Royal London Asset Management’s (RLAM or “the Firm”) Global Sustainable Equities Fund (“the Fund”) is an equity fund investing across all markets globally to achieve returns through investing in companies which seek to solve long-term environmental and social challenges. Weighted toward the US market and technology sector, the Fund’s investment thesis lacks originality, although its TCFD reporting warrants praise. Morningstar give the Fund a sustainability rating of five worlds (the maximum rating), based on how well the portfolio holdings are managing ESG risk relative to the global category peer group. Although arguments could be made for the alignment of individual holdings with other Sustainable Development Goals not mentioned here, the key SDGs which corresponding to the Fund are (8) decent work and economic growth, (12) responsible consumption and production, and (13) climate action.
Launched in February 2020, the Fund invests predominantly in large cap growth stocks. Somewhat unhelpfully, different investor documents give different figures for the fund size, these include GBP 254.1million, GBP 250.05million and GBP 129.8million. Accordingly, it is difficult to ascertain the fund size at the time of writing (March 2022). A high-conviction strategy, the Fund has a concentrated portfolio of 30-50 holdings; its top ten holdings, with percentage weightings and corresponding Sustainalytics ESG ratings, are listed below:
Microsoft Corp 5.0% 13.8 | Taiwan Semiconductor Co 4.4% 38 | Thermo Fisher Scientific Inc 3.4% 13.5 | Alphabet Inc 3.4% 24.3 | Adobe Inc 3.4% 10.8 | Texas Instruments Inc 3.2% 20.3 | Amazon.com Inc 3.1% 30.1 | Astrazeneca PLC 2.9% 23.2 | Schneider Electric SE 2.9% 17.1 | Visa Inc Class A Shares Common Stock USD 2.9% 16.1.
The top ten holdings have a total weighting of 34.6%. Sustainalytics ESG ratings assess the risk that various ESG issues pose to a company, rather than the company’s impact upon ESG issues, hence Taiwan Semiconductor Co has a higher rating (and is more at risk from ESG issues) than Adobe Inc, for example, with a lower rating. Questions may be raised regarding the ESG credentials of stocks such as Alphabet Inc, parent company of Google, whose use of advertisements and near-monopoly status as a search engine may present social or governance dilemmas. However, proponents note Alphabet’s contribution of various tools to address ESG concerns, such as a recently-unveiled carbon footprint tracker from Google Cloud. Hence, it’s inclusion should be monitored but is not problematic at the time of writing.
As the top holdings would suggest, the Fund is bullish on technology stocks, with a 33% weighting for the sector. Other key sectors are industrials (24.8%), health care (19.8%), consumer discretionary (11.7%), financials (8%), real estate (1.8%) and basic materials (1%). In accordance with its technology focus, the geographical allocations of the Fund are heavily skewed toward the US (68.8%), followed by the UK (10.2%), France (4.9%), the Netherlands (3.8%), Germany (3.5%), Switzerland (3.1%), Hong Kong (2.8%), Denmark (2.0%), and Japan (0.9%). RLAM score the Fund 5/7 on risk, with the guidance that the Fund is not suitable for investors with a horizon shorter than five years.
The Fund aims to deliver growth over the medium term (defined as 3-5 years) with a target to outperform the MSCI All Countries World Net Total Return Index GBP (“the benchmark”) by 2.5%, after charges, over three-year rolling periods. In pursuit of this objective, the Fund invests in companies providing solutions to long-term environmental and social challenges, outlining long-term active ownership as a channel for engagement and voting, which can be used to encourage positive corporate behaviour. NGO ShareAction examined the Firm’s proxy voting record, finding that RLAM voted in favour of 73% of environmental and social resolutions in 2021. Of 65 asset managers ranked by ShareAction, RLAM placed 25th, showing some awareness of the role of proxy voting, but hardly enough to correspond to the importance placed upon voting in the Fund’s investment thesis.
During the stock selection process, an in-house screening tool reduces the Fund’s investment universe from over 3000 shares to around 600, of which “deeper dive” analysis helps identify the stocks which are the best portfolio fit. The investment process considers the sustainability of the products and services of the companies it invests in, as well as their standards of ESG management. It would seem the former carries less gravitas, since the products and services provided by holdings such as Amazon.com can hardly be considered environmentally friendly.
Negative screens also play a role in the investment process: the Fund “avoids investing” in tobacco and armament manufacturers, nuclear-power generators, and companies that conduct animal testing, although no absolute screen is explicitly stated. In addition, the Fund “avoids” investment in companies which are unwilling or unable to minimise significant environmental impacts, or which derive a “material” proportion of business from countries where human rights are disregarded. Furthermore, investment is “avoided” in companies which promote pornography, irresponsible gambling, irresponsible drinking, worker exploitation, exploitative consumer practices; companies with unacceptable corporate governance, which mismanage ESG risk, which produce or sell torture equipment of landmines.
The Fund has three co-managers: Mike Fox, RLAM’s Head of Sustainable Investments and Fund Manager of the Sustainable Leaders, World and Diversified Trusts (he has managed the Sustainable Leaders since November 2003, representing a long tenure in sustainable investing); George Crowdy was previously member of the Global Sustainable Equity team at Janus Henderson; Sebastien Beguelin worked at the Firm as an analyst and junior fund manager specialising in European Equities, although seems to possess no ESG-specific qualifications or experience. The Responsible Investing team which supports the Fund Managers has an average of 13 years’ experience in the industry. The Firm is part of Royal London Group, principally known as an insurance company. Royal London made headlines in Autumn 2021 for attempting to prevent Bain Capital’s acquisition of insurance company LV=; Royal London’s offers were rejected by LV= and Royal London was accused of interference, although many supported the efforts of Royal London to keep another UK insurance company under British ownership.
The Fund and its managers deserve our attention for undertaking TCFD reporting before being legally obliged to do so. The Fund’s Climate Metrics paper provides information regarding the weighted average carbon intensity (WACI), warming potential, climate value at risk, and green and brown revenues exposure of the fund. The Fund is shown to have a lower WACI and warming potential than the benchmark, as well as a higher exposure to green activities such as renewable energy, sustainable agriculture and pollution prevention, and a lower expose to brown activities (oil and gas, coal mining etc.) than the benchmark, although its brown exposure remains above 1%.