According to Matt Evans, Citywire A-rated manager of the newly launched Investec UK Sustainable Equity fund, there are three key pillars to sustainable investing: financial, internal and external.
Financial sustainability refers to good companies delivering sustainable returns. Internal focuses on how companies make the most efficient use of resources. And external refers to the sustainability of the products and services a company delivers.
Evans and the fund’s six investment professionals will often be found on the ground at manufacturers since the fund’s launch in the last quarter of 2018, ensuring they practice what their presentations preach.
‘We can engage with all companies to not only keep doing more of what is having a positive impact, but also to keep improving, and minimise and reduce areas of less positive impact,’ he says.
‘As investors, we have a huge responsibility but also an opportunity to allocate capital to those businesses that really understand what it is to deliver not only good financial returns but this transformation towards a more sustainable future.’
Evans is keen to avoid ‘box-ticking’ or ‘greenwashing’. He also wants to engage with companies not necessarily fulfilling all environmental, social and governance (ESG) criteria, such as Unilever, because of its internal sustainability focus on supply chain management and waste minimisation, and the opportunity for the fund to exert positive influence.
‘I will measure the company’s total turnover and link it to the themes we are using. This is to ensure Unilever as a whole will only qualify as 20% of its turnover having a positive impact towards those themes, not 100% of the company,’ Evans explains.
‘We’re not just looking to greenwash the whole fund. We are looking to be very open and transparent, and engage with those companies to ensure they keep improving their overall impact.’
Finding the balance
Evans will hold between 40 and 60 stocks in the new fund with a view to delivering 15% a year returns, but the fund’s all-cap capabilities allow the flexibility to hold high-conviction names like Unilever, with its £119 billion market cap, and a host of small-cap companies that enable him to sell down bigger names when they hit target prices and recycle them back in.
He explains: ‘When you run a portfolio it’s all about managing risk and reward, so in my portfolio construction I’m intentionally allocating capital to ensure I deliver financial, internal and external sustainability.
‘A company like Unilever that is better known, better understood, is probably going to deliver returns slightly lower than that. It’s more fairly valued, it’s growing and it’s got the dividend yield so we can get to high single digits. But to get that return I can justify the risk/return of running a 4%-to-5% weighting in that stock.
‘With Axis Technologies at the other end, it’s much earlier stage, it is high risk and I’m not trying to hide from that, but the rewards are potentially significant.’
Evans therefore holds a 1% weighting in the latter in the hope it will contribute the same alpha to the fund as Unilever over five years.
One smaller company he is particularly excited about is Polypipe, which makes pipes to transport water for UK construction projects. It has invested in a plastics recycling plant that enables it to recycle used plastics and generate new raw material.
Evans says: ‘If you think about the people who are using that, they are also being encouraged to source more responsibly. Buying pipes from Polypipe becomes a more competitive proposition. It’s no more expensive, it’s decent quality, it’s a very good business but it’s also giving it a requirement for more recycled products.’
Similarly promising for Evans is Clinigen, which has established a platform to take unlicensed medicines to market globally.
He explains: ‘Clinigen has relationships with pharma companies and recently signed a deal with Bristol Myers Squibb (BMS) in the US to distribute a range of its oncology products into Africa.
‘BMS is a huge company – it is focused on its core markets. The cost for it to go through the registration process and the regulation of all these products in all markets is just too expensive and doesn’t generate the return, yet it can use a company like Clinigen, which has the network, verification and compliance to ensure those key important medicines can get to the right place at the right time in a fully compliant manner.’