Montanaro Better World Fund

overall rating:

2.5

planets

Hari Kukreja
3/20/2022
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The Montanaro Better World Fund (“the Fund”) was recently named the Best ESG Investment Fund 2022: Impact at the ESG Investing Awards, an award the Fund thoroughly deserves. It is offered by Montanaro Asset Management (“the Firm”) who are a great example of a sustainable financial firm – they are a certified B Corp and have a target of being Net Zero by 2030. The Fund has excellent governance, with a rigorous process to select the securities it invests in, a strong history of engaging with its portfolio companies and clear intentions to create impact. The Fund’s environmental impact boasts impressive emissions, waste and water savings over the World SMID Cap benchmark. It does, however, take a very wide view on sustainability, and on non-environmental areas its impact reporting doesn’t contain nearly the same detail or quantification as its environmental reporting . Going forward it would be great to see the balance of reporting addressed to avoid questions of whether the definition of sustainability has been overextended.

What it's made of:

2

The Fund takes a holistic view towards sustainability and focuses its investing across 6 impact investing themes: environmental protection, the green economy, healthcare, innovative technologies, nutrition and wellbeing (which includes education). Their top ten holdings by weight are Trex Company (3.5%), SolarEdge Technologies (3.5%), Icon (3.4%), Entegris (3.4%), Bio Techne (3.1%), Bruker (3.1%), Sartorius Stedim Biotech (3.0%), Idexx Laboratories (2.9%), Nova Ltd (2.9%), Ansys Inc (2.9%).

Healthcare is the largest sector in the fund and makes up 38% of the Fund in combination with nutrition. While the Fund has investments in pharmaceutical companies, there is a particular emphasis on companies that provide reagents, laboratory equipment and medical devices. These companies usually have simpler, less controversial cases for impact: they provide researchers and doctors with the tools they need for better research and better patient care without many of the pricing and accessibility issues associated with pharmaceutical companies. These factors, however, are still important and it would be great to see the Impact Report include more discussion on them across all its holdings in the sector (currently they only state that a £1M investment in the fund would give 48 more people access to healthcare, although it is unclear whether this is an annual or all-time figure).

The inclusion of wellbeing and innovative technologies as impact categories vastly broadens the range of companies the Fund can invest in. These include companies in the semiconductor, specialist materials, education consultancy, consumer discretionary and software industries. Some of these companies have clear cases for sustainability and impact. However, the broad range of companies under these headings, as well as a lack of discussion on their impact in the reporting does make it feel as though the definition of sustainability and impact is being stretched to widen the pool of potential investments.

On the environmental front, the Fund has very strong credentials. Through investments in a variety of renewable energy companies, it has gained exposure to key elements across the wind, geothermal, solar, hydrogen and battery storage value chains. These are energy solutions that are poised to be key components of the zero-carbon economy. It also has its largest holding by value in one of the darlings of ESG investors - Trex Company - who manufacture outdoor decking products from recycled plastic bags and scrap wood. It is here too that the Fund has comprehensive reporting. The companies they invest in have 9X, 138X and 7X better carbon, waste and water efficiencies respectively per £1M of revenue compared to the MSCI World SMID Cap Index. One cause for concern, however, is the Fund’s investment in American Water Works. A subsidiary of American Waterworks was asked to pay US$126m in 2016 after a coal-cleaning agent leaked into a river and left 300,000 people without water for nine days. With Montanaro’s strong record of engagement with the companies they hold, it would be good to know whether they have raised this with American Water Works.

Overall, the Fund’s investment team remains remarkably faithful to the criteria they set out for selecting its investments. For the most part these companies make clear cases for impact and are leaders of sustainability in their respective industries. What would really help is more in depth and quantitative reporting across non-environmental impact themes so that prospective investors have a clearer idea of the fund’s impact and can decide whether they feel the Fund is being sufficiently ambitious in chasing impact in these areas. This may also improve when the criteria for reporting of the EU’s new Sustainable Finance Disclosure Regulation comes out later this year as the Fund has recently been classified an Article 9 Fund.

How it's made:

2.5

Montanaro believes that the world faces three crises: a climate crisis, a healthcare crisis and a social crisis. The aim of the Better World Fund is to direct capital towards these crises in the hope of being part of the solution.

Across all of their funds, Montanaro focuses exclusively on Small and MidCap companies (“SMCs”). To identify potential investments for the Better World Fund, they first identify SMCs that make a clear case for impact under any of the six impact themes mentioned in the previous section. Only these companies are then screened for the quality of their business and the attractiveness of their valuation. Montanaro also excludes any company that has “material revenue exposure to “the manufacturing or supply of weapons, tobacco, gambling, adult entertainment, alcohol, exploration and production oil & coal companies, or any other areas deemed not to meet the Investment Manager’s ethical standards” across all of their funds. While the use of the phrase “material revenue exposure” doesn’t fully exclude the named revenue sources, a look down the Fund’s holdings shows that the investment team are indeed operating with exclusionary spirit.

When it comes to assessing impact, Montanaro analysts complete an “Impact Profile”, with certain criteria that must be met: the company has to have unique products that address a sustainability challenge, more than 50% of revenue must be aligned with the impact themes, there must be alignment with the UN SDGs and management intention to deliver impact. Although that 50% number can definitely be higher, these are on the whole clear criteria that back up the investment team’s desire to create impact. In their list of other features that the team “want to identify”, however, is “what measurable outcome can be used to determine impact”. To me it is odd that this is not a compulsory criteria and could be an explanation for the lack of quantified reporting on non-environmental impact that was noted in the previous section.

The investment team also have a strong record of active voting and engagement with not just portfolio companies but potential new investments and companies that passed the screens but weren’t invested in. The team engage on a variety of issues, with Net Zero carbon, supply chain management & labour rights, diversity, plastics and animal welfare arising as major themes. They have a particular focus on Net Zero carbon as Montanaro published a target of 10% of the Fund’s value coming from companies that have achieved Net Zero by 2030 and as part of this engaged with 17 of their companies to discuss their road to Net Zero. There have been a number of positive outcomes that have come out of their engagements with portfolio companies.

Who makes it:

3

Montanaro Asset Management was founded in 1991 by Charles Montanaro and is based in London. They manage “around £5bn on behalf of [their] clients” and focus on long term investments into Small and MidCap firms. The exclusion criteria detailed above applies to all of their funds.

Montanaro became a certified B corporation in 2019, which is a significant feat considering the amount of work that goes into such an application as well as the sustainability of the Firm that it implies. The Firm also has a target to be Net Zero by 2030 and for 10% of the Better World Fund by value to be Net Zero by 2030. The Firm’s sustainability committee is responsible for setting the ESG and impact agenda across the company, reviews portfolio company reporting and engagement and approves companies on impact grounds for the Better World Fund.

There are three managers of the fund. The Lead Fund Manager of the Fund is Mark Rogers, who has over 35 years of portfolio management and equity research experience. He is supported by the Founder and Co-Fund Manager, Charles Montanaro, who has 42 years of portfolio management experience and Ed Heaven, the Head of Sustainable Investments who is also the Co-Chair of the B Corp UK Finance and Investment Working Group. A group of analysts support the Fund Managers with research into portfolio and potential companies. The Fund has deservedly won numerous awards and most recently won the Best ESG Investment Fund 2022: Impact at the ESG Investing Awards.