November 24, 2020 / Engagement and Advocacy
Chris Lees manages one the world’s top-performing global equity funds – and it comes with an Environmental, Social and Governance fund rating in the 96th percentile of all funds in the MSCI universe.
Regnan works with Lees to analyse how the fund’s investees can improve their performance — advice he takes back to company directors.
CHRIS LEES has always been a socially responsible investor.
For 32 years the J O Hambro fund manager has been screening out ethically problematic companies like weapon manufacturers, tobacco groups and alcohol companies.
London-based J O Hambro — wholly owned by Australia’s Pendal Group — is an active, long-only fund manager specialising in global equities.
Lee’s mother, he says, was an environmentalist well before it was fashionable. So is that why he became an ethical investor?
“No,” he says unapologetically. “I did it because I’ve got a fiduciary responsibility to improve risk-return outcomes for clients. And ESG [Environmental, Social and Governance factors] helped me do that. So I adopted it from a financial perspective, not from a social conscience perspective.
“The data sets show that including environmental, social and governance factors in your calculations improves returns and decreases risk. That’s an evidenced-based decision.”
JOHCM Global Select Fund — which is co-managed by Lees and Nudgem Richyal — invests in developed and emerging markets. It is one of the group’s most successful funds, with a top-decile investment performance since inception.
It is green and financially outperforming. Or as Lees puts it: “You can have your cake and it eat too.”
J O Hambro senior portfolio manager Chris Lees.
Collaboration with Regnan
Lees has been working closely with another Pendal Group business, Regnan, to analyse how the fund’s investees can improve their performance — advice he takes back to company directors.
Regnan is a responsible investment leader with a long history of providing insight and advice to investors with an interest in long-term, broad-based or values-aligned performance.
(Regnan is now putting that experience into impact investment with the launch of the Regnan Global Equity Impact Solutions fund — see below).
Regnan’s analysts work with Pendal Group fund managers and other investors to support better decision-making and influence the way companies tackle performance-related issues such as climate-related risks and corporate governance.
“By understanding what makes a company tick and what it needs to grow, we try to make sure those assets are protected, so it can perform for the long term,” says Regnan head of advisory Susheela Peres da Costa (pictured above).
Environmental performance is one such asset. “We think about the things that aren’t on people’s radar,” Peres da Costa says.
“It’s about understanding how to optimise for the long term, by taking a wider view of what matters today.”
How Regnan and Chris Lees helped A2 Milk
Lees gives the example of The a2 Milk Company, listed on the Australian Securities Exchange.
A2M produces high quality milk with only the A2 protein type and no A1.
“We looked at it and it was brilliant on fundamentals and valuations, and it was part of a growing trend,” Lees said. “But it always had a poor ESG score and was rated ‘high risk’ by Sustainalytics.”
Owned by Morningstar, Sustainalytics is a global leader in rating ESG characteristics of companies. A2 Milk had rated poorly on its management and disclosure of carbon emissions, the environmental and social impacts of its products and on human rights in the supply chain.
“We undertook a joint project with Regnan — who are experts at engaging with corporates around their sustainability practices — and spoke to the chief executive and chief financial officer of A2 Milk.”
Regnan senior analyst Osh Siyaguna conducted a deep dive on A2 Milk. He found the company’s rapid growth meant it was likely to face water security and pollution risks in New Zealand and long-term physical impacts related to climate change. Its disclosures had not kept up with investor expectations as the company grew.
“We said ‘we love your business, but you have this huge business risk’,” Lees says.
“Their business model is to sell premium-priced milk — but that won’t be good enough for millennials. A2 needed to take their business from producing better milk to also being the cleanest dairy in the world.
“They needed to redress all the negative issues that were in ESG reports about the business.”
Regnan head of advisory Susheela Peres da Costa
Regnan’s expertise on ESG issues meant that its engagement with the company was of real value to them, said Peres da Costa.
“We could provide detailed input into A2Milk’s strategic consideration as well as help with understanding what reporting needed to be improved and why.
“A2M has since made new appointments to understand and address these issues and is now considering ESG risks in its supply chain – where the physical risks of climate change could arise.
“We have been pleased to hear that these insights and discussions about supply chain resilience and climate change have helped management understand the company’s opportunities and risk more holistically.
“Success for Regnan is when ESG issues are handled as part of strategy and enterprise risks management.”
As the company improved its approach to sustainability and disclosure, it was re-graded by Sustainalytics from high to medium risk. Over the past five years its share price has gone from 65c a share to around $14 a share.
Lees said: “We have made five times our money since owning it”.
Fundamentally Lees and co-manager Richyal have a growth at a reasonable price investment philosophy. But to achieve that, they exploit market anomalies and inefficiencies. And externalities provide some of those market anomalies.
“We have arrived at a point where the profit motive is the driver to address climate change. You can get there as a tree hugger, or a pragmatic money-maker but you end up coming to the same conclusion.”
Regnan moves into impact investing
While continuing to provide engagement, advisory and research services, Regnan now also delivers innovative sustainable and impact investment solutions.
The new Regnan Global Equity Impact Solutions Fund invests in mission-driven companies that are well placed to solve the world’s biggest problems.
Managed by a London-based investment team led by Tim Crockford, the fund aims to outperform the broad global equity market over the long term by investing in companies that provide solutions for the growing, unmet sustainability needs of society and the environment.
“We want to be thought leaders,” says Crockford. “We want to invest in companies and work with the purpose of solving public and environmental challenges.
“We look for companies who have a unique service, who have a product for a challenge.”
Crockford and his team have trawled thousands of companies globally, using the United Nations Sustainable Development targets as a benchmark, to find products and services that meet the goals of Regnan.
The group will work with companies to help them achieve the UN targets.
“We have a team that works in-house that looks for companies who offer a unique service and have a product for a challenge,” Crockford says. “We help integrate ESG into existing strategies. We understand the challenge, the value chain, the financial potential and how to find practical solutions.”
Regnan is looking for the right opportunities to make a difference.
“We have never bought into solar, for example. The cost is decreasing, but it doesn’t compare well to the offshore wind industry. In that industry there are only three players who manufacture turbines and one of them has 60 per cent market share. That’s more interesting.”
Crockford said Europe has led the ESG drive, but it initially came from consumers and governments wanting to solve challenges.
“Part of the asset management world realised that there will be a financial cost if companies fail to address externalities. If they lack focus on that, it will cost shareholders money.”
The Regnan Global Equity Impact Solutions Fund is distributed in the UK and Europe by J O Hambro Capital Mmanagement is expected to be available in Europe soon.
In Australia the fund is distributed by Pendal.
UK and European investors can find more information here: https://www.regnan-johcm.com
Australian investors can contact Head of Regnan and Responsible Investment Distribution Jeremy Dean at jeremy.dean@regnan.com.
This article has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and the information contained within is current as at 27 November 2020. It is not to be published, or otherwise made available to any person other than the party to whom it is provided. PFSL is the responsible entity and issuer of units in the Regnan Global Equity Impact Solutions Fund (Fund) ARSN: 645 981 853. A product disclosure statement (PDS) is available for the Fund and can be obtained by calling 1800 813 886 or visiting www.pendalgroup.com. You should obtain and consider the PDS before deciding whether to acquire, continue to hold or dispose of units in the Fund. An investment in the Fund is subject to investment risk, including possible delays in repayment of withdrawal proceeds and loss of income and principal invested.
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