Fund Spotlight: Addressing the impact of climate change, one investment at a time

August 14, 2018 MD

 

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MD Fossil Fuel Free Equity Fund™

This summer’s record-setting heat wave has sparked a lot of discussion about the impact of climate change on human health and well-being. Deciding to do more than just talk, global investors have led a charge against fossil fuel industries by limiting their investments in oil, gas and coal companies.

Last month, the Government of Ireland decided to ban fossil fuel companies from its public funds—the first sovereign nation to do so. Here in Canada, members of the Canadian Medical Association voted to divest the organization’s reserve funds from investment in fossil fuel industries three years ago, following in the footsteps of the British Medical Association, the first health organization to take such action against climate change.

As a reflection of many doctors’ preferences, MD set out to provide investment options that are environmentally responsible while generating reasonable returns. That’s why we launched the MD Fossil Fuel Free Equity Fund™ (as well as the MD Fossil Fuel Free Bond Fund™) in May 2016. The fund’s mandate isn’t simply to exclude holdings in oil, gas or coal companies: it can also invest in innovative businesses that provide solutions to climate change and help reduce energy use, leading to sustainable, long-term returns.

A stock picker’s view on climate change

Rather than applying a simple screen to restrict investment in a sector on moral grounds, our investment team analyzes companies using fundamental research that counts the size of their carbon footprint, among other environmental and social factors.

“We don’t have a ‘fossil-fuel-free’ filter: we are simply a quality fundamental stock picker,” said Zak Smerczak, analyst and portfolio manager with Comgest Asset Management International, our global equity sub-adviser based in Paris.

“The metrics by which we assess quality include environmental, social and governance—or ESG—criteria. That immediately removes all the ‘usual suspects’: metals and miners, fossil fuel companies, oil production businesses and so on—all of which invariably end up having a low ESG corporate score,” heexplained.

The same measures can also identify companies that do have an environmental impact but are changing and innovating to reduce their carbon footprint in a way that can boost sales or expand markets. We’ve highlighted a few examples of such companies below.

The new cool: Daikin innovates air conditioning

Daikin Industries is a world leader in air conditioning and has been developing new technologies and environmentally friendly refrigerants, which are now used in all its new air conditioners.

While air conditioning consumes a vast amount of energy, Comgest can track how this company is innovating to shrink its carbon footprint in a way that drives sales. For instance, it has developed software to direct more efficient flows of refrigerants and ultimately reduce energy use by its customers. Builders are attracted to this technology to earn points toward LEED certification, for instance, boosting business.

About 50% of Daikin’s operating profit is now generated in China, whose current five-year plan is significantly focused on reducing air pollution. As an environmental innovator in reducing carbon impacts, Daikin has become a supplier of choice when it comes to being specified on contracts in China, another significant driver for increased sales.

Going electric: Nidec Corporation revs up auto industry

One current portfolio holding might be spinning your hard drive right now: Kyoto-based Nidec Corporation manufactures precision motors for products ranging from home appliances and IT equipment to elevators and automobiles.

Most notably, the company has spent the past few years developing traction motors for electric vehicles (EVs) and hybrids, an area responsible for an estimated 33% of its recent growth. Nidec is now ramping up to rival Germany’s Robert Bosch GmbH as a global auto parts supplier. It recently teamed with Peugeot carmaker and PSA Group to electrify all its brands of vehicles by 2025.

EVs may not kill the fossil fuel industry in the short term, but they could sure slow things down: Bloomberg estimates that EVs could displace demand for nearly 1 million barrels of fuel a day by 2025.

Consumer friendlier: Unilever counts cost of cup of tea

Another unconventional candidate that fits well into the MD Fossil Fuel Free Equity Fund portfolio is consumer goods giant Unilever PLC, a company in transition to a low carbon economy.

In addition to having sustainable and fair trade sourcing initiatives, Unilever aims to eliminate fossil fuels from its operations by 2030, and to generate more renewable energy than it will consume. In July 2016, it introduced an internal carbon levy on its businesses’ carbon emissions, raising funds to invest in renewable energy sources on its manufacturing sites.

The company measures its carbon footprint through the whole life cycle, through to the end consumer, driving its product innovations. “They literally look at the cost and economic impact of you making yourself a cup of tea or doing a load of wash,” said Smerczak.

“In terms of financial returns, Unilever has been very clever in understanding consumers are becoming more conscious around their impact on the environment,” said Smerczak. The company has made itself the first port of call to attract product innovators or small companies that can sell themselves to Unilever without losing face. A good example is its recent acquisition of Seventh Generation, a Vermont-based maker of “green” household products.

A sound investment strategy for a clean yield

We understand that the decision to invest in a fossil-fuel-free portfolio is a personal one, and that this strategy is not for everyone. With so much uncertainty around clean energy and climate change policies around the world, it helps to view this on a long-term investment horizon.

But even when investing based on his or her personal values, every investor wants to see a financial return. That’s why our MD Fossil Fuel Free Equity Fund looks for quality companies that demonstrate a strong and sustainable competitive advantage.

“We’re not going to invest in companies just for the sake of appearing to be environmentally friendly—absolutely not,” said Smerczak. “For instance, we’re not going to invest in a solar energy company simply because it looks good in the portfolio when actually it’s surviving on huge [government] subsidies.”

Since the fund’s inception two years ago, returns have been 13.9% as of June 30, 2018, with a one-year return of 9.4% as of the same date. A $10,000 investment in the fund at inception, in May 2016, would have grown to $13,116 by the end of June 2018.

For more information about the MD Fossil Fuel Free Equity Fund (or the MD Fossil Fuel Free Bond Fund), please contact your MD Advisor.

 

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