An active approach is critical to success in ESG investing

We believe that a passive approach is not suitable for investing in situations where there are important environmental, social and governance (ESG) considerations, on the following basis:

• Performance – passive funds may experience greater downside during periods of elevated volatility due to their specific sector exposure. The largest and most liquid exchange traded funds (ETFs) with a clean energy focus fell 9.4% in February (on average);
• Exposure to ‘green washing’ – in an environment where companies are more likely to label themselves as sustainable, passive strategies may lack the level of insight required to be able to differentiate between true and false; and
• Passive, while it may have a benevolent intent, does not necessarily avoid unacceptable ESG operating practices as these strategies tend to select companies based on filtering with less consideration to ongoing performance.

Our end-to-end approach to ESG

Our ESG due diligence is managed by Tonya Payne, an experienced member of our team who shares our vision that “a fundamentally attractive clean energy company is no good to us unless it is operated in an ethical and sustainable manner”. You will recall that there are four important aspects to our ESG framework:

• Dedication to clean energy – we only invest in companies which produce clean energy or are critical to the value-chain thereof;
• ‘Clean enough’ – we will invest in companies pivoting to clean energy from less sustainable forms, however they must pass our hurdle of being ‘clean enough’. BP (BP/ LN), one of the world’s largest oil companies, is a good example. During 2020 the company committed to building a 50GW renewable energy portfolio by 2030 at an estimated cost of c.US$50 Billion. If in existence today, this would be one of the world’s largest renewable energy portfolios. This sounds like an impressive commitment but the reality is that it is dwarfed by BP’s existing hydrocarbon production – if achieved today, <10% of BP’s energy output would be renewable on an energy equivalent basis and at this stage of its transformation it does not pass our ‘clean enough’ hurdle;
• 23-factor ESG assessment – in addition to the abovementioned filters, all companies we invest in must also pass our bottom-up ESG assessment across a range of environmental, social and governance issues. Leading clean energy companies are not always squeaky clean below the surface and February provided a good example. Our active ESG monitoring identified new allegations regarding two of our portfolio companies, JinkoSolar (JKS US) and Daqo New Energy (DQ US). Both companies have a high risk of exposure to forced human labour in Xinjiang, China. When engagement with the companies did not provide comfort, we elected to exit both positions. They will remain on our prohibited list until we can be confident that this is not an issue. Both companies remain constituents of clean energy ETFs; and
• Ongoing monitoring – we actively monitor our portfolio to ensure it remains compliant.

We consider our hands-on, end-to-end approach to ESG to be critical to success and a core ingredient of our competitive advantage. Combined with our unique focus on clean energy, it is core to delivering a genuine positive impact.