Deirdre Cooper tells Garnet Roach why, from 2030, the fund manager won’t hold companies that don’t have science-based targets
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.
Knowing a company’s footprint doesn’t necessarily tell you whether or not that company is really taking the transition seriously
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.
Do you use ESG ratings agencies? If so, which ones and how do you incorporate that data into your investment decisions?
We use ESG ratings agencies in exactly the same way we use sell-side research. We have access to research from ISS, MSCI and Refinitiv, we have Bloomberg ESG data, we have CDP carbon data. We have different data sources on both the country side and the company side. We read ESG research just like we read sell-side research, but we absolutely never fully implement sustainability by simply eliminating the bottom X percent on an ESG score basis.
There’s very low correlation between ESG scores across providers. There’s even low correlation if you look into the individual pillars, so the E scores aren’t correlated, the S scores aren’t correlated. My favorite study of ESG ratings looked at whether better transparency improved correlation and actually, it’s the opposite, which makes sense if you think about the way the ratings work.
Ratings agencies are also very risk-focused rather than impact-focused. The industry grew up trying to understand ESG risks. What these scores don’t assess so well is whether a company has products that are helping to solve the decarbonization problem. And that positive impact is what we really try to get at in terms of our investment process and the kind of companies we invest in.
And that’s why, for active management, fundamental research is absolutely key to sustainable investing.
Just adding women to your board doesn’t necessarily make your organization more inclusive
Ninety One has talked about why it believes divestment is not a solution to ESG issues, going so far as to suggest divestment does not constitute good stewardship. Can you explain your engagement process for when a company falls short of your expectations and what options you employ given your views on divestment?
We look at divestment from a theory-of-change perspective. Part of the issue is that a lot of the industries you might divest from tend to be very mature and cash-generative. That’s absolutely the case for the tobacco industry and the oil and gas industry: they don’t need to raise external equity so it doesn’t really work. We see divestment as signaling rather than a real, positive impact.
Having said that, for our sustainability strategies, there are sectors we don’t hold but the reason is because we work on sustainability issues as seriously, if not more seriously, than we do on financial issues. We study all those negative externalities. We believe for the oil and gas sector, for example, that if you were to properly price carbon emissions, including downstream Scope 3 emissions, the sector would have no value.
The other really concerning side effect of divestment is that it encourages companies to sell their dirty businesses – and they will often sell them to less responsible owners. We’ve seen that in action in the mining sector, with companies selling coal-mining businesses to owners that would run those assets for longer, that treat employees less well. We do want to, in some sense, keep some of these firms under public market scrutiny.
When it comes to engagement, on the one hand, there are the regular conversations and dialogues we have with management. At the other end of the scale, there’s true activism and taking a board seat. We tend not to get involved in that type of engagement, but we do have extremely active conversations with management.
We want to work with management – we have absolute respect for people who run businesses and we don’t want to tell them what to do in terms of the minutiae of running their company. We want to understand that they have the right policies in place, that they’re thinking about their externalities. But we try not to be prescriptive unless there is a very specific problem. One of the things we’re spending a lot of time on just now is encouraging companies to set science-based targets because we think that’s the right way to think about climate risk. It’s not about looking at a basic footprint, because the footprint tells you if you have emissions – it doesn’t necessarily tell you if you’re at the place in the value chain that will bear those emissions and it doesn’t adjust for your sector.
We know those science-based targets take time. If a company has never reported emissions, you don’t want to set it a target for tomorrow. You want to do it very thoughtfully. You really need to understand the context before you embark on your engagement and before you set deadlines.
The other point I would make is that, generally speaking, we’re happy to collaborate – particularly on sustainability issues or to work with organizations like Climate Action 100+ or the CDP. I think cross-industry engagement makes a lot of sense.
Part of the issue is that a lot of the industries you might divest from tend to be very mature and cash-generative
Can you tell us about some of your favorite companies?
We continue to be very excited about the electrification of transport and that value chain, particularly the firms in that value chain that are less well covered and less widely appreciated. Some examples of that would be two Chinese companies we hold. One is Wuxi Lead Intelligent Equipment, the market leader in making the machines that make lithium ion batteries for electric vehicles (EVs).
Wuxi is the biggest supplier to CATL, another Chinese firm and the biggest battery company in the world. We see [these companies] as a really fantastic way to invest in the very early days of the electrification of transport. Wuxi is sort of the arms dealer to the sector, so to speak. We see exceptional growth prospects and really strong competitive advantages for it.
It has been really interesting to see that at the back end of last year, the percentage of new cars sold in Europe that were electric was in the high teens. In 2020, globally, that number was 2.4 percent of new cars sold – so we’re moving toward that tipping point. We think all the companies that are linear volume plays on EV adoption look really well placed.
Finally, what would be top of your wish list for 2022?
That would have to be the science-based targets. For our strategy, investing in a way that can be Paris-aligned – I won't say is Paris-aligned as that implies all these firms are ready for 1.5°C when the world is nowhere near ready for that – is crucial.
We won’t hold anything in the strategy beyond 2030 that doesn’t use a science-based target.
Wuxi is sort of the arms dealer to the sector
