Donald Trump is not exactly famous for his ethical credentials, and when it comes to his achievements in the area of environmental sustainability, the less said the better
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However, Hermes Investment Management’s Tim Crockford (pictured) believes the US president is helping to prove the benefits of impact investing – backing companies that make a positive impact on people and the planet – by demonstrating that the argument for using this strategy is now grounded in economics, as well as in ethics.
The manager of the Hermes Impact Opportunities Equity fund said that despite Trump’s well-publicised scepticism of climate change and support for fossil-fuel industries such as coal, renewable energy adoption has accelerated drastically in the US during his time in office.
“In fact, you’ve had weeks now where renewable energy is starting to exceed power generated by coal,” he explained.
“The reason for that is not policy, or because of anything that Trump has done directly, the reason is the economics now just make sense.
“The great thing about the US is it will be very pragmatic and driven by the bottom line, if nothing else. That makes us happy because we want to see renewable energy start to overtake and displace fossil fuel, whatever the reason.
“But I think to see the world or the US through the eyes of who is in office is almost misleading.”
The Hermes Impact Opportunities Equity fund does not just invest in companies that operate sustainably, but in those selling products or services that are helping the world to become a better place – specifically those that help the planet meet the UN’s Sustainable Development Goals.
Source: The UN/Hermes
Crockford said this represents a huge opportunity for all investors, as it points them towards the companies at the forefront of the trends that will shape the future.
“I often get asked by clients how we differentiate between the impact case and the financial case with the investments that we make,” the manager continued.
“And my answer is always the same, ‘we don’t’. Because the impact case is the financial case: the growth of the 30 companies that we are invested in will be driven by the growth in the total addressable market into which they sell, and these markets will get bigger as a result of more demand coming through for the goods and services that they’re producing.
“What you’ll notice is that all of these companies present a new way of doing something in a more sustainable fashion.
“Whether that’s renewable energy – which of course will one day replace fossil-fuel generation – whether that’s electric vehicles – which of course will eventually displace the internal combustion engine – or whether that’s things like genetic therapies and other biological drugs, which will hopefully one day supersede the old small molecule way of doing things in many, many indications.”
One example of a typical holding in the fund – and one that is particularly topical at the moment – is Tomra, which makes a “reverse vending machine” for recycling plastic.
Crockford pointed out the problem with plastic is that it is a catch-all term for numerous different materials – for example, a plastic bottle tends to be made from a different material to its bottle top, and each one must be recycled in a different way. This helps to explain why less than 15 per cent of discarded plastic is recycled and only 2 per cent of FMCG (fast moving consumer goods) packaging is made out of recycled plastic, with the rest coming from virgin material.
The manager said this is where Tomra comes in.
“If you go to Germany, or actually all of the countries in Scandinavia, you’ll see its machines everywhere,” he continued.
“When you go to do your weekly shop, you take all your empty plastic bottles with you and throw them into what is essentially a very smart bin. But of course, that very smart bin has sensors on the inside, and a very big machine behind the wall which you can’t see sorts them into each different type of plastic.
“That vastly improves the economics for the companies that sort and recycle plastic and has had a very rapid effect of increasing plastic recycling rates in the countries that put these circle deposit return schemes into place.
“Germany has been doing this since 2006, so the UK is quite far behind. But England is now looking at putting a deposit return scheme into place. And in fact, I think Scotland is just about to roll one out.”
Approximately 90 per cent of plastic bottles in Germany, Sweden and Norway are returned through deposit return schemes.
Crockford said the nascent markets his holdings address and the potential for a substantial acceleration in sales growth offer the potential to “turbo-charge” returns for investors.
He added that with a growing list of global headwinds, funds such as Hermes Impact Opportunities Equity offer exposure to themes for investors to “hang their hat on” – as whatever happens, the likes of renewable energy, electric vehicles and biotech will be a much larger part of the benchmark in 10 or 15 years than they are today.
The fund manager said this is evident from the fact that more and more mainstream investors are looking towards this area for opportunities.
On a recent trip to the US, where he spoke to some of “the biggest asset owners in the world” he noticed an uptick in interest in sustainable investing – but in contrast to the stereotype of the average Wall Street trader, he said this appeared to be motivated not by profit, but morality.
“All of them now realise it’s an absolute imperative that companies start to think about the world not just in terms of the bottom line and pleasing the short-term shareholder, but actually doing what’s best for the long-term owners of these businesses and, therefore, considering all stakeholders,” Crockford added.
“You saw that with this announcement the other day by the Business Roundtable [a US non-profit association headed by JP Morgan Chase & Co chief Jamie Dimon]. And this is not something which I would expect to be a passing fad, it just makes economic sense.”
Data from FE Analytics shows Hermes Impact Opportunities Equity has made 21.61 per cent since launch in December 2017, compared with gains of 12.72 per cent from its IA Global sector and 11.93 per cent from its MSCI AC World IMI index benchmark.
Performance of fund vs sector and index since launch
Source: FE Analytics
The fund is $239m in size and has ongoing charges of 0.9 per cent.