Triodos Global Equities Impact Fund invests globally in large companies, large caps, that genuinely contribute to positive change. The ultimate goal is the transition to a sustainable and prosperous society. The fund achieves this with a concentrated portfolio of 50 to 70 companies, from an investment universe of around 220 companies that offer positive impact as well as financial returns.
Palthe: "For a global fund, this universe is admittedly not very big. But with 50 to 70 stocks, you can build a well-diversified portfolio. One advantage of a limited universe is that we know all the companies inside out. We also aim to meet periodically with management, and that doesn't work when you have hundreds of companies to visit."
Triodos Global Equities Impact Fund invests according to seven Triodos transition themes. Prosperous & Healthy People and Innovation for Sustainability are important themes for us, while certain others are more challenging to address, according to Palthe. “Investing in large caps requires its own vision on impact. These are big companies that have often already 'arrived'. This means you miss out on the more specialised, sustainable pioneers. Large caps, however, have huge impact because of their size, as well as by setting an example in their sector."
Equity selection starts with positive impact
Many asset managers start their equity selection with financial criteria or by excluding sectors or companies. "We take a different approach," says Marugg. "First, we look at the positive impact of a company, and assess how it contributes to solving the big social and environmental issues of our time. By looking with a positive lens first, companies with no sustainable vision or with a net negative contribution are immediately excluded. Then we look further: what services and goods does a company provide? Is sustainability an integral part of the business model? You try to analyse the impact as broadly as possible. Things are not always clear-cut and cannot be captured by data alone.”
Companies must then meet the minimum ESG requirements, as set by Triodos Investment Management in its strict Minimum Standards. This leads to further companies being excluded.
According to Marugg, balancing positive and negative impact is not a calculation of positive minus negative. "We analyse any negative impact on a case-by-case basis to see if it meets our Minimum Standards. Any connection to arms production for example, even for a tiny proportion of revenue, is not acceptable. After the invasion of Ukraine, things started to shift slightly in the investment sector, but for us, arms financing is never up for discussion. With weapons, you can never guarantee that they won't end up in the wrong hands."
Marugg: "Finally, we look at the valuation of a share, based on revenue and expected profits, but we also translate ESG considerations into a financial value. In this framework, a share worth EUR 10 on the stock exchange can be worth much more thanks to positive sustainable factors."
A constant improvement of the ecological footprint
To measure impact, the fund looks at products or services, as well as a company's carbon footprint: water, waste and carbon emissions. Palthe: "We are committed to continuously improving the footprint in our portfolio, and this year is no exception."
To illustrate, Palthe points to paper manufacturer Smurfit Kappa. Cardboard is an important substitute for plastic. Palthe: "However, cardboard production also consumes energy, and you cannot recycle cardboard more than seven times. So we also look at how it is produced."
Impact is sometimes hard to quantify. Palthe: "It is very important to us not to focus on ESG scores based on historical data alone, but to look beyond them. There are low correlations between data providers. That's why we supplement this data with our internal research."
Measuring social impact is a challenge in itself. What percentage of revenue contributes to social causes such as education or reducing social inequality? Marugg: “Anticonception and childcare services are examples of measurable products and services that reduce gender inequality.”
Outlook for the rest of the year
Global equity markets are positive despite higher interest rates on account of stubborn inflation. Many investors expect a recession in Europe. Palthe: "However, we think this expectation is already factored into current share price levels. Moreover, large caps typically have more opportunities to pass on increased costs to customers than smaller companies."
Interest rates have risen sharply, which is usually negative for equities. In terms of profit development, however, things are looking good, argues Palthe. "Previously, companies mainly issued downgrades, but now you see analysts revising their profit expectations upwards again. The fund's return last year was minus 15%, and we are now at plus 10% for the first five months of this year."
Finally, a current trend is the meteoric growth of artificial intelligence. Which sectors will be most affected by the rise of artificial intelligence? This is also a relevant question for sustainable investors, Marugg argues. "We examine the impact: the opportunities but also the possible negative consequences, for example for employment. Even though this is invisible to the user, the training and use of AI models requires enormous amounts of electricity and water for cooling of datacentres. Aside from the ethical aspects, also the impact on the climate must be taken into consideration."