Sustainability has been a driving theme throughout the investing world in recent years, with environmental, social and governance (ESG) funds popping up left, right and centre.
Many fund houses have also added ESG elements onto existing funds so sustainability is a consideration in stock picking across most of their portfolios, even those that aren’t ESG specific.
However, sustainability is a broad term that’s open to a lot of interpretation and a predominant approach to ESG investing is through engagement.
This involves funds investing in assets that aren’t necessarily the most ESG friendly and using their influence as shareholders to encourage change. Tackling sustainably this way can be more effective and profitable than neglecting companies entirely, advocates say.
Many asset managers seek to engage with companies on ESG issues but will occasionally divest from a stock entirely if they do not see adequate change.
This is a last resort that fund managers do not take lightly, but does occur when a company is too passive in improving its ESG credentials.
Here, Trustnet asks three fund managers for stocks they divested from over sustainability concerns.
Anta Sport
Nick Payne, manager of the Jupiter Global Emerging Markets Focus fund, divested from Chinese sportswear company Anata Sport after it failed to meet ESG expectations.
It was a longstanding holding in the portfolio and Payne had several discussions with management over his concerns about where it was sourcing materials.
Much of the cotton used in manufacturing its clothes came from the Xinjiang province of China, notorious for its forced labour camps.
This is an issue Payne has frequently faced when he’s considered investing in Chinese clothing brands, with 80% of all cotton used in China originating from the region.
He said: “For a Chinese company based in China, where the existence of any forced labour camps is denied, discussion of these issues is challenging.
“We wanted to understand what steps Anta was taking to ensure its own supply chain was clean, and also wanted to make clear our expectation that the company should uphold the highest labour standards in line with the UN Global Compact.”
Payne was pleased when Anta joined the Better Cotton Initiative in July 2019, an organisation that encourages signatories to source materials from more ethical farms.
Encouragingly, the company pledged to source 10% of its cotton sustainably by the end of the year and set out a roadmap on how it would improve practices.
However, by March 2021, Anta removed itself from the initiative after pressure from the government led it to source all cotton domestically. After many attempts to improve upon the company’s supply chain, this was the final straw for Payne.
He said: “As a national champion and a key sponsor of China’s Olympic team, the company was in a difficult position. Though we appreciated this difficulty, given the company’s public backing of Xinjiang cotton we decided it was right to divest.”
However, this was not the end the fund’s relationship with Anto – Payne had meetings with the group to fully explain his ESG concerns and why this led him to divest. He hopes that Anto will eventually withdraw its support of Xinjiang cotton.
Norsk Hydro
Mike Appleby, an investment manager on Liontrust’s sustainable investment team, exited from his position in Norwegian aluminium and renewable energy company Norsk Hydro after failed attempts to engage with management.
The catalyst for his divestment was in February 2018, when extreme rainfall led to one of the company’s mining sites in Barcarena, Brazil to flood.
Brazilian officials accused Norsk Hydro of spilling toxic waste into the surrounding area, which the company first denied.
However, it admitted fault after evidence surfaced of a pipeline leading from the facility that was disposing of untreated effluent.
Embargos were placed on Norsk Hydro, which was quick to offer help to surrounding communities, according to Appleby.
The company claims to have distributed 15 million litres of drinking water by November that year, as well as working with the local water supplier to provide local communities to clean water, but the damage had been done.
“Embargos were lifted in September 2019, reiterating our view that the company had managed this proactively, which was positive for the stock,” Appleby said. “However, upon reviewing its business fundamentals, we ultimately exited the position.”
The company claims to have distributed 15 million litres of drinking water by November that year, as well as working with the local water supplier to provide local communities to clean water, but the damage had been done.
“Embargos were lifted in September 2019, reiterating our view that the company had managed this proactively, which was positive for the stock,” Appleby said. “However, upon reviewing its business fundamentals, we ultimately exited the position.”
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Medtronic
Medtronic is an American healthcare technology business that Stephanie Niven removed from her Ninety One Global Sustainable Equity fund.
Niven was concerned that the company was not implementing adequate quality control measures and that its products were not up to scratch.
A couple of weeks ago, Medtronic recalled over a million catheters when they discovered a “potential leaking condition” that could put patients at risk.
Niven said: “We have actively pushed medical technology businesses on product quality, a key social capital consideration – for a medical device company, product quality failures can have significant real world implications for patients.”
In June, Medtronic also had to recall their ventricular assist devices, which are used to help blood flow, when it discovered a battery welding defect that could be lethal to some users.
“We discussed with the company, industry networks, and peers the need to improve product quality failings with urgency and have been disappointed by the company’s response to this,” Niven said.