Watch: 'Impact Investing Has Lost Its Focus'

VIDEO: Nomura Sustainable Equity fund manager Alex Rowe on why outcomes are key to successful ESG investing

James Gard 24 June, 2022 | 12:55AM
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James Gard: Welcome to Morningstar. With me today is Alex Rowe. He is the Lead Manager of the Nomura Global Sustainable Equity Fund.

So, Alex, the fund is relatively new, having launched in 2019. Can you tell us a little bit about the fund's investment philosophy, please?

Alex Rowe: Absolutely. So, the fund has a just over three-year track record now. We manage just under $600 million across the strategy. The approach of the fund is very much a double bottom line. And what we mean when we say that is delivering strong returns to our clients and also having a positive impact on a number of environmental and social challenges. And as we go on to speak about impact awareness, both the impact of our investments and of our engagement activity is really core to everything we do. In terms of the investment philosophy, we are quality at discount valuation investors, particularly on that valuation side. That's something which is very differentiated within the sustainable and impact space. Most peers do have a growth bias to a very strong growth bias, which is as we'll come onto, actually drives a lot of the difference in performance we've seen over the last few years.

Gard: Super. Thanks very much. So, you mentioned impact as a concept. I mean, we're running a Good Money Week here at Morningstar. Well, what does good money mean to you as a professional investor?

Rowe: So, for us, good money is really – and it's where we think the industry has gone quite wrong actually – we are really bombarded with an alphabet soup of ESG ratings that actually get away from what the core impact a company is actually having. So, really, if you're looking at a company that produces HIV treatment and makes a lot of effort to ensure access to that treatment in emerging economies really want to be focusing on how many people have been reached, what's the impact on people's lives. Similarly, an African mobile payments business, we really want to understand, we really focus on that impact of the number of people that now have access to basic financial services. Whereas the industry is really more focused on just pure financial materiality in general and also just really doesn't – often sometimes kind of focus on the wrong things. I see a lot of good companies that have poor ESG ratings externally because they don't have policies. So, this is something where the industry is going really wrong.

The other side as well where I think the industry needs to improve is through impact through engagement. It's very difficult, but there's a tendency to just focus on what was done in terms of engaging with companies rather than what the outcome of that engagement was. So, it's actually more nuanced than that, so did your engagement actually drive any change at the company, but then what was actually the result of that change. So, we can all pat ourselves on the back, for example, if we get an energy company to divest some horrible assets. But if the new owner then is less responsible and the emissions of that asset then increase substantially, what impact did we actually have? So, I think this is going to become more and more of a focus as the industry matures really impact awareness is really what we – kind of, what we've got to be thinking about in everything we do.

Gard: So, Alex, in these sort of volatile market conditions, is it harder to be a sustainable investor?

Rowe: Well, first of all, I'd say, no. But I think in general within the industry there is, as I mentioned, a very strong bias toward towards growth, and what I would say is, chasing impact at any price, and markets really flipped around the end of last year from really being prepared to pay almost any multiple for disruptors to really refocusing this year on valuation. So, we've seen some very tough performance within the sustainable space, really, because we don't think there was enough focus on valuation. It's been a tough year for us as well on an absolute basis, of course. But on a relative basis, we've done pretty well, particularly standing out in the sustainable space because of that really core focus on valuation that we have.

Gard: Sure. That makes sense. Thanks. So, as a final question really, do you have any sort of sectors or companies that you're looking at in particular?

Rowe: One area I'm really excited about is building products. So, most of the buildings that we have here today are still going to be around in 20, 30 years' time. And buildings account for 30% to 40% of emissions. There are some fantastic companies out there which are reducing the manufacturing of building management systems, exceptionally efficient air conditioning systems that can drastically reduce the emissions of buildings by sort of 50% to 60%. And you've really seen a pickup in the rhetoric from the EU and from the Biden administration that we've really got to tackle building emissions, and we've really got to ramp up the retrofitting of buildings. These companies have not performed very well this year because of fears of recession. But over the long term, I think these are fantastically well-positioned and (really present) very attractive valuation levels at the moment.

Gard: Great. Fantastic. Well, thanks so much for your amazing insights today, Alex. For Morningstar, I'm James Gard.

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James Gard  is senior editor for Morningstar.co.uk