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Is your sustainable equity allocation appropriate for today’s environment?

Alex Davis, Investment Specialist
2023-09-30
Archived info
Archived pieces remain available on the site. Please consider the publish date while reading these older pieces.

PROFESSIONAL AND ACCREDITED INVESTOR USE ONLY. NOT FOR FURTHER DISTRIBUTION.

This is a marketing communication. Please refer to the prospectus of the Fund and to the KIID and/or offering documents before making any final investment decisions

  • Sustainable equities are currently facing significant headwinds, prompting the question whether they are appropriate for today’s environment.
  • We believe the case for sustainability is more solid than ever but that recent difficulties highlight the importance of having a resilient, style-balanced core at the heart of your portfolio. 
  • We think that this core allocation can be further strengthened by in-depth research and engagement as both can help identify and nurture the long-lasting drivers of both competitive financial and sustainable returns.

Sustainable investment approaches encompass an increasingly broad spectrum, ranging from negative screening to pure impact strategies. Each of these may have a role to play in an investor portfolio, but investors need to be mindful of unintended style exposures as illustrated by recent events. After a period of benefiting from favourable market sentiment, a number of sustainable equity portfolios have come under some pressure through style or sector biases, as many of the underlying companies are facing headwinds. Given the still-deteriorating outlook, it may therefore be tempting to conclude that sustainable equities are ill-suited to this new, more volatile environment. Yet, we think that the case for more sustainable allocations is stronger than ever due to the long-term nature of these challenges, whether it is the transition to net zero or the need to prioritise all stakeholders. 

We believe the answer, therefore, lies in taking a broader view of sustainability — after all, a sustainable portfolio does not have to be growth or technology heavy — and building a more resilient core at the heart of your portfolio. We think an attractive avenue to achieve that goal is to identify companies that are outstanding stewards of their shareholder capital and ESG leaders, irrespective of the sector in which they operate. Using careful portfolio construction to minimise style, factor and regional biases, these holdings can then be combined into a more balanced allocation. We believe the resulting portfolio offers the potential to compound positive stewardship into more consistent returns, regardless of whether sectors are in or out of favour.

Importantly, this focus on stewardship also minimises the risk of financial and sustainable goals being at odds, as we believe quality companies can focus on positive environmental and social outcomes. We think companies that are good stewards can build support among customers, employees and other stakeholders; improve the resilience of their businesses; and attain a lower cost of capital — which, in turn, potentially helps them provide investors with superior returns on capital over the long run. We believe consistent engagement can strengthen this virtuous cycle further.

Sticking to Stewards

In the Wellington Global Stewards Fund, we seek to select leading stewards across industries and geographies based on their potential to succeed over the next decade. Active ownership and engagement are therefore incredibly important to us, as illustrated by the fact that we engaged 143 times with portfolio companies in 2021, up from 135 in 2020, including the below examples. 

Our engagement with global tyre manufacturer Michelin on responsible sourcing and mitigating supply-chain risk helped us to identify what we believe are Michelin’s exemplary credentials as a best-in-class steward, from training over 100,000 rubber farmers annually on deforestation and biodiversity risks to actively managing the impact of rubber cultivation on biodiversity and local ecosystems. We support the company’s efforts in supply-chain management through proactive dialogue.

Microsoft is well recognised for the strength of its balance sheet and its ability to adapt and deliver, but through our engagement we identified its ambitious environmental goals as an equally important game changer over the long run. The company has set a target to not only be carbon neutral but also carbon negative by 2030 and has embedded carbon pricing into its procurement decisions in preparation for the energy transition. 

GSK has been incredibly responsive, transparent, and open to our engagement and through our research and dialogue we became increasingly confident about the outlook for GSK’s return on capital given its stronger balance sheet, more focused mix of businesses, improved capital allocation and promising drug pipeline. After five years under a new CEO, the company has made notable advances in R&D productivity, has exemplified robust employee engagement and has attracted and retained talent despite a remarkably challenging backdrop.

Why the Wellington Global Stewards Fund?

1 – Focusing on engagement

We believe it is our duty to actively engage with the companies in the portfolio. The goal of our stewardship activities — engaging with managements on ESG issues and voting proxies on your behalf — is to support or influence decisions that can maximise the value of companies.

2 – Actively investing in stakeholders

We like to define stewardship as investing in companies that prioritise people, the planet and profit. We believe the best stewards balance their impact on people, the planet and profits to build long-lasting advantage:

  • Companies lower their turnover, build loyalty, enhance culture and benefit from diversity when they invest in people, including employees, suppliers, customers and the community.
  • Companies positively impact the planet and build resilience when they reduce their environmental footprint, consider finite resources and engage proactively on climate change.
  • Companies boost profit when they have investment discipline — balancing shareholder returns today with investment in innovation, business and people for tomorrow.

3 – Long term and style agnostic

We observed that many “ESG funds” tend to have meaningful style biases. Our value proposition is to offer clients a high-quality, global, large-cap core allocation. We intend to hold companies for +10 years, resulting in a low turnover portfolio that is very much aligned with our long-term engagement initiatives.

The Wellington Global Stewards Fund is managed by Yolanda Courtines and Mark Mandel.

  • SFDR Article 91
  • AAA MSCI ESG rating
  • Five Morningstar Globes & Five Stars2

1 https://www.wellington.com/en-gb/intermediary/sustainability/sustainable-finance-disclosure-regulation

2©2022 Morningstar, Inc. All rights reserved. The information contained herein: (a) is proprietary to Morningstar and/or its content providers; (b) may not be copied or distributed; and (c) is not warranted to be accurate, complete, or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Rating as of 30 August 2022. Past performance does not predict future returns. Rating is based on USD S Acc Unhg. Ratings are not a recommendation.

The engagement case studies presented are for illustrative purposes only. The engagement case studies chosen are based on meetings held and focus on topics we think are important to stewardship, giving insight into our process. There can be no assurance we will continue to hold these companies and that they will be profitable in the future. The individual issuers listed should not be considered a recommendation to buy or sell. Please refer to the annual and semi-annual report for the full holdings.

Consider the risks
Investors should consider the risks that may impact their capital, before investing. The value of your investment may fluctuate from the time of the original investment. A decision to invest should consider all characteristics and objectives as described in the prospectus and KIID.

Risks
Capital: Investment markets are subject to economic, regulatory, market sentiment and political risks. All investors should consider the risks that may impact their capital, before investing. The value of your investment may become worth more or less than at the time of the original investment. The Fund may experience a high volatility from time to time. | Concentration: Concentration of investments within securities, sectors or industries, or geographical regions may impact performance. | Currency: The value of the Fund may be affected by changes in currency exchange rates. Unhedged currency risk may subject the Fund to significant volatility. | Emerging Markets: Emerging markets may be subject to custodial and political risks, and volatility. Investment in foreign currency entails exchange risks. | Equities: Investments may be volatile and may fluctuate according to market conditions, the performance of individual companies and that of the broader equity market. | Hedging: Any hedging strategy using derivatives may not achieve a perfect hedge. | Sustainability: An environmental, social or governance event or condition that, if it occurs, could cause an actual or potential material negative impact on the value of an investment.

Please refer to the prospectus and KIID for additional information on the risks associated with investing.

Our approach to sustainable investing

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