Interview with a fund manager

The Big Exchange’s impact analyst Liz Rees speaks with Ty Lee, a fund manager at WHEB Asset Management. Read on to learn more about a fund manager’s thinking and get behind the scenes of the impact process and objective of a fund on The Big Exchange.

Q: You have recently produced a detailed impact report — why is impact reporting important for WHEB and its investors (especially our Big Exchange users)?

A: Many investors want to do good with their money. However, it has always been difficult enough to choose between the increasing number of sustainable investment funds, let alone understanding their underlying impact. In fact, most of these investment products out there don’t even measure their impact. WHEB’s impact reports allow our investors to “see” the impact their investments are associated with, which helps them understand the contribution in the real world.

Impact reporting also helps build investors’ confidence in impact funds. Impact investing in companies listed on stock markets is still in its early stage and most investors are often confused about the terminology used. Our impact reports cut to the chase. We disclose all the holdings in the fund and explain how they provide solutions to sustainability challenges. Increasing transparency not only helps investors better understand their investments, but it also improves asset managers’ accountability by making sure that asset managers do exactly what “they say on the tin.”

Q: Your report is titled ‘building back better’ from the Covid crisis and you highlight sustainable opportunities in transport, safety, and clean energy. Can you give an example of an investment you have made in each of these themes and explain what makes them stand out from others in their sector?

Example 1

A: Aptiv is a good example in our Sustainable Transport theme. It is a leading automotive supplier. Its products include electronic components for use in electric vehicles. The company is also a major supplier of active and automated safety systems including collision warning systems and sensing technologies. Like many of our holdings in the theme, it facilitates the transition by car manufacturers from internal combustion engines to electric vehicles.

Aptiv has revolutionised car design and implementation. It encapsulates hardware and software, as well as power and data distribution, into a single smart vehicle platform. It enables many start-up car manufacturers to develop safer and greener cars much faster.

Example 2

MSA Safety is our long-term investment in the Safety theme. It is a maker of safety products that help protect workers. Its products include self-contained breathing apparatus (SCBA) and fire helmets for firefighters as well as fall protection equipment for working at height. It also manufactures fixed gas and flame detection systems used across different industries.

The company has a strong track record of innovation that brings new technologies to market. Its recent SCBA product is a perfect example. It enables fire fighters to have better vision and communication in dark and smoke-filled environments. It is this constant innovation that draws us to invest in the company.

Example 3

TPI Composites sits in our Cleaner Energy theme. It is a global manufacturer of blades for wind turbines. Its regional manufacturing hubs complement the companies making the turbines, expanding their global wind blade capacity. These strategically located hubs enable it to produce wind turbine blades in a very cost-effective manner.

The company is truly committed to protecting the environment. One example is its focus on end of product life recycling. Recycling composite materials is very challenging. The company does not shy away from that, and conducts research and development on a variety of technologies that support a circular economy. It is exploring new ways of developing new materials and process technologies that enable greater recyclability. Given its expertise in advanced composite technology, the company is also developing lightweight composites for electric vehicles.

Q: How do you look at the negative impact of any of WHEB’s investments?

A:BOur investment strategy is guided by positive impact, so we look for companies where positive impact significantly outweighs negative impact. All our portfolio companies satisfy this requirement. Most products and services typically involve some negative impacts. These issues are routinely considered in our investment process, but negative impacts are not always easily measurable or directly comparable to the positive impacts generated by the company. To make sure we truly invest in impactful companies, we typically err on the side of caution and choose not to invest where the negative impact is significant or uncertain.

For example, we have recently researched a company which produces polylactic acid-based polymers, which are used to make bioplastic. Its product is meant to offer a significantly reduced carbon footprint compared to fossil fuel based plastics and can be produced from renewable feedstocks. However, when we take a holistic view of the product lifecycle, we are not convinced that this bioplastic can provide a long-term sustainability solution to the plastic waste problem. It takes decades to break down in domestic composting and centuries to break down in the ocean. For that reason, we have decided not to invest in this company.

Q: Sustainable and impact funds don’t all have the same holdings, many invest in the big companies like Amazon, Facebook and Google. What’s WHEB’s view of the impact these ‘megacaps’ have on the world?

A:The industry has come up with many definitions for sustainable and impact investing. Some invest in best-in-class ESG performers whilst others only invest in certain environmental themes. At WHEB, impact investing means investing in companies that provide solutions to sustainability challenges. These companies sell products and services which have a positive environmental and social impact.

Some of these mega cap companies do have good ESG practices, which should be applauded. However, we just don’t see them providing sustainability solutions. Amazon is an example which fails to tick either of these boxes. Firstly, most of its businesses do not directly address sustainability challenges. On top of that, Amazon has been plagued by various ESG issues including concerns over wages and working conditions. A recent report by an ITV News investigation uncovered some horrific findings. At a single site in Scotland, they found that Amazon was destroying 130,000 perfectly good items every week. This is the exact opposite of the circular economy they claim to be investing in.

A simple litmus test for us is whether a company generates more positive impact by generating more revenue. Based on this definition, it is obvious that the FAANGs are not investable to us.

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