The portfolio of Triodos Global Equities Impact Fund is quite different from that of other impact funds in the same category, according to Husken. “Our distinctive feature is that we make real choices, applying a meticulous screening process. Does the company really fit with one of our transition themes, such as sustainable food & agriculture, renewable energy or the circular economy?”

Furthermore, companies must meet the minimum sustainable standards defined by Triodos. If they do not, they are excluded from investment. The list of criteria is long, ranging from the exclusion of companies linked to child labour, fossil fuels and other types of environmental pollution to remuneration structures for a company’s management. “Many companies are not eligible and that is reflected in our portfolio. For instance, in our portfolios you will not find any of the so-called FAANG-stocks (companies such as Facebook, Amazon and Apple), which are represented in and are important drivers for many other ESG funds. These companies do not really fit in with our transition themes, or do not meet the Triodos minimum standards.”

Most financial services providers also do not pass our screening process. “For banks, for instance, we check whether they genuinely operate in the real economy and provide credit to sectors that Triodos embraces. We apply stricter criteria than other asset managers. Banks must obtain a specific score on the scorecard defined by the Global Alliance for Banking on Values to qualify for investment. Currently there are virtually no listed banks that qualify.”

Impact investing requires a broad perspective

What Triodos Global Equities Impact Fund does invest in, are companies that make a contribution to the transition to a more sustainable world. “Selecting these companies goes a lot further than just checking the boxes for historical ESG data. We focus more on a company's intention, the direction of its policies and its behaviour. Historical data are not strong indicators for outperformance anyway. Only when a company actually starts to make improvements and to make a real contribution to sustainable trends, will this be reflected in the return and in impact that matters.”

Husken points out that during the selection process, multiple factors must be considered. “You can make your selection based on the carbon footprint of the company, but that does of course not tell the whole impact story. For instance, we own shares in a chemical company that manufactures activated carbon. During the production process a lot of CO2 is emitted. The carbon, however, is used for air and water purification. That is a positive impact that you need to take into consideration as an impact investor. Look at the whole picture.”

Husken is pleased to see that the investment sector is increasingly focusing on the impact of investments. Investors ask for this and the new European regulations (SFDR) also require asset manages to become more transparent about the negative impact of their investments. “It is encouraging to note that the standard practices that Triodos applies are now also being adopted elsewhere. But again, it is essential to not just build a portfolio that exclusively minimises CO2 emissions or only focuses on limiting negative impact. Equally, or even more important is how companies address all those other aspects of sustainable development and contribute to positive impact”

Attractive returns

Despite its strict selection criteria, Triodos Global Equities Impact Fund provided its investors with an average annual return of 9.6% over the past five years. In 2020, the fund generated a return of 7.4%. A large part of this return was due to the fact that the fund did not hold any fossil fuel-related stocks and financials - two of the worst performing sectors last year. 

Due to the strong performance of US (mainly growth) stocks in 2020, the fund’s underweight position in the US (20% of the fund's assets versus 60% of the benchmark) did have a negative impact on its return. “That underweight position is not a tactical choice, but is due to our selection of individual stocks, for which we consider impact and valuation. Our selection process simply turns up fewer US stocks. We see more upward potential elsewhere”, comments Husken.

Japanese companies are overrepresented in the portfolio, at almost 30% versus around 8% for the benchmark. “Attractive features of Japanese companies include their valuations, balance sheet quality and strong focus on sustainability. In terms of corporate governance, Japanese companies are also making a lot of progress.”

Market sentiment warrants caution

Husken remains cautious about 2021. He refers to the valuation levels on the sharply higher US equity markets and the significant increase in the participation rate of (inexperienced) private investors. “In the Netherlands, for instance, many younger people have started investing, sometimes even using their student loans. Investment gamification is a new trend. Market rumours alone can cause sharp share price movements. Fundamental equity analysis appears to have been forced into the back seat.”

In addition, the logistical costs for companies are rising. “Fuel has become more expensive, but certain segments of the global economy are also faced with a shortage of, for instance, containers and drivers. That shortage is one the lessons that was learned during the COVID-19 crisis: long supply routes make companies vulnerable. Those routes are now being shortened, made more local, but in the short term that shift causes capacity shortages on those new supply routes”, comments Husken.

A third reason for not going ‘risk-on’, is that the chances of the rising inflation scenario coming true have increased, says Husken. “Investors need to starting discounting this, certainly given the huge increase in liquidity in the markets. If all this cash is eventually spent and thus ends up in the real economy, inflation could shoot up more than expected.”