Tim Crockford, head of equity impact solutions at Regnan, talks to Alexandra Cain about the fund’s inception and the companies it invests in
Tim Crockford is head of equity impact solutions at Regnan, the responsible investment business affiliated with UK-headquartered J O Hambro Capital Management. Crockford leads a four-strong investment team, including Mohsin Ahmad, Maxine Wille and Maxime Le Floch. The team launched and ran the Hermes Impact Opportunities Fund until 2019, when they joined their current employer. They manage more than $250 mn across three funds, which launched in October 2020.
Tell me about the Regnan Global Equity Impact Solutions Fund you run The fund is a global equities strategy that looks for businesses driving a positive environmental or social impact, as defined by the UN Sustainable Development Goals (SDGs) and their underlying targets.
The team and I championed this approach previously when we launched a similar fund with our old employer. Our current fund looks for companies with a product or service at the center of their mission to solve a major environmental or social challenge, and we then look to engage with all our investee companies to drive additional positive impacts by encouraging better business practices. What is an impact investment? What impact investors are trying to do is find new, more sustainable ways of doing things, of generating productive growth, and then allocate capital toward companies that are capable of solving major environmental and social challenges. Impact investors also invest with the intention of driving their own positive impact, which we aim to do by working collaboratively with the management teams we back.
For example, we look for companies that are able to offer a circular economy solution to replace what is otherwise a linear, extract-use-discard model. One of our investments is in a business that recycles spent steel dust generated in the steel manufacturing process. It takes waste material and, rather than allowing this highly toxic material to go into landfill, recycles it through a patented refinery process into zinc oxide, which is then refined into zinc.
So the business is selling a commodity, but it’s not extracting the commodity from a primary source; it’s recycling a secondary source. How do you find assets to invest in? The process is built on our sustainability taxonomy, which relates to the UN’s SDGs, which is how we define what a positive impact is. The businesses we invest in must contribute to one or more of the UN’s 17 goals and – specifically – one or more of the 169 targets that underlie them. These span things such as broadening access to education, the transition toward a zero-emissions economy and green power generation, health and wellbeing, with future therapy modalities that lead to better treatment rates and financial inclusion, among many other goals.
We started building the taxonomy in 2016, a year after the SDGs were released. We needed to study the SDGs and understand the opportunity for globally listed entities to contribute toward these goals. This led to us digging deeper than the goals, looking into the targets that underlie them and trying to match products and services with those targets. We articulate a theory of change about how each particular product or service might drive a better outcome against one of the targets, to represent a solution.
This process helps us to decide how to direct our research resources and prioritize which products and services to invest in, looking at their scope for scale. At the same time, we keep in mind the underlying philosophy that impact investing is about delivering an additional measurable impact, so our investments must have a quantifiable impact that can be delivered from investment through to divestment.
The first thing we look at is the extent to which we expect the market for these solutions to grow and solve otherwise unmet environmental social needs. Then they go through a much longer investment process, in order to validate that the expected positive impact is indeed being generated and to assess the company’s valuation.
Ultimately, the taxonomy gives us our investment universe so we’re not using a benchmark or buying an off-the-shelf investment universe. Over the last five years, we’ve built up a list of more than 2,200 companies worldwide.
How do you weigh up the return you expect with the positive change you want an investment to make? Under our ethos, the impact case is equal to the investment case. That doesn’t mean we give the two relative equivalents; it means the impact case is what drives the investment case. The businesses that make their way down our investment process and into the portfolio are companies that can grow substantially in size over the next five to 10 years, as the need for the solution they sell grows substantially, driving up demand and the size of their market. We’re talking markets that can triple, quadruple or even more than that over that timescale.
These companies typically sell a market-leading proposition within an emerging niche and can hold on to their competitive position as the market scales up. The investment’s ability to prove itself as the best solution for a particular environmental or social challenge will determine its ability to grow revenue and profits in the future. This will, in turn, drive the business’s valuation.
What risks do you face with the more unusual investments in the portfolio? When you invest in challenger companies – the leaders in a niche area that are trying to displace an incumbent way of doing the same thing – the biggest risk is understanding the extent to which these companies can succeed in driving growth and taking over or replacing whatever activity they’re ultimately trying to displace.
If we look at renewable energy, there are various options that ultimately compete with each other, such as onshore and offshore wind and solar. In the same way, there are different methods of recycling – for instance, chemical versus mechanical recycling, or alternatively we may see increased adoption of biodegradable plastic that can be composted easily, or plastics that can be combusted to create energy in a waste-to-energy plant.
So there will always be alternative solutions to a particular environmental or social challenge. The risk to us, and the biggest thing we’re trying to assess in the pre-investment period, is understanding to what extent the solutions we are backing are going to be successful at delivering their intended impact.
The SDG taxonomy can help us analyze this risk. It focuses our attention on finding the solutions that are best placed to solve a particular environmental challenge, so we back a solution before we’ve chosen the company in which we’re going to invest. Once we figure out which one we think is the winning solution, we look for companies that are selling it and figure out which is the leader.
What does your normal day look like? I’m fortunate to work for a company with a truly global footprint and a fantastic distribution platform around the world. We've had three successive fund launches within the same strategy, first in the UK, then in Australia and then in Europe. In a typical day, as well as getting to meet interesting companies and learn about some nascent products and technologies, I get to speak to like-minded investors across the world.
The challenge is doing a lot of virtual meetings in a lot of different time zones, which is great for my carbon footprint because I’m not flying around anymore. But it’s challenging from a time-management point of view. I have to be very diligent with respect to planning time to do my day job and also, of course, see my family, which is key for balance.
Who are your investors? When we designed the strategy in 2016, part of the aim was to democratize impact investments, which were born in the private equity and debt markets. They serve a particular part of the capital structure that is critical for delivering impact solutions. But there is also a need to continually finance these companies and support them as they ramp up their activities and mature.
Part of what public equity impact investing strategies offer is a much more accessible option for all investors. We were focused on the institutional market when we launched the strategy; now there is interest from retail as well as institutional investors.
Geographically, the market was traditionally confined to Europe. But demand is growing in Asia and the US at an accelerating pace. There’s more broad-based growth in investor demand for responsible investment products in general, but impact investing within that spectrum has been one of the fastest-growing areas.
How much do you want to raise across your three funds? We’re targeting a capacity limit of $5 bn across the strategy. This figure takes into account that a lot of the companies we invest in will go on to be large, even very large, companies. We always want to have the nimbleness to be able to invest in and support them when they are smaller businesses. We don’t want to compromise investor return by growing ad infinitum, which would limit our ability to continue executing the strategy the way we have always done. So $5 bn is an amount we estimate will allow the strategy to continue without changing its approach.
You will only invest in companies whose management teams are prepared to engage with you. How does this work? It’s part of why we’re called an impact fund and what differentiates us from thematic sustainability funds. We want to drive an additional impact through engagement with our investee firms. We have an engagement program in place with every company in the portfolio. We won’t invest if we don’t get a good reception from management. We’ll also divest if management stops engaging with us over the course of the investment period.
Part of the mandate we’re trying to deliver to our clients is to mitigate some of the negative impacts of the businesses in which we’re investing, and every business has negative impacts that can be curtailed. Every company uses energy and needs inputs like water. There are always compromises with any solution and its manufacturing process.
What we try to do, pre-investment, is identify what those negative impacts are and then engage with these businesses to put in place a program to manage them. Bear in mind that we have very long-term investment periods of 10 years so, over the course of the holding period, we can hopefully drive better practices and reduce these negative impacts.
How do you like investor relaions people to engage with you? We’ve had a fantastic experience with all of the companies in which we have invested. Disclosure is always a vital point when we engage with a company: we want a high level of transparency into the business’ operations.
Making relevant disclosures around the impact delivered by the product or service the company sells is especially important to a process such as ours, given that we need to measure and report these impacts.
I often use the distinction between a footprint and a handprint. Companies increasingly realize investors want to see more information around their ESG footprint and how their operations perform against their ESG credentials.
Impact investors like us are also going to be focused on the handprint of the products and services companies sell and how those products can drive a positive impact. We need KPIs to be able to measure and quantify that over the years.
A lot of our engagements start with us underlining the KPIs we would like to track and we then work with companies to help them to transition toward measuring against standard frameworks such as the GRI.
In the UK the Future-Fit Foundation has also developed a Future-Fit Benchmark that allows companies to better articulate the outputs by which they are being measured and also the cause-and-effect relationship to contextualize those outputs.
That’s really important because a KPI can’t tell you anything without context. So we encourage companies and IR departments to focus on these types of measurement tools, and we would welcome businesses that want to speak to us about them.
