James Anderson this month said that Tesla’s commitment to mitigating the effects of climate change had reduced his concern for negative headlines hitting the company, while he picked renewables as the sector most likely to deliver investors value over the next decade.
The £7bn Scottish Mortgage investment trust Anderson (pictured) manages does not use any environmental, social and governance (ESG) screen or apply negative exclusions, but his comments in a presentation for professional investors in London highlight the blurred line between responsibly-invested funds and their mainstream counterparts.
He said the carbon era was over and the implications for the environment and climate change are so vast that the current model of post-Second World War capitalism will have to change.
In reference to governance concerns surrounding Tesla CEO Elon Musk in H2 2018, Anderson said he was getting phone calls from 20 journalists a day but that he “could not care less” about the electric vehicle maker’s short-term underperformance if the team could help build a company committed to altering the course of climate change.
Baillie Gifford voted against a motion to oust Musk as chairman last summer following erratic behaviour from the Silicon Valley billionaire who tweeted he was going to take the company private at $420 a share before rescinding his offer.
Low carbon but room for improvement on ESG
Scottish Mortgage client services director Catharine Flood tells Portfolio Adviser because the investment trust seeks companies aiming to address deep structural shifts in the global economy social and environmental factors can feature in a number of the trust’s holdings. This is most obvious in transportation/energy generation, such as Tesla and Nio, as well as healthcare, Flood says.
That is highlighted in Anderson’s pick for the sector most likely to outperform over the medium to long term. “Over the next 10 years, we expect there will be lots of ups and downs. We absolutely expect that over that time period, the majority of companies that have the ability to truly add value for investors will firstly be in areas related to renewable energy.”
Scottish Mortgage’s sustainability rating is a mixed bag, according to analysis by Morningstar. The portfolio’s carbon risk score is deemed “negligible” at 4.12 on a scale that goes all the way up to 100 but its sustainability score is ranked as “low”.
Within the portfolio, Morningstar ranks retailers Kering and Industria De Diseno Textil and semiconductor business ASML as industry leaders on ESG, while Netflix is pegged as a laggard alongside internet business Ctrip.com.
Responsible investment labels not always relevant
The lack of ESG tag on Scottish Mortgage isn’t necessarily a problem for some discretionary fund managers who manage sustainable products. While no DFMs Portfolio Adviser contacted held Scottish Mortgage in their responsibly-invested ranges, several mentioned they do not restrict themselves to funds that market themselves as responsible investments.
EQ Investors holds Scottish Mortgage across a number of client portfolios but not within its risk-rated EQ Positive Impact range, according to portfolio manager Kasim Zafar.
“Scottish Mortgage is exposed to a lot of really, really great themes but for one reason or another there are a number of other funds that we believe are more impactful,” Zafar says, pointing to the investment trust’s large holding in technology as an example. “Take Netflix, for example. It’s a great company, it’s a tremendous growth stock, it has got loads of positives in terms of the individual characteristics of that company. But whether it’s delivering a net positive effect on our society or environment is where that stock would fall down.”
However, Zafar points out Sarasin Food & Agriculture Opportunities and Pictet Water both feature in the EQ Positive Impact range despite not being tagged as ESG or sustainable funds. “There are some funds that are not explicitly ethical or sustainable in the Positive Impact range but they would be more thematic funds.”
Parmenion senior investment manager Andrew Gilbert says there are a surprising number of fund managers not marketing the ESG approach they take on portfolios. Schroders UK Value and M&G Global Select could be suitable for responsible investors but are not marketed as such, says Gilbert. Hermes and Robeco also have strong ESG processes across their stables of funds, he adds.
“It’s not really about what the fund name is, it’s about whether it delivers on client objectives. That works in both directions, both for funds that don’t have ESG or sustainability in the name and also with those that do but aren’t doing it,” he says.
“You’d do the same thing from a risk and return perspective. If your client is looking for a low risk investment product and you put them in something that said it’s low risk but wasn’t low risk then you’d be making a pretty fundamental error. You have to do the due diligence basically.”
Intentionality
However, Whitechurch Securities head of SRI portfolios Amanda Tovey prefers to focus on funds with a stated intention to focus on factors beyond financial performance. The wealth manager works with external firm Ethical Screening on applying responsible investing criteria to its SRI funds.
“If a fund hasn’t got a clear mandate to be a green fund but has decided to invest in a large amount of renewables it could then easily change at some point. For our portfolios, we’re quite cautious on where we invest in that sense,” Tovey says in reference to SRI.
While Scottish Mortgage has virtually no exposure to basic materials or oil and gas, plus a sizeable stake in Tesla, she says the trust also has a lot of exposure to Chinese and US tech firms, pharma and consumer goods companies that indicate it is not a “green fund” when compared with the likes of Wheb Sustainability or Impax Environmental Markets.
Ferrari holding prompts questions
At the Scottish Mortgage presentation, Anderson’s comments on climate change ranged from convincing, when he discussed the catastrophic implications of inaction plus the end of the carbon era, to wavering.
When challenged on how his fund’s exposure to Ferrari was at odds with his comments on climate change, Anderson gave a long-winded response, discussing parent company Fiat Chrysler’s history of family ownership and the tragic death of former chief executive Sergio Marchionne while he was still at the helm of the company, before finally pointing out that John Elkann, chairman of parent company Fiat Chrysler, was deeply and personally concerned about climate change.
Incidentally, Ferrari’s strong governance score puts it marginally ahead of Tesla in Morningstar’s overall ESG rating of the company even though its environmental score of 57 out of 100 lags Musk’s company, which lands a score of 70. Anderson praised the managerial culture of Fiat Chrysler, which is controlled by Italy’s Elkann and Agnelli families.
Mainstreaming of climate change
Climate change is becoming more mainstream in funds regardless of whether they are tagged as green or not, says Zafar. EQ Investors uses in-house sustainability analysis, which is applied across its Positive Impact range and the discretionary manager is currently reviewing how to roll it out across its unconstrained portfolios too, meaning Scottish Mortgage will eventually be up for analysis.
He says: “If you look at our best ideas portfolios, which is the bulk of our business, we don’t have a requirement for placing climate change at the top of the list. But when we look at these long-term structural themes, like climate change or healthcare or electrification of vehicles, we find that our unconstrained fund managers are exposed to one or a number of these themes to different degrees at different times.”
Emerging market funds at various times have held exposure to solar panels and more general energy efficiency-type plays, he points out, while biotech and healthcare funds often align with positive impact objectives.
