s definition, one in five children in the U.S. live before the poverty line. Covid has made this problem worse, causing a US$64 billion loss in women’s wages and economic activity per year.
Companies can play a meaningful role in addressing these challenges in how they seek to build inclusive workforces. In this context it’s important to cite the example of portfolio holding CSL, which is a global biotech leader in plasma therapy, whose work force is over 50% female. This is unusual in a high technology sector. The company has a strong social mobility and inclusive approach as well as market leading global position in prevention of human medical narrative. On average, our holdings have a 42% female workforce, which we see as supportive of the economic and social quality characteristics of the team’s capital allocation.
There are other examples of how capital can be meaningfully allocated to drive a more inclusive economy as well. We see significant economic and social opportunities in financial inclusion. Through digitalisation of cashflow, there is greater transparency and traceability than physical cash, which supports better security by increasing accountability, reducing corruption and personal theft as a result. More broadly, it enables inclusive growth through building a more accessible, cost effective, transparent digitalised platform. It also further supports financial independence of women given approximately one billion women worldwide are excluded from a formal financial system1. Even as digital account ownership continues to grow, inequalities persist. Globally, 80 million unbanked women still receive government wages or transfers in cash; 210 million unbanked women receive cash payments for the sale of agricultural goods; 585 million women pay for utilities in cash all a source of personal risk.
Kenya’s largest mobile phone company Safaricom is revolutionising financial inclusion with the help of its mobile money transfer service. This is an example of how financial inclusion enables social mobility through digitisation of money supply and broadening the access of financial products, particularly in rural communities. This has been transformative to people’s lives in allowing them to transfer and receive money more quickly, safely, securely and reliably without requiring traditional banking infrastructure that can be preventative. By some estimates over 40% of Kenya’s GDP is now transacted over Safaricom’s platform.
In Brazil, Itau Unibanco’ Inclusion and Entrepreneurship programme has trained 125,000 entrepreneurs, including providing £1.2bn in credit to female entrepreneurs. Visa and Mastercard have each provided first-time financial access to 500m people, and are now focusing on bringing 50m small businesses into the digital financial system. These initiatives are transformative for people and economies, while also supporting the switch to cashless payments and e-commerce which the coronavirus crisis has accelerated; a clear opportunity for fund returns as well.
Minimising impact on the environment, maximising value for society, generating attractive returns for savings
It is very clear to us that there is a meaningful opportunity to address the intersectionality of social equality and the environment. Our investment framework looks to identify high quality companies that are leading the transition to a more sustainable world, by balancing the interests of three key stakeholders; the planet, on which we all live, people, with whom we all co-exist and profit that we require from our savings.
The past three years since the launch have amplified the overlap of these issues and the need for structural shift towards more sustainable outcomes. This presents both risk and opportunities to companies.
For our clients, investing their savings into a decarbonized portfolio, with a focus on inclusivity, we have positioned our fund at the forefront of this transition. The investment opportunities are looked at through stakeholder analysis; a company’s relationship with the planet and people is central to our conviction in an investment opportunity. We sense check our conclusion with currently available sustainable frameworks, including the UN Sustainable Development Goals, the temperature goals of the Paris Agreement and the UN Global Compact. We report on all of these in our Annual Impact Report.
As testament to the success of the investment framework, we are pleased that since the fund’s launch on April 9, 2018 to May 31, 2021, the cumulative returns of the fund (T ACC) have been 61.9% compared to its benchmark’s returns of 48.7%, delivering top quartile performance relative to global peers.
As we slowly emerge from the coronavirus crises, the importance of investing in high-quality, resilient and forward-thinking companies leading the transition to a more sustainable world is more imperative than ever.
Past performance is no guide to the future. Source: Morningstar, NAV to NAV, gross income reinvested, net of fees, Jupiter Global Sustainable Equities T Acc, to 31.05.21. *Since inception: 09.04.2018. Target Benchmark: MSCI AC World. Comparator: IA Global
+Relative return is net and MSCI ACWL. Source: Jupite/Statpro, in GBP, to 31.05.21. Numbers may not add up due to rounding.
Target benchmark: MSCI ACWL in GBP.
1The Global Findex Database Measuring Financial Inclusion and the Fintech Revolution