EQ Investors made a strategic decision to reduce its exposure to UK equities towards the end of last year.
‘That decision was mainly based on the sector exposure,’ says Kennedy.
‘Investing in UK equities gives you a underweight to tech and a overweight to some large energy companies, where stranded assets might be an issue.’
Stranded assets have become an important theme for investors looking at sustainability. The term was coined by think-tank Carbon Tracker and refers to assets that will, in the not-too-distant future, no longer deliver an economic return as the world moves towards carbon neutral targets. Fossil fuels are one.
According to EQ’s Positive Impact Report for 2020, the FTSE 100 has nearly 10,000 tonnes of disclosed CO²-polluting reserves from coal, oil and gas companies. The MSCI World Index has just under 4,000 tonnes. EQ’s portfolios have none.
Some of these fears played out during this year, when a lower demand for fossil fuels during the lockdowns around the world, coupled with geopolitical tensions between oil-producing nations, sent the price of oil falling.
This in turn led oil companies to slash their dividends and put investors off the traditionally popular companies. By the end of November, BP’s share price was down 48.5% compared with the start of the year, while Royal Dutch Shell’s was down 43.7%.
‘From both a traditional financial perspective and an impact perspective, there are better opportunities elsewhere,’ says Kennedy.
However, there are still some ‘fantastic funds’ in UK equities for impact investors, says Kennedy. She highlights the £43.4m Ninety One UK Sustainable Equity fund, managed by Citywire AA-rated Matt Evans.
Although the fund is small and has only been running for two years, it has impressed EQ’s team. It returned 4.8% in the 12 months from December 2019 to November 2020, outperforming the Morningstar UK benchmark and the popular Royal London Sustainable Leaders Trust (see chart above).
‘Evans is well aware that the UK market has its constraints in impact investing,’ says Kennedy.
‘What we are looking for and working with him on is the transition. It is about pushing these companies to be the best in class and improve, which is a great way to make an impact.’
In its annual impact report for 2019, the fund gave an example of engaging with energy company Ceres Power. Evans, who also holds Ceres in the £249.8m Ninety One UK Small-Cap fund he manages, first held the company in July 2018.
The following year the fund raised concerns about Ceres’ lack of an ESG policy, prompting it to set clear targets against the United Nations’ Sustainable Development Goals (SDG). According to the report, Evans planned to meet the newly formed Ceres ESG committee in 2020.
Sticking with the company has paid off for the fund. It was the portfolio’s top contributor in the three months between September and November, returning 53.7% and contributing 1.2% to the fund’s performance over that period, according to Morningstar.
Alongside the Ninety One fund, EQ Investors also uses the £2.3bn Royal London Sustainable Leaders Trust, which is managed by Citywire AAA-rated Michael Fox, for large-cap exposure in the UK.