YOUR PORTFOLIO ESG may be encouraged to divest and buy into renewable energy . But there are potential consequences from making decisions that seem sensible on face value . “ I ’ ve increased my exposure to the green economy to 30 % of the Stonehage Fleming Global Sustainable Equity fund ,” says Shah . “ And that ’ s actually increased my carbon footprint . Making wind turbines , electric vehicles and upgrading the grid so you can attach new solar and wind farms to it in the short term are carbon-intensive activities . “ But over the longer term , they ’ re absolutely going to get us to a good place .” While switching from investment in high-carbon companies or sectors to lower-carbon alternatives may be sensible for risk mitigation over the long term , other potential problems need to be addressed . “ It can be much riskier ,” says Lisa Beauvilain , head of ESG at Impax Asset Management . “ For instance , though it depends on what type of renewable energy you are interested in , this sector can have some quite commoditised areas with low barriers
“ Dangerous rubbish ” Baillie Gifford ’ s James Anderson , the outgoing manager of the Scottish Mortgage Investment Trust , warns that commonly used ESG metrics and ratings are ineffective for measuring a company ’ s true sustainability credentials .
As an example , he points to Tesla , in which Baillie Gifford is the second-largest investor behind the company ’ s chief executive Elon Musk . Even though it is the world ’ s largest manufacturer of electric vehicles , Anderson notes standard ESG ratings suggest it is a polluter with ill-defined future metrics .
“ This is dangerous rubbish ,” he says . “ The relevant number isn ’ t the carbon Tesla expends , not even just the driving emissions removed and pollution deaths avoided , but all those plus the resultant benefits of its transformation of the rest of the industry . It ’ s all the electric vehicles made by others from Volkswagen to General Motors , because Tesla changed the world . That ’ s the scale of the contribution .”
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IN THE BACK
We have recently added LF
Montanaro Better World to the
Square Mile Academy of Funds, with a
Responsible A rating.
Montanaro Asset Management is
an investment boutique that was
founded by Charles Montanaro in the
early 1990s, specialising in small- and
mid-cap equity investments. Originally
focused on European equities, the
group has expanded its coverage to
include UK and global remits. It uses
the same investment process across its
funds: managers identify and invest
in the best-quality growth companies,
with the intention of sustainably
increasing the value of capital over the
long term.
Life through a lens
On the LF Montanaro Better World
fund, managers Mark Rogers and
Charles Montanaro also look at
businesses through a positive impact
lens. Every company must derive
at least 50% of its revenue from
operations that make an impact
in one of the following six areas:
environmental protection, the move
to a low-carbon economy, healthcare,
nutrition, innovative technologies
and wellbeing. In this way, the fund
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What I Bought Last
LF Montanaro
Better World
Square Mile’s Daniel Pereira says this impact fund is not trying
to maximise its impact, but deliver the highest returns within
sustainable guidelines
aligns itself with the United Nations
Sustainable Development Goals. We
like this clear definition, combined
with the fact that potential holdings
are ratified by the firm’s sustainability
committee prior to investment,
ensuring high impact standards.
Yet Rogers and Montanaro are
not trying to maximise the fund’s
positive impact, but to deliver the
best financial performance from the
pre-approved responsible investment
list. This separates it from many
other responsibly oriented funds,
which primarily seek to deliver a
responsible investing outcome.
Although the fund was only
launched in early 2020, the strategy
has a longer history, with the offshore
mirror launching in April 2018.
It is worth bearing in mind that
investing in small- and medium-
sized companies typically comes
with a greater level of volatility and
therefore risk, and given the fund’s
focus on responsible investment, it is
likely to be absent from certain areas
of the market. For example, it will not
invest in businesses that derive 10%
or more of their revenue from the
following areas: fossil fuel exploration
or production, tobacco production or
distribution, alcohol production or
distribution, controversial weapons,
gambling, adult entertainment, high-
interest loans and animal testing.
Issue 78 / November 2021
Standing out
Overall, we believe there are a few
tenets of this approach that stand out:
the focus on small and mid caps, the
long-term approach, the preference
for quality, an embedded ESG culture
with a good hurdle for impact, and
the team’s collegiate approach. We
believe this is an exceptional fund for
long-term investors who want to invest
responsibly in a fund that has a well
thought-out investment process.
Daniel Pereira is an investment
research analyst at Square Mile
Investment Consulting & Research
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