Impact Report 2019
Welcome to our inaugural impact report
Our aim is to provide investors in Affinity’s Sustainable Strategy with an insight to the positive contributions their capital has made towards the UN’s Sustainable Development Goals (SDGs), using the themes which shape this mandate.
Much like the investment challenges associated with this space, reporting on impact is no easy task. The financial services industry is working to establish a global, standardised taxonomy to enable fairer assessment and measurement. In the interim, unsubstantiated data and misinformation abounds – some of it intentional “green washing”. Whilst we acknowledge the benefit of translating complexity into simple numbers and images, the risk is that these encourage capital to be directed inappropriately. Consequently, it is important to recognise that a like-for-like comparison of investments is neither fair nor meaningful, at this time. It is better to simply report on the positive social and environmental activities of the underlying companies held in your portfolio; as well as the managers’ engagement to influence change for good. So this is what we are doing.
The purpose of the Sustainable mandate
For us sustainability means making economic prosperity long lasting, more socially inclusive and less dependent on exploitation of finite resources and the natural environment. Over the past decades, this theme has also permeated financial markets. The rationale for sustainable investing has gained support and legitimacy. This imperative of sustainable finance is nothing new; what is new is the momentum behind its implementation. Today, companies that provide solutions to the challenges faced are well placed to grow strongly. We believe, by investing in these firms, our clients can make a positive contribution towards a more sustainable world, align wealth with their values and generate attractive capital gains.
The purpose of this mandate is to provide growth with impact. The strategy targets inflation plus 3%, over a long time horizon of at least ten years. This report focuses on impact and does not analyse the investment performance, which is detailed in our quarterly communications.
8 themes
We allocate capital, using funds, across 8 themes. Namely;
education sustainable cities reduced inequality water future mobility health and wellbeing clean energy resource efficiency
These sustainability themes relate to long-term trends and the funds we use to access them are focused on the competitive advantages of firms and economies in the future, rather than value-diminishing short-term reactions. Each theme maps to one or more of the 17 UN SDGs.
The impact of your investments
The data we have available is for 2018 and reflects the holdings over that year. During this time the portfolio held over 800 individual stocks, across 10 funds. However, this number was significantly inflated by a tactical allocation to iShares World SRI ETF, which has since been sold. This passive – with holdings of circa 400 shares – was used to “equitise” cash, whilst researching alternative active managers. For the purposes of this communication, we are not reporting the ETF’s impact and do not intend to own this fund in the future.
You will likely be relieved to know we are not reporting on every underlying position, although we have access to this information. Instead, we are selecting a small number of examples that bring the 8 themes to life and illustrate the diversity of sectors, geography and mandate. We also address how the individual fund houses have been engaging with company management.
To be clear, our strategy is not composed of a portfolio of angelic enterprises. Rather they are businesses working towards a more sustainable world.
BMO Responsible Global Emerging Markets
This fund invests in high quality, large cap companies, with strong or improving sustainability characteristics which we believe is the right approach for long-term investing in emerging markets.
HDFC Bank (India): empowering women
HDFC Bank, one of India’s largest private banks, has a number of initiatives to promote financial literacy and inclusion across the country. Under its Sustainable Livelihood Initiative (SLI), the bank has provided access to financial services to over 8 million rural households across India in the past five years. SLI is based on a holistic model aimed at empowering women at the bottom of the pyramid in rural India. It involves offering training and enhancing occupational skills, as well as providing counselling, financial literacy and market linkages to empower them financially.
Engagement
Vitasoy (China): food and nutrition
Manufactures plant-based beverages sold in 40+ markets worldwide. Vitasoy’s main product, soy milk, has nutritional qualities that include high levels of polyunsaturated fats and fibre and a low glycemic index. The production of soy milk is less carbon intensive and has lower impact on land and water use when compared to dairy.
In 2018, BMO engaged with 30 companies held in their strategy, with the aim of improving their management of Environment, Social and Governance (ESG) issues. On environmental topics, they challenged boards on climate change, plastic packaging, pollution and water use. As for social topics, the engagement covered labour practices and health issues linked to sugar.
Hermes Impact Opportunities
Impact Opportunities is a high conviction, global equity strategy with a bold objective. It aims to generate long-term outperformance by investing in companies succeeding in their core purpose: to generate value by creating positive and sustainable change that addresses the underserved needs of society and the environment.
Ørsted (Denmark): energy transition
Ørsted is the world leader in offshore wind, having installed more than a quarter of the total offshore wind capacity globally. Its mission is to lower offshore wind’s Levelised Cost of Electricity (LCoE). According to the International Renewable Energy Agency, the construction and installation of offshore wind farms – Ørsted’s core competency – accounts for more than 60% of the total LCoE reduction potential for offshore wind from 2016-2025. A decreasing LCoE of renewable energy improves offshore wind’s economics vis-avis fossil fuels, which in turn speeds up adoption and allows for a quicker transition to a low carbon economy.
Valeo S.A. (France): EV components
Valeo manufactures automotive components that enable the electrification of powertrains from mild hybrids to full EVs. CO2 emissions from battery electric vehicles (BEV) were about 40% lower than internal combustion engine (ICE) vehicles in 2018. That said, it is dependent on the energy mix of the grid and the reduction can be as high as 80% to 90% in a country like France, thereby mitigating climate change. More generally, beyond pure BEV, electrification improves fuel efficiency for ICE vehicles, which is particularly important for the gradual transition before BEVs dominate vehicle fleets.
Engagement
Since its inception, Hermes has been at the forefront of responsible investing and active ownership. Their stewardship and engagement arm, Hermes EOS, established a pioneering model for working constructively with corporate boards and management teams in the long-term interests of investors, coining the term for this practice – engagement – along the way. They contributed to the development of the Principles for Responsible Investment in 2005 and are a founding signatory.
Kames Global Sustainable Equity
Neil and Craig, who co-manage this fund, describe its style as mid-cap growth. They use a bottom-up approach to categorise companies as sustainability leaders, improvers or laggards. Their investment conviction is ultimately determined by combining these insights with an established global equity stock-picking process. The team search for the best ideas and aim to enhance performance by increasing exposure to companies with strong sustainability criteria.
Kornit Digital (Israel): cleaner manufacturing
The textile industry is incredibly water intensive and after the manufacturing process, the waste water is often not treated before it is disposed of. This waste can contain all kinds of nasty chemicals that cause harm to humans. Kornit manufactures textile printing machines that utilise a 100% waterless process with no pre-treatments, steaming or washing. They also produce environmentally friendly inks that are non-hazardous, non-toxic and biodegradable.
Insulet (US): insulin management technology
A manufacturer of a ‘pump patch’ called the OmniPod, which is the only product of its type approved by the FDA and European health care systems. The device offers a step change in the delivery of insulin to Type 1 diabetes patients by providing consistent, round the clock delivery. Small, robust and water-proof, it replaces multiple daily injections. This is an early stage growth company with profitability forecast to improve meaningfully as the business scales.
Engagement
As a significant shareholder in many companies, Kames are well placed to actively promote best practice in ESG matters. For the year they engaged with 15 fund holdings on a range of ESG issues. In addition, they met with numerous companies, throughout the analysis process, which did not meet their requirements and were subsequently rated as sustainability laggards. During the period, the team also downgraded a limited number of holdings from improver to laggard status on the basis that their sustainability performance was not changing as expected. These holdings were subsequently sold.
Pictet Water
The strategy invests across the entire water value chain. The team believe allocating capital to firms developing solutions to global water challenges leads to a win-win proposition. On one hand companies providing such solutions experience growth superior to that of the market; whilst, simultaneously, having a positive impact on our society and the environment.
Xylem (US): solving water
The world’s largest, pure-play water technology company, serving the public water utility sector, as well as industrial and commercial clients. The company is dedicated to delivering applications, products and services across the full water cycle, from freshwater extraction and distribution (energy efficient pumps, testing and treatment instruments) to wastewater treatment and resilience solution against water scarcity and floods. With its products, Xylem has a direct impact on public health through supply of clean drinking water and a positive environmental impact on rivers, lakes and oceans through treatment of wastewater.
Engagement
Pictet’s engagement framework is aimed at positively influencing the ESG performance of target companies. It is built on four key pillars: direct engagements by the investment teams, pooled engagements led by an external service provider, participation in collaborative initiatives and targeted engagements. As an example, the firm has been actively engaging with a drinking water, waste water and waste management services company. Over the last years, they regularly raised concerns regarding the size and diversity of the board (especially diversity, in terms of culture).
Pictet Global Environmental Opportunities
The fund’s investment approach uses a unique scientific framework; Planetary Boundaries. It identifies nine key environmental dimensions (water, climate change, biodiversity, land use, nitrogen & phosphorous cycle, ocean acidification, ozone depletion, aerosol loading and chemical pollution) and specifies the respective thresholds that humanity should not cross if it wishes to avoid irreversible environmental damage. The team aim to understand how a company’s products and services, taken over their entire life cycle, impact on the nine key environmental dimensions. They only invest in companies within the safe operating space that make an ‘active’ contribution to solving environmental challenges.
Smurfit-Kappa (Ireland): future of packaging
We are all aware that plastic-based waste is a major issue globally, with an estimated 12.7 million tonnes of plastic polluting our oceans each year. The fund invests in SmurfitKappa to help address this. The company produces paperbased packaging products that are a necessity to avoid plastic waste and helps reduce transportation cost by appropriate package design. A large proportion of the company’s products are based on recycled paper. In addition, Smurfit Kappa owns and operates 100k hectares of forests globally. The company’s’ biggest positive impact with regards to the Planetary Boundaries is measured on the climate change, freshwater use and chemical pollution categories.
Engagement
See Pictet Water.
Polar Capital Emerging Market Stars
At first glance this fund might seem inconsistent with this strategy’s investment philosophy. However, our mandate is not a portfolio of angelic companies. Rather, we look for exposure to companies that are moving from less good to better. EM Stars is very representative of this approach. When we approved this fund we were aware that positive contributions in categories such as water efficiency, social good and economic development were sitting alongside less good scores in gender equality and waste efficiency. As we have consistently stated, investing sustainably is complicated and sometimes the materiality of a large company moving in the right direction is very impactful. To be clear, this fund incorporates input inspired by the UN’s SDGs and adjusts the cost of capital calculations in financial analysis for specific and material ESG issues. Additionally, the Sustainable Accounting Standards Board (SASB) guidelines form the backbone for their analysis.
Alibaba (China): technology, infrastructure and marketing
Engagement
This company scores highly on Polar’s “Impact to Progress” analysis, meaning the company is on the right side of mega trends in technology/productivity, whilst incorporating environmental and natural resource optimisation. This is a company that will be a leader in 10 to 15 years’ time.
The team vote on every single company and disclose all their voting. They have undertaken in excess of 400 company meetings to-date, focusing engagement on specific portfolio companies, rather than more broadly. No companies in EM report to SASB standards yet.
RobecoSAM Global Gender Equality Impact Equities
RobecoSAM Global Gender Equality Impact Equities invests in companies that are known to demonstrate significant gender diversity and equality, as well as sustainability. A high degree of gender equality means that a company consciously recognises and encourages gender equality in the acquisition, cultivation and commitment to female talent at all levels of the company's structure. The term sustainability is understood to mean aiming to achieve commercial success while, at the same time, taking account of environmental and social goals.
McKinsey suggests that achieving full gender equality in the workforce could boost global annual GDP by $28 trillion by 2025. Firms with high gender diversity deliver better risk-adjusted stock returns than those with low gender diversity. The presence of women in the boardroom also correlates with profitability and diverse leadership teams boost innovation and improve financial performance
Adidas A.G. (Germany): sports, athleisure & wellbeing
This company is a RobecoSAM Sustainability Gold Leader. In a sector that has come under stakeholder scrutiny regarding occupational health and safety, human rights and labour law violations, and immense negative environmental impact in the supply chain, Adidas has worked to boost transparency throughout all tiers of its operations. As a leader in its sector, it is working to integrate environmental considerations into the whole lifecycle process, from product design and raw materials sourcing at the front end to used product recycling at the back end.
Engagement
Corporate engagement is framed around the guidelines used to determine the eligibility of companies in the Gender Equality fund. The objectives of the engagement dialogue focus on increasing the disclosures related to gender diversity throughout the workforce, equal remuneration practices, disclosure of wellbeing programs and how gender diversity is approached at board level.
Trium Morphic ESG Long/Short
Morphic is a Sydney-based investment manager with a strong record in delivering high risk-adjusted returns from investing in global equities in a way that doesn’t harm the environment, society or people. Morphic is also a signatory of Climate Action 100+, a five-year initiative led by investors to engage with the world’s largest corporate greenhouse gas emitters to improve governance on climate change, curb emissions and strengthen climate-related financial disclosures.
The team aims to deliver global equity market performance during good times and, through the use of hedging, endeavours to protect a degree of capital when things get tough, in a responsible way.
Coca-Cola Amatil (Australia): bottler of soft drinks
This is one of the largest bottlers of non-alcoholic ready-todrink beverages in the Asia-Pacific region and one of the world's five major Coca-Cola bottlers. CCA operates in six countries – Australia, New Zealand, Indonesia, Papua New Guinea, Fiji and Samoa.
The stock was a short position in the Trium Morphic portfolio predicated on the falling demand for carbonated drinks, given rising obesity levels/sugar taxes. CCA had committed to reduce sugar consumption by 10% by 2020, but excluded Samoa, Papua New Guinea, Fiji and Indonesia – which account for c.50% of their profit – from this target. The investment team considered this to be a meaningless target and the management’s focus was more on revenue realisation, rather than the wellbeing of its customers – i.e. a clear example of ‘green washing’ to look like they were trying.
Engagement
In instances where Morphic believe a company is pursuing a course of action that risks the sustainability of the business and is detrimental to shareholder value, the team will step up their level of engagement. In this context, company strategy, capital structure and governance frameworks are areas where they have historically undertaken extraordinary engagement strategies concerning specific issues.
Most company engagement is private, however, in some cases, engagement is made public in order to communicate the relevant issue to a wider group of stakeholders.
Vontobel Clean Technology
This fund invests in companies providing clean and innovative technologies or services that benefit from the global secular trend toward sustainable urbanisation and industrialisation. Such companies endeavour to minimize the negative impact of human intervention in global ecosystems. Reducing the negative effects of global climate change and resource scarcity offers considerable growth opportunities for companies active in these areas.
A key impact metric for this strategy is quantifying potential avoided emissions (PAE). Measuring the emissions of the entire value chain allows an assessment of potential contribution to achieve climate change mitigation. To this purpose, ISS-climate, an independent auditor, has quantified the portfolio companies’ impact by estimating the PAE. These come from energy efficient products or services which allow a reduction in emissions.
Huaneng Renewables (China): electricity from wind farms
The image often associated with a Chinese state-owned enterprise is one of profit irrespective of pollution. However, since its establishment, this company’s mission has been green power development and clean energy production. It focuses on developing and operating wind power projects, while promoting synergistic growth of solar power and other renewable energies. Huaneng Renewables places great emphasis on protecting and improving the environment and on fulfilling its social responsibilities. It strives to bring sustainable, stable and increasing returns to its shareholders and is seeking to expand globally, with a view to becoming an internationally competitive and premier renewable energy provider.
Engagement
The managers are active, both in terms of their voting at shareholder meetings and engagement. The latter takes two forms – collaborative engagement carried out by their Global Trend team, in cooperation with ISS-climate and fact-finding engagement undertaken by Hermes EOS. An example of collaborative engagement is around governance and succession planning at East Japan Railway, where the company provided further details to reassure the fund managers retired executives were not interfering with
current management. As part of a fact-finding engagement, Andritz – an Austrian plant engineering group – were asked for information on ESG critical projects and management encouraged to formulate internal criteria in a binding policy. As a consequence, Andritz are now publishing information detailing the positive impact for the environment that many of their products and projects achieve, such as efficiency gains in hydropower refurbishments or plant optimisations to reduce energy consumption.
Affinity’s social responsibility
We believe in walking the talk. As a firm, our Ethical Charter (accessible on our website) sets the tone for our business. We aim to be good citizens, active in our community and supporting global efforts towards a more sustainable world.
Some of the activities we are proud of include;
Being the 5th company on the island to be awarded Charter Status, by the Jersey Good Business Council. Our application was assessed by 12 senior business leaders, who affirmed our commitment to the 5 areas of the charter, namely: people, environment, community, suppliers and customers.
Supporting The Diversity Network – an initiative which promotes and enables diversity and innovative working practices in Jersey.
Sponsoring Eco Jersey - which aims to raise awareness of environmental issues and encourage islanders to take actions.
Being part of a government environmental management scheme – Eco Active – taking action to lower the environmental impact of our business.
Durrell Wildlife Conservation Trust
By investing in this strategy you also support Durrell Wildlife Conservation Trust (DWCT). A fixed percentage of the discretionary fees you pay are donated to this Jersey-registered charity. They go to support the charity’s work around the globe to save species from extinction. Learn more about the important work they do by visiting www.durrell.org.
Please consider the environment before printing this report