Green investing, but not as you know it

After years of being caricatured as the spoilsport of the financial world, environmental, social and governance investing is at last enjoying its moment in the sun.

Drawing on three decades of investment in this sector, Janus Henderson has chosen this moment to launch its Janus Henderson Global Sustainable Equity Active ETF.

“Our team has three objectives: to seek to deliver outstanding investment returns to clients; to be regarded as leaders in sustainable investing; and, as active investors, to play a part in making the world a better place,” says Hamish Chamberlayne, head of global sustainable equities and portfolio manager at Janus Henderson.

Hamish Chamberlayne

Portfolio Manager, Head of Global Sustainable Equities

Janus Henderson

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The fund is available in exchange-traded (ASX: FUTR) and unlisted versions.

In this wire, Chamberlayne covers the lessons learnt in 30 years of sustainable investing, and the power of the ESG approach. He spells out the four pillars of Janus Henderson's sustainability-driven investment strategy and the importance of financial rigour as the sector gains in popularity and valuations rise.

Chamberlayne also talks about two exciting stocks set to benefit from a cleaner world: one produces innovative semiconductors that are at the heart of digital disruption; the other helps pharma and biotech producers to navigate clinical trials and the approvals process.

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Janus Henderson Global Sustainable Equity Active ETF

Global Shares

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Janus Henderson can boast a 30-year history of sustainable investing. What are the key lessons learnt over that period which give you an advantage? What do the next 30 years look like?

Over the past 30 years we’ve seen a huge shift in attitudes towards sustainable investing. It used to occupy a niche area of the investment landscape, and we came across many cynics.

Today sustainable investing is an approach that is not only shaping the way companies operate, but is also shaping the expectations investors have of their managers.

On numerous occasions through that transition we were challenged by those who felt we were compromising on investment returns due to “limiting our investment universe”.

However, we have always believed we would produce great returns for our clients because of our sustainable approach, rather than despite it.

The great lesson we have learnt is that by sticking to that philosophy, clearly defining it, articulating it and engaging with all our stakeholders along the way, we have been able to achieve what we set out to do.

The next 30 years will see even greater awareness of the role sustainability considerations play in investment decisions. We believe that the knowledge, networks and rigour we have developed as an investment team will therefore stand us in good stead.

ESG is on everyone’s lips, yet no one seems to like the taste. Why does investment in ESG arouse such a low level of enthusiasm as a topic among investors and what do you see as the catalysts to change this?

ESG can definitely sound a little dry — dare I say boring? It has become a rather generic acronym, but we absolutely love the taste!

When we talk to investors about what this acronym is actually all about, that’s when our clients really start to understand the scale of the opportunities it presents. It never takes them long to see the connections between the choices they make in their own lives, the conversations they’re having in their communities and the news they’re reading.

At that point they are often struck by the idea that anyone would think about investing in a company without considering the environmental and social impact that company has.

We talk to our investors about the reputational damage social media platforms are going through because of their failure to protect their users from harmful content, or how excited we are to invest in the companies that are clearing up the harmful toxins in our tap water and how it’s the software companies with the most inclusive cultures that are attracting the best engineering talent.

When we open people’s eyes to what “ESG” actually means, that’s when they see the power of this approach and get genuinely excited by an investment team that analyses the equity market through this lens.

There’s a lot of greenwashing in the ESG space now — how do you ensure you “walk the walk”?

Our mantra is “be who we say we are, do what we say we do” and we absolutely believe the onus is on us to clearly demonstrate this to our clients.

We know that we’re thinking about positive impact, about sustainability and about high operational ESG standards at every stage of our investment process – but we also know that our investors can only have trust in us doing that if we show that in all our client materials.

That’s why we produce regular reports that clearly spell out our positive impact thesis on every company we invest in, why we publish a raft of data on the carbon and climate characteristics of our portfolios, and why are completely transparent on the numbers and nature of the corporate engagement conversations we have.

JHI has a stated belief that “there is a strong link between sustainable development, innovation and long-term compounding growth”. Please elaborate on this with some examples.

We see the global economy transitioning to a more sustainable footing, requiring new technologies and more sustainable approaches to business to mitigate the risks of climate change, resource scarcity, and our ageing and growing populations.

Companies that do this well, ensuring they are on the right side of this migration, will be the ones that innovate and that will have bright futures.

Companies that don’t will face harsher regulation, technological obsolescence, and are much more likely to see their customers vote against them with their feet and their wallets.

This is a high-conviction fund dedicated to investing in between 50 and 70 “companies whose products and services are considered by the investment manager as contributing to positive environmental or social change”. How do you assess the positive impact of the companies you select?

We have identified 10 key sustainable development investment themes that we see bringing real positive impact to our environment and our society.

We will only invest in companies where at least half of their revenues (and usually a lot more) are aligned with one of the five environmental themes (clean energy, efficiency, environmental services, sustainable transport and water management) or the five social themes (knowledge and technology, sustainable property and finance, health, safety and quality of life).

As a team we will assess the products and services of every company we consider for investment against this standard.

And we will often seek the advice of external experts as we do this analysis. For example, we’ve asked school teachers about their perspective on the learning and STEM-subject aptitude of Nintendo’s content, and have looked at academic studies on the environmental benefits of e-commerce logistics.

The fund is built around addressing key megatrends stressing the global economy, including climate change, resource constraints, population growth and ageing populations.

The implications for society and the environment are plain. What is the impact from a financial and investment perspective?

One of our core beliefs is in the alignment between sustainability trends, and financial and investment outcomes.

In the long term, what is good for the environment and society is good for wealth generation. If we don’t address these big sustainability challenges, then we will all be poorer.

You describe four pillars for a sustainability-driven investment strategy. What are they and why these four?

Often there are conflicts between environmental and social sustainability, and our approach seeks to address this by using both positive and negative (avoidance) investment criteria and considering both the products and operations of a business.

We also believe company engagement and active portfolio management are essential features of any true sustainable investment strategy.

The four pillars of our sustainability-driven investment strategy are:

1. Positive impact
   
2. Do no harm
   
3. Triple bottom-line framework
   
4. Active portfolio and engagement.
   

These represent our rigorous framework for evaluating an investment opportunity from top to bottom, weighing the impact of the company’s product or service in relation to sustainability, assessing its operational performance, and analysing its financial characteristics and attractiveness as an investment opportunity.

ESG investing has become extremely popular. Is there a risk that valuations for ESG companies could get out of hand with investors having a more limited universe? What’s your valuation methodology? Are you growth or value focused?

Yes, we share that concern! There is no doubt that the amount of money finding its way into passive ESG funds, or towards managers with less valuation discipline, is creating some completely untenable valuations.

We are absolutely adamant that being a sustainable equity investor doesn’t mean you give up on rigorous financial research and disciplined investment behaviours. We are looking for exciting companies that we believe have many years of growth ahead of them, but we’re only doing that analysis with the aim of generating positive returns for our clients.

We’re not philanthropists, nor are we speculative investors. If we see companies that we think are overvalued, no matter how strong the sustainability characteristics, or the promise of a new clean, green technology, we’re not going to invest.

We want to grow our clients’ capital, but we also want to protect it, and so only investing in companies with resilient financial structures and justifiable valuations is key to our approach.

Why is now the right time for an active global sustainable equity ETF?

We have a long history of sustainability-focused investing, but we haven’t always been able to provide this in the vehicles that are easiest for our clients to access.

By launching both a listed and an unlisted vehicle into the Australian market, we are hoping that as many investors as possible can access our strategy in a vehicle that makes the most sense for them.

Can you discuss a couple of stocks that are most interesting right now?

Of course! Talking stocks is the most fun bit, especially given just how exciting so many of the companies in our portfolio are.

First I’ll mention Nvidia (NASDAQ: NVDA). This is a semiconductor design company, designing the chips that are powering some of the most exciting innovations across the world, and aligns with both our efficiency and quality of life themes.

Nvidia’s graphics processing units have traditionally been used primarily in gaming devices, but increasingly they are the intelligence that is powering autonomous driving, advanced medical research, that are making data centres more energy efficient and are powering a host of AI-led innovations. A recent one we learned about was designing chips that help tractors till and seed a field as efficiently as possible.

There are so many exciting sustainability-focused outcomes here, and a company that is growing revenues over 50%, has 40% margins and a net cash balance sheet.

Another one I’ll mention is a recent addition to our portfolio: an Irish-based company called ICON (NASDAQ: ICLR). ICON is a clinical research organisation, working with pharma and biotech companies to manage the clinical trials process to get a drug to regulatory approval.

The costs of developing drugs are astronomical (on average it takes over US$2 billion to get a drug to market) and the role of companies like ICON is to make this process more efficient, quicker and cheaper.

The benefit to society from having lower drug costs is obvious — lower costs, lower prices and greater access. The benefit of getting them quicker to market, as we’ve seen with the COVID vaccines, can be huge.

ICON plays a key role in this industry. Also interesting is that the company’s CEO, Steve Cutler, used to play second row for the Wallabies in the '80s. So, a great company, doing great things, with a great Australian connection!

ETF

Janus Henderson Global Sustainable Equity Active ETF

Global Shares

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