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People and Planet in the Accounts: how to make genuinely green investment decisions

25 November 2020: Sustainability and ESG are becoming important considerations for investors. WHEB – a truly sustainability-first investor – explains how they assess opportunities.

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WHEB Group only invests in companies that are working to directly address climate change and sustainability through their products and services. When WHEB first started investing, they were outliers in their approach. Now, other investors want to play in their sandbox: “Everyone wants to get in the corner with us,” says Seb Beloe, partner and head of research at WHEB.

The firm relaunched its strategy in 2012 with £25m. In 2016, the fund passed £100m, helped in part by GBP’s sudden fall in value following the Brexit vote. “A lot of our investments are outside the UK, explains Beloe. “In December last year we were at £400m and, all being well, we will be close to a billion by the end of this year”. 

The ESG stampede

There has been what Beloe calls an ‘ESG stampede’ in recent years, with more businesses vying to prove their ESG or sustainability credentials, and more investors are looking at ESG and sustainability when making investment decisions. “A lot of activity in this space is just marketing, but at least businesses now think it's worth marketing, which is a step forward.”

More financial institutions now see sustainability as important from a compliance point of view, whereas three years ago, it was rare to see a sustainability report from a financial institution. It will still take around five years, Beloe believes, for larger organisations to recognise that sustainability is ultimately a strategic issue and not just about marketing or compliance.

“Our investment strategy has been an outperforming one,” says Beloe. We outperform the benchmark, we've outperformed the average global equity fund. We do that because investing in this is a sensible way to invest. It’s where the future lies.”

As the world moves towards becoming zero-carbon, some of the biggest hurdles are historical assumptions that are no longer true, says Beloe. Take renewable energy: there are still some who believe that it is an expensive option for generating energy. In fact, due to technological developments, it’s now one of the cheapest and most efficient. “A lot of people still echo that original framing of this agenda. They've not looked at it again to find out how it has progressed.”

Last year was a big year for progress when it came to climate change, with the UK’s law-enshrined pledge to become a net-zero economy by 2050 and the climate protests led by activists such as Greta Thunberg. Then COVID-19 stopped progress as all focus turned towards getting through the pandemic. But Beloe sees the recovery period as an opportunity to reset and make some real progress. 

“President Biden, potentially, could be an incredible shot in the arm,” he says. “We've seen Japan and South Korea commit to net-zero by 2050, and China by 2060. That helps to get the cynics to rethink this agenda.”

While some green technologies are still expensive, such as hydrogen produced from renewable power, the efficiency and cost-effectiveness of modern renewable products present an opportunity for developing economies to grow. 

“People used to say this is a luxury that only we can afford in the West,” says Beloe. “That is completely unfounded now because the cheapest way of producing power is through renewables. You can see that in India, which is massively scaling back its coal-fired power stations and ramping up its renewables because its government can see that is the logical way to go.”

A product-first approach

In assessing what entities it will invest in, WHEB’s product-first approach makes it slightly easier to assess. If a product is delivering a positive impact, the market should grow more quickly and deliver higher revenue growth than a similar product without that positive impact, Beloe explains.

When it comes to ESG, it can be trickier to measure. WHEB uses the SASB Materiality Map as a framework for assessment, focusing primarily on quality. “We think it is rare for ESG issues in and of themselves to move share prices. Being better at health and safety, in the kinds of companies we invest in, is not really going to move the share price. It might if you're a mining business, but we don't invest in mining businesses.” 

WHEB looks at whether the entity has a robust approach to issues such as health and safety, diversity, environmental emissions, waste and energy efficiency. If those approaches are deemed of sufficient calibre, it’s likely the business, in general, is higher quality, which in turn means the risk is lower.

“That kind of ESG analysis is a subset of our assessment of the quality of a company, which also looks at other factors. We'll look at levels of debt and the health of the balance sheet and margins, the competitive position; that's all part of quality, but ESG is also a part of that.”

When it comes to including sustainable/emissions information in the accounts, Beloe is an advocate of carbon pricing or a similar solution. “It’s the neatest solution to ensure that these externalities get internalized in some way, whether that's through a carbon price or some other kind of metric. And not just on the environmental side, but on the social side as well.”

Beloe is less of a fan of green taxonomies, which have been a focus in Europe. To him, it is approaching the problem from the wrong angle. “Ultimately, if the market was working effectively, then it would be clear to people that these were just better investments. You wouldn't have to label them because they would be attracting investment on their own behalf.”

It isn’t easy to integrate ESG factors into reporting, however – carbon is one thing, but how do you recognise something like diversity? It is why WHEB focuses on products and a softer, all-round ‘quality’ approach. “The growth case around the themes that we invest in is a bit easier because it just translates directly into the forecasts that you have for the business. That makes it an easier win for us.”

Article series: People and Planet in the Accounts

Convergence of non-financial frameworks and standards is gaining momentum and we are beginning to see how nature and society might be included in the financial statements. But can these frameworks tolerate such change? In these articles we explore this from the perspectives of different actors in the debate.

See the series