Ninety One: Buying the solution providers for climate change

Founded in South Africa more than 30 years ago, Ninety One maintains a strong emerging markets focus – something that regularly features in commentary around the need for an ‘inclusive’ approach to tackling climate change. The fund manager is vocal on ESG and the transition to net-zero.

Here, Deirdre Cooper, one of two portfolio managers on the highly concentrated $3.4 bn (as at September 30, 2021) Global Environment Strategy Fund, talks about the need to go way beyond ESG scores, why divestment doesn’t work and what the firm wants to see from companies moving into a greener future.

You’ve talked in the past about the need to ‘break down the economic system and rebuild it’. That’s quite a radical view. How does it translate into your investment style?

That comment relates to how difficult it is to decarbonize. It [represents] the kind of thematic work and long-term scenario analysis work that we do within the multi-asset team at Ninety One.

It makes sense, when you’re thinking particularly about very long-term trends, to take yourself out of the weeds – whether that’s daily stock movements or quarterly earnings – and really think about the businesses that will have competitive advantages, not just in the next couple of quarters, but in the next couple of decades. That is a key feature of both my own investment philosophy and investment style, and also some of the work we do more broadly in the team.

It is about the under-appreciated benefit of sustainable investing but I don’t think sustainable investing will generate better returns because there’s a so-called ESG factor. I do believe strongly that understanding a company’s externalities is essential.

The Global Environment Strategy is highly concentrated, typically about 25 names. We screen global equities to find those companies that are the solution providers for climate change.

Then we have another screen that tells us which of those companies are most likely to generate good returns and revenue growth. We will also look at a company's different value chains.

Ninety One is very vocal on ESG. How have the conversations you have with companies evolved in recent years? Where do you think firms are still falling short and where should they be focusing their attention in the coming year or two?

We’ve seen huge progress on reporting good carbon data and we’ve done a lot of work engaging on behalf of the Carbon Disclosure Project (CDP). Our strategy is really global, it has a big weight in emerging markets and we spend a lot of time with firms in China and other emerging markets, working with them on carbon data disclosure, so that’s been a big area of success.

What I’m most concerned about at the moment is the tension that exists between investing in companies that are really thinking about all their stakeholders, that are thinking about all the externalities, versus a sort of ESG-by-numbers approach. That’s quite a difficult circle to square.

On the one hand, we want to be open and transparent with our clients – and eventually, it all comes back to somebody’s savings and somebody’s pension. We need to be able to explain in a simple way what we mean when we say sustainable, and that has really driven forward ESG scores and climate scores. But the truth is that this simplifies what is a very complex issue. Trying to figure out whether a company is sustainable is not something you can easily sum up in a mark out of 10.

Focusing on the data sometimes masks the more important issue. On the climate side, just knowing a company’s footprint doesn’t necessarily tell you whether or not that company is really taking the transition seriously and putting plans in place in order to address climate. It tells you more about the industry that company is in: is it asset-heavy or asset-light? Is it in the developed market, which is lower carbon, or in an emerging market, which is carbon-heavy?

On the diversity side, we definitely support diverse boards. But if you obsess too much about board diversity, you miss the fact that the company might not be moving forward on diversity more widely. Just adding women to your board doesn’t necessarily make your organization more inclusive. In fact, there isn’t really any correlation between companies that have diverse boards and having more diverse senior management teams or having better gender pay gaps – which are probably better indicators of diversity.

This is an extract of an article that was published in the Spring 2022 issue of IR Magazine. Click here to read the full article.