We talk to a UK-based fund management firm about its approach to sustainability and ESG investing. It is frank about the challenges, and the ways to think about this investment philosophy.

Investment funds playing to a sustainability and ESG theme have been knocked back in the past few years, as soaring energy costs, rising interest rates and supply chain mayhem hit. It hasn’t been easy being green.

Conditions have been tough but such strategies take time to bear fruit. 

That is the stance of Seb Beloe, partner and head of research at WHEB Asset Management, a London-based firm he’s worked at since 2012. The firm oversees £1.2 billion ($1.4 billion) in AuM, and has a team of 20 people. 

About six years ago, businesses saw the ESG/sustainability phenomenon as an opportunity to grow business and revenues, Beloe said. “It was the ESG stampede.” 

That influx has seen the rise of worries about “greenwashing” and “bubble” valuations of sectors such as “cleantech” – as was mentioned by the Bank for International Settlements in February 2022. (When central bank organisations refer to “bubbles,” this is time to get concerned.)

These developments have added to an air of caution. Beloe does not think this is a bad thing.

“We’ve been seeing a bit of a pushback over ESG and the Net Zero goal in the past couple of years. We think there has been a winnowing-out of appetite for sustainability and we think there is a huge opportunity here,” he said. 

“We think this [ESG scepticism, questioning of approaches] is a healthy process. Regulators and others need to step up their game, but they are catching up,” he said.

There has been plenty of pushback. In the UK, to give one example, the Conservative government of Rishi Sunak pushed the date from when sales of new internal combustion engine vehicles will be banned to 2035 instead of 2030. In the US, asset management titan BlackRock has dialled back notably on the ESG rhetoric, and has drawn flak from US states and investors over its stance on decarbonisation.

Bloomberg reported (28 March) that UBS recently told a closed-doors conference with other banks and central banks that delivering on decarbonisation was financially difficult. The Swiss bank earlier in March reportedly scrapped a planned phase-out of coal financing that Credit Suisse had backed. Unstable geopolitics (attacks on Red Sea shipping, worries about China’s pressure on Taiwan, Russia-Ukraine, etc.) have also put a focus on supplies not just of fossil fuels, but of rare earths and other important components necessary for non-carbon energy resources.

Positives
But for all some of the difficulties, there remain important tailwinds for sustainable energy, Beloe said. 

“We want to be investing in companies that are growing rather than poorly positioned for the future,” he said. Some of the move towards new energy sources are being “turbocharged” politically by legislation such as the US Inflation Reduction Act of the Joe Biden administration, for example, Beloe said. With fossil fuels becoming more expensive to extract over time, shifting to alternatives is an economic as well as environmental imperative, he said.

WHEB has five funds adopting the same strategy, he said.

“Our key focus is on companies that are providing solutions,” he said, giving examples such as heat pumps, solar energy, types of medical technology. WHEB uses third-party data to show the impact that companies it might invest in are able to make.

At the moment, WHEB AM has 42 holdings, which is a relatively concentrated portfolio. The firm has a focus on nine sustainable investment themes. Only about 15 per cent of listed companies meet its positive impact criteria and qualify as potential candidates for investment.

In the short run, that concentration and focus can cause a cost.

Looking at the FP WHEB Sustainability Fund factsheet for 31 January, over five years, for example, the fund has a cumulative performance (C Acc Primary share class) in sterling of 35.03 per cent, less than half the 77.16 per cent return from the MSCI World Total Return (sterling) index, and also less than the IA Global Sector Average Total Return. 

“The inflection in performance came at the start of 2021 when interest rate rises were first publicly mooted by central banks,” Beloe said. “From relaunch of the fund in April 2012 until the end of 2020, the fund was actually ahead of the IA Global Sector Average Total Return.

“The performance divergence since then is largely down to WHEB not owning tech stocks like Amazon, Apple, Microsoft and Nvidia. WHEB’s focus has been and will remain on companies that sell products and services that have a direct positive social or environmental impact.

“Post-Covid and with higher interest rates, these stocks have not kept up with the global tech stocks. Our contention, which we are sticking with, is companies that focus on addressing critical social or environmental issues will, over the long-term, be companies that will perform strongly because they are industries of the future. We are not going to dramatically change our approach because of performance over a relatively short period of time because that would mean losing sight of our long-term conviction,” he said. 

A sense of perspective comes from a person with plenty of experience under the belt. Beloe has worked for almost 30 years working at the nexus of business, investment, and sustainability. Before joining WHEB about 12 years ago, Beloe was head of SRI Research at Henderson Global Investors. Beloe also spent 10 years in senior roles in both the UK and US at SustainAbility, a think-tank and consultancy.

Some of the differences between the firms that WHEB AM holds and the wider market are particularly stark at the moment, Beloe said. 

“The relationship between stocks in general, growth stocks and inflation expectations is not precise. There is, however, a popular market narrative that the latter is bad for both of the former. This period has matched that narrative. Energy and early-cycle names have outperformed. Staples have been broadly in line and growth stocks have underperformed,” he said.  

“One difference in this period, however, has been the strong performance of the mega cap technology stocks. These companies are still in a growth phase but, other than Tesla, we do not consider any of them to provide solutions to sustainability challenges, and they therefore are not included in our investable universe,” Beloe continued. “Their strong performance has therefore been a particular challenge for our strategy in terms of relative comparison to the index. During this cycle, weak relative performance of the growth style has therefore been more concentrated in smaller or mid cap stocks. Funds seeking to achieve a positive environmental and/or social impact tend to have strong biases to mid-cap and growth companies and have therefore been particularly challenged.”