Big Exchange positive impact medals awarded to two new funds
by Liz Rees, Impact Analyst, The Big Exchange
We are excited to introduce more funds to help you achieve your investing goals whilst, at the same time, benefiting people and the planet. Following our independent assessment, Baillie Gifford have been awarded a gold medal whilst J.P. Morgan Asset Management receives a bronze medal for their Emerging Markets Sustainable Equities fund.
You can read here about the approach taken by these funds, with an example of a company they invest in, so you can decide if they might fit with your own principles.
Baillie Gifford Positive Change Fund
Baillie Gifford is an Edinburgh-based independent partnership owned by its employees. The firm has enjoyed considerable success with its philosophy of long-term, patient investing. The Baillie Gifford Positive Change Fund builds on a heritage of engaged investing. It offers a high conviction, concentrated portfolio with detailed and insightful reporting.
The fund aims to outperform the MSCI AC World by at least 2% per annum over rolling five-year periods, and to deliver positive change by contributing towards a more sustainable and inclusive world. Indeed, more than 90% of portfolio is invested in stocks making a positive impact through their core products and services. *
The managers, Kate Fox and Lee Qian, see great opportunities in a ‘technological golden age’, which is enabling structural changes in industries ranging from healthcare to energy. They seek companies that are leading the way, whose products and services represent a significant improvement to the status quo, and who conduct business with honesty and integrity.
To this end, four impact themes have been identified: social inclusion and education; environment and resource needs; healthcare and quality of life; and the base of the pyramid (services to people on low incomes). To assess the expected impact of a holding, the managers consider the challenge the company is tackling, its product characteristics and business practices.
Once an investment is made, the managers continue to monitor operational performance and progress towards delivering positive change. They engage with company management on an ongoing basis. Most of this relates to understanding the positioning of companies on ESG (Environmental, social & governance) factors, but around 20% is dedicated to influencing the companies on ESG issues.
The level of transparency is excellent with a first-class impact report that provides full rationales for all holdings. The fund lives up to its name with clear documentation of how it is achieving Positive Change with reference to the UN Sustainable Development Goals. Hence the fund receives a maximum 3/3 score for positive influence and impact evidence.
Baillie Gifford impact stock example
Safaricom, Kenya’s largest mobile phone operator, is a holding that aligns to the ‘base of the pyramid’ theme. It allows people to connect, in a basic but transformative way, through its mobile network infrastructure and mobile payments service, m-Pesa. The managers believe these services have potential to both improve lives and deliver strong investment returns.
The platform can be used by anyone with a mobile phone to pay for goods and services and send money to family and friends, even if they have no access to a bank account. It allows millions of people in Kenya to work further away from home, access basic services such as insurance, save or borrow money, or pay for education.
The social impact is two-fold. Firstly, investing in the mobile network creates jobs and has boosted the Kenyan economy. Second, increasing financial inclusion through the payments business helps lift more people out of poverty. Safaricom’s networks and services benefit underserved communities and a study by KPMG estimated that the value created for society is worth almost 10 times the financial profits.**
*The Big Exchange Impact Assessment, April 2021
JPM Emerging Markets Sustainable Equity Fund
J.P. Morgan Asset Management is a global investment firm with extensive experience in ESG (Environmental, Social & Governance) integration and sustainable investment research. Its parent company JP Morgan Chase is one of the top four US banks.
This fund aims to provide capital growth over the long-term (5–10 years) from sustainable businesses operating in Emerging Markets or ones that demonstrate improving sustainability characteristics. Sustainable companies are those that the managers believe to have effective governance and best-in-class management of environmental and social issues. Unsustainable activities, such as fossil fuels, are excluded.
The investment process follows a high-quality growth strategy that is long established in the Emerging Markets and Asia-Pacific (EMAP) team. This involves a focus on companies with excellent management and sound finances, as well as potential for strong cash generation.
Analysts from the 91-strong team provide in-depth research coverage of the large universe. Most are based in or near the countries they cover, providing vital local knowledge of social, economic, and cultural drivers. They assess which companies are well positioned to adapt to change and then highlight ESG leaders in their sector.
The managers look for superior operational practices and this is clearly reflected in the fund’s holdings. Active engagement is considered important to fully understand ESG issues, manage any risks identified and encourage best practice. There is reporting of this, and some advocacy efforts, but limited evidence of the outcomes means the fund scores 1 out of 3 for positive influence.
Reporting overall is somewhat limited due to the focus being on practices rather than solutions to the Sustainable Development Goals (SDGs). A clearer process to identify and report on key ESG issues for each company would lift the 1 out of 3 score for impact evidence, however, there is better reporting on the Emerging Markets strategy on a wider level.
That said, there are clear sustainability themes in the portfolio, with companies making a positive difference in areas such as financial inclusion, contributions to local communities and pollution control. The fund is most aligned to SDG 9 (Industry, Innovation and Infrastructure).*
The biggest country exposures are to China, Taiwan, and India (37%, 18% and 15% of the portfolio respectively) whilst the main sector exposures are technology, financials and consumer staples (25%, 22% and 21% respectively). *
J.P. Morgan impact stock example:
The fund’s top holding is Taiwan Semi-conductor Manufacturing Company (TSMC), the world’s largest independent semiconductor foundry business. Semiconductors are critical components in products that are transforming and improving lives and livelihoods, from telecoms and digital services to healthcare and transport. The manufacturing process is very energy intensive and TSMC has led the industry in switching to renewable power sources. This includes signing the world’s largest ever offshore wind contract and committing to a target of 25% of renewable energy for its fabrication plants and 100% for its other facilities by 2030.** Furthermore, they were one of the first emerging market companies to include the cost of carbon emissions in their financial analysis when building new foundries.
*Fund factsheet @ 30/4/2021 and The Big Exchange Impact Assessment, April 2021
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