In this episode of our podcast series, “Global Perspectives,” Global Sustainable Equity Portfolio Managers Hamish Chamberlayne and Aaron Scully join Adam Hetts to help decode sustainable investing.

Key Takeaways

• Environmental and social considerations are a common denominator among the many different approaches to sustainable investing; focusing on the triple bottom line – profit, people and the planet – is key.
• The migration toward a sustainable economy will produce winners and losers. Mr. Chamberlayne and Mr. Scully believe the best investment opportunities will be generated by companies that are on the right side of this disruption.
• COVID-19 has accelerated many sustainable investing themes, including software as a service, telemedicine and in-home medical care, all of which have thrived during the pandemic.

View Transcript

Adam Hetts: Hello and welcome to another episode of Global Perspectives, where we feature candid conversations with Janus Henderson’s thought leaders. I’m your host, Adam Hetts, Global Head of Portfolio Construction and Strategy here at the firm. And today, we act like adults and talk about investing responsibly because our guests are Hamish Chamberlayne, our head of Global Sustainable Equities, and Aaron Scully, a portfolio manager on the Global Sustainable Equity Team. We will cover responsible investing through their lens of sustainability, demystify the differences between sustainable, SRI¹ and ESG² investing, and plenty more. So, Hamish, Aaron, welcome to the show, guys.

Hamish Chamberlayne: Thanks.

Aaron Scully: Yeah, thanks for having us.

Hetts: Yeah, thanks for being here. So, I’m excited for today. This is a great topic and I thought I’d start… your team is focused on sustainable investing, but I think this whole space can be intimidating because there are so many labels: ESG, SRI, impact investing and so on. And I think these terms tend to get scrambled and then used incorrectly. So, do you mind starting simple? Just give us a rundown of the taxonomy and explain how your own style of sustainable investing fits in.

Chamberlayne: Yes, sure, I’d be happy to. And you’re quite right, the industry does not help itself with all the acronyms, and I think we make it much more complex than it needs to be to be honest. I think the best place to start is just talking about sustainable. And we often start our conversations with our investors by highlighting the definition of sustainable development. The first United Nations report into sustainable development happened over 30 years ago in 1987, and the result of that was a report called Our Common Future. And in that report was the definition of sustainable development. So, I’ll quote it here: “Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs.” So that is the United Nations approved definition of what sustainable development is.

Now, we’ve had many follow-on reports over the years, the most recent of which was the publication of the Sustainable Development Goals (SDGs), the United Nations SDGs, in 2015. And all of these reports, the SDGs included, are really just iterations on that first definition. And to be clear, the sustainable development goals go into much more detail, much more granularity around sustainable development and provide a very clear framework on the types of issues that that we need to focus on. So, there are 17 goals. There are 169 targets under their goals that cover both environmental and social factors. So, the point is, is that sustainability is not a narrow field. It’s a very broad topic. And there can be many different types of investment approach that can incorporate some, or all, of these factors. However, what is common to all investment approaches is the incorporation of environmental and social factors into the investment process. That’s the whole point. It’s called…another term is the triple bottom line or “the three Ps.” So, thinking about profit, people and the planet – this idea that we need to incorporate environmental and social considerations into our economic model, into our investment thought process, in order to think about sustainable investing.

We are aligned with all of the United Nations Sustainable Development Goals and more specifically, the consideration of four environmental and social megatrends: climate change, resource constraints in respect of our natural capital and population growth and aging populations. And we believe that these environmental and social megatrends capture the heart of the sustainability problem. We recognize that these for environmental and social megatrends are putting the global economy under enormous pressure and they have far reaching investment implications and will drive significant changes to our societies and our economies. And as a result of the significant changes, there will be big winners and big losers.

So, we believe there are a myriad of investment opportunities arising from the migration towards a more sustainable global economy, and that the best investment returns will be generated by companies that are on the right side of these.

Hetts: Thanks Hamish, that’s super helpful thinking about sustainability is a broader kind of umbrella and these different ESG and other factors fit within that. And that leads me to another, I think, high level question.

You talk about these megatrends. I just wanted to drill down on your philosophy of sustainable investing a bit more, because I think broadly speaking, some might view this sustainable approach as a bit anti-capitalist in its pursuit, where its focus is less on just making money, but in others might see it as simply a better way to make money by looking at these megatrends and looking at the bigger picture.

So how do you define success? Is it P&L? Is it impact? And do you guys struggle to quantify or measure any of that?

Scully: Maybe I’ll take that one if that’s alright. I think that public companies have been, you know, probably too myopically focused on just the shareholder and the bottom line for too long and to the detriment of those companies. You know, capitalism probably does need to evolve. And they need to evolve, not just because it is morally right to evolve but also because it’s ultimately the right business decision.

So, we’re drawn to companies that think about all the constituents in their ecosystem. Right. So, this includes employees, suppliers, customers, shareholders, the environment. So, by creating this, this healthier ecosystem for the company to operate in, the more sustainable that company’s business model should become. So, you know, I think customers are increasingly expecting more of their companies. And so, when companies start to fall on the wrong side, whether [that be] how they’re treating the environment or how they’re treating their employees, customers are going to vote with their feet. They’re not going to use the product or service of that company. And, you know, ultimately, companies are going to struggle to attract and retain top employee talent. You know, the best talent is critical to a strong business model, right. And so, if you can’t attract the best people, you’re going to be at a competitive disadvantage.

And then ultimately, I think that government regulators are increasingly going to go after these companies that are on the wrong side. Right. And again, all this comes back to a healthier business if we think about it. So, a company that helps its ecosystem to flourish should in turn have a higher probability of flourishing.

Chamberlayne: Absolutely, I mean, I think Aaron captures it really well, and the whole point is that there is this alignment. We believe that companies that have got products and services that are aligned with a sustainable future and that are making a positive contribution to our societies, to our environment, to the development of a sustainable global economy and companies that are managed in a sustainable way are going to be more likely to have the investment characteristics that we look for. [We believe] that they’re going to be more likely to generate growth, that they’re going to be more resilient and they’re going to be more likely to compound and grow wealth over time.

I think the great misperception is that sustainable investing is a completely different investment discipline. And that’s not the case. Both myself and Aaron come from conventional investment backgrounds. And it’s our belief that thinking about sustainability is helping us, or making us, better investors. It’s helping us to make better investment decisions by really sort of understanding companies and understanding the broader ecosystem, getting into the weeds. It increases your probability of making a good investment decision. So, this very strong alignment between fundamental research, looking at the financials, understanding the profit and loss, looking at that cash flow generation over three- and five-year period. And, you know, reinforcing conviction in our investment decisions is this is this analysis of environmental and social factors that are relevant to each company because that will underpin the confidence that we have in those forward-looking investment assumptions.

Hetts: So, with that all being said, as far as the positive and negative themes, are there one or two that are really top of mind that you’re finding yourself disproportionately focused on right now?

Chamberlayne: Yeah. So, we have these ten sustainable development investment themes to try to categorize our universe, but there are a few trends that really span a number of these themes. And we really regard them as generational investment trends, and they are impacting multiple industries in multiple sectors.

The first big trend is this low carbon energy transition, the transition to a low carbon economy. And we think this is going to have a huge impact the whole way along the fossil fuel value chain in terms of being a negative for many companies exposed the fossil fuel industry. And it also represents a huge investment opportunity across many different types of company. We always like to make the point that low carbon investing is much more complex than just taking fossil fuels out of your portfolio and investing in renewable energy companies.

And we see many different investment opportunities all the way from renewable energy companies to battery technology to the electrification of transportation. So electric cars, but not only the actual electric car manufacturers, but also the whole technology supply chain serving the electrification of cars all the way down to semiconductors and sensors and connectors. We also look at buildings. You know, buildings are one of the most carbon intensive parts of the economy. So, there’s lots of investment opportunities in terms of building technology and even building materials.

And then you can go into sort of technology and software. And there are many software companies that have got a really powerful story aligned with the whole transition to a low carbon economy. So, there’s lots of investment opportunities there.

And then closely linked to this, is this trend of digitalization. And we see digitalization as this generational investment trend. And it’s highly aligned with sustainability. At its very core, digitalization is all about how do things in a more virtual sense or have a less or lower physical impact on the global economy. And I think the events of this year have really illustrated how digitalization can result in reduced environmental impacts. So, we actually see this trend accelerating as we come out of this, out of this crisis.

Hetts: So, you’ve been keen on this carbon transition for a while and you’ve got this great holistic view of it across sectors, across industries. So, let’s talk about the EU [European Union] green recovery deal this year. When that hit, was that, to you, and evolution of all these themes that you’ve been keen on for so long, or did that fundamentally change the narrative to you in any way?

Chamberlayne: We’ve been following the regulatory landscape for many years and the European Union has had a positive approach towards regulation with regards to the energy transition and the green economy. So, it was very pleasing to see the European Union making such a firm commitment to embedding the green economy into its recovery package. So that makes us very optimistic about the growth potential of companies exposed to these areas coming out of this crisis.

However, what I would say is that regulation is definitely a tailwind for many of the companies but the thing that we really focus on is the fact that, actually, it’s not always necessary. And if we go back four years to the last U.S. presidential elections, there were many people who asked us whether this would have a negative impact on our investment performance [and] whether the companies that we focused on would be set back by an administration that was not so focused on, or, [rather], focused on deregulation. And the answer to that was no. At the time we said no. I mean, it’s almost independent of the regulatory picture that companies are changing, they’re innovating. And we have this very high conviction that the future is going to be green because companies themselves are investing in that area. And that’s where the growth is coming.

Scully: The poster child to that is the cost of renewables and the cost of electricity from renewables is just plummeted over the last 20 years. And so, to add to what Hamish was saying, this is just better economics. It’s much more affordable now. Even relative to coal in lot of cases in the U.S., to just rely on solar or wind. And the second leg of that stool (there’s a stool here) is batteries. And the cost of batteries is going to continue to plummet. And so, the extent that we can see the cost of storage of electricity come down, then renewables has everything that traditional generation has. And so, [we believe] that will drive adoption of renewables, not some regulatory body saying, “you should do this.”

Hetts: So, I guess on the note of adoption, the trends we’re talking about right now around energy and then obviously technology, these sustainable trends that you’ve been focused on before this year were accelerated quite a bit, maybe a bit obliquely by the COVID crisis. So, I personally wasn’t surprised, seeing the research I’ve seen, showing the resilience of sustainable funds this year during the market sell-off earlier in the year.

But for you guys, what was surprising to you this year in terms of reactions to the sell-off?

Scully: I guess what was surprising is this concept of anti-fragility; the idea of having a stressor introduced and the business model actually doing better and thriving. If you think about the pandemic and all the implications, a lot of different themes that have actually done even better because of it. Right? So, what are those themes? Telemedicine is an obvious one. Software as a service [is another theme] that is allowing people to work remotely. You know, [what is crucial is] the infrastructure for working remotely. So, the cell towers, the data centers. I mean, even just looking at judging by my kid’s activities – online video game subscriptions. Right? And then and then finally, post-acute care moving more towards the home setting in all these themes. And I’m sure there’s loads more. But all these themes have actually done even better. And probably what the pandemic did is it brought forward, you know, five or ten years for these themes. They’ve gone into the future and it accelerated everything.

I think the other important thing to exam is, why is there a correlation with sustainability? Again, we’re drawn to companies with cultures that focus on the long term. So, we’re drawn to cultures of flexibility. We want balance sheets with little debt. All these factors generally increase the probability of having a more resilient business model. And so, I guess coming out of this, if anything, we now feel even better despite being in this massive recession.

Hetts: And you mentioned your kids and in video games. I’m just curious, anything else and the personal level that you learned just from working remotely and sheltering in place about this new kind of economic reality? You know, lessons learned from living through this personally?

Scully: That’s a good question. I do think telemedicine just through experience is even more critical and for whatever reason was never really largely adopted by society. But telemedicine is something that every constituent likes. The doctors love it because they don’t have to be in person with people that are, possibly, very infectious. Consumers love it because they don’t have to drive, then wait in the waiting room and then, again, get exposed to all these other people in the waiting room. Payers love it because it’s so cost effective. And finally, regulatory bodies [such as] Medicare and CMS [Centers for Medicare & Medicaid Services]. They’ve come around and said, you know what, this actually makes a lot of sense. And so, when you have a product to service that every constituent likes, it’s more economical. I think that the future is just telemedicine. And as technology improves, this will become even more apparent. And so, there’s a lot of ways to play that. But, just thinking about our aging parents, they all the one common theme among baby boomers [is that] they don’t want to go into a home. They don’t want to go into a skilled nursing facility. They want to age in place. And to the extent that telemedicine technology can really facilitate that, I think that that that’s been an eye opener for us.

Chamberlayne: Yeah. I’m trying to think of the things that I’ve learned and, you know, I think, I think it’s important to be clear that we don’t want to be Panglossian about this crisis and say that everything’s going to be great because we’re still so far away from what we consider to be a normal and healthy society. So, there’s still a lot of challenges. And I think what I’m hopeful of is that this crisis would have illustrated how we can be smarter and cleverer about the way we organize our economies, about the way we do things, and that when we emerge and go back to towards what we would consider “normal,” that we sort of end up achieving a better “new normal” where we are cleverer about how we allocate our time and cleverer about how we do things. And we really focus on the things that are important with regards to our families, our health, our work, our relationships and the way our economies function. And so, we get very excited because we think that the tools are all there from a technology perspective. All the ingredients are there for us to achieve a really high quality of life at a society level and for that to be a win-win outcome, or net positive outcomes for both the environment and society.

Hetts: Thanks, super interesting to hear how you guys experienced everything this year. Maybe we can stick with the personal for a bit here. I’m just curious, with it being such a fascinating space and it being relatively new. Hamish, as you mentioned, it was originally defined back in 1987, then sort of re-specified in 2015. But it’s really been since 2015 that the popularity has really compounded in sustainable investing. So, do you guys mind telling us a little bit more about your backgrounds and how you ended up here in sustainable investing?

Chamberlayne: Sure. Well, I came from a conventional investment background. I started out working on in a global equities team with what you might call classic global equity strategies. And then just under 10 years ago, so about nine years ago, the opportunity arose to work on sustainability global equity strategies. And this was actually an opportunity that came to me. So, I was incredibly lucky to be given that opportunity. And I quickly realized that it was a really exciting investment product, investment strategy to work on. And like many people, to be completely frank, when the, when the opportunity arose, I was a bit skeptical of it. And I think there was a high degree of skepticism around sustainable investment strategies at that time. But I quickly realized that it was a really great investment strategy. And I feel very fortunate to have spent nine years of my career working in this space and getting to research really interesting companies. And it’s really exciting to invest in companies that are ultimately having a positive impact on the development of a sustainable global economy, making the world a better place. So, it’s great. I really enjoy it.

Scully: Yeah, just to add on to that. For me, it’s been this incredible serendipity that I’ve been able to have my path across Hamish’s and the strategy. Just real quick, I started almost 20 years ago to the day I came to Denver. Back then, it was still this old cow town. And I started at Janus and took on a number of different roles on the investment side. But one of the things was I got to have exposure to a lot of different great investors at Janus and was able to take the parts of the process from each of those investors that I really liked and create my own process. And the foundation of the process that I created was this hyper focus on the long term, that the long term is a place where we still have a competitive advantage to try to find those companies that will compound and avoid companies that have underappreciated risk. And that was my process. I was really focused on the long term.

And then to fast forward three and a half years ago to meeting Hamish. When I heard about the strategy, I was just blown away that this was a better lens on long-term investing, that this was a superior way to generate strong returns for our shareholders. And then add on to that that Hamish and I got along really well. Life’s too short and you want to spend time with people that you really like and respect. And Hamish is one of those people. And so, from a professional standpoint, that was great. On a personal standpoint, it was also great.

I mean, what really gets me out of bed every day is being able to help people. Right. If you think about what we’re doing, we’re, hopefully, through strong performance, helping our fund holders fund college, help them get closer to retirement. You know, that’s as important as allocating capital to companies that are going to help the world as well. And so, we’re able to make an impact that way. And I feel very lucky to be on the strategy.

Hetts: Yeah, well, thanks, I’ve enjoyed the time with you two. And life is short, so I think we’ll start wrapping things up. But is there anything else we haven’t talked about that you guys wanted to cover today?

Chamberlayne: Yeah, I don’t know how to follow what you just said, Aaron. I think that was the best response of the discussion. Yeah, I’d echo that 100 percent. I think what we’ve got is a great partnership.

Hetts: All right. Well, Hamish, Aaron, thank you for joining us. This is such an interesting topic we could talk about for a long time. But I think we’ll have to stop here. And listeners, thank you for joining us for this episode of Global Perspectives. As always, the views of Janus Henderson’s investment teams and thought leaders are freely available within the Insights section of our websites. We look forward to bringing you more conversations in the near future.

 

¹Socially responsible investing
²Environmental, social and governance