Institutional investors are increasingly looking to achieve impact in addition to financial returns. The UN Sustainable Development Goals (SDGs) provide a widely used framework for this purpose. However, translating the SDGs into a concrete investment strategy with the right companies can be challenging, as Rozing knows. ‘The SDGs offer a good start with useful guidelines, but as an investor you will have to make clear choices yourself about priorities and the ultimate application in an investment portfolio.’
As portfolio manager, Rozing knows better than anyone that it takes time and research to make an investment theme concrete. Child welfare was no exception. ‘After more than three years, we can now show a convincing track record. The inception year 2022 was challenging, but since then we have outperformed the benchmark. Starting this year, that benchmark is now a generic index: the Bloomberg Developed Markets Mid & Small Cap Index.’
Impact and return
Rozing emphasises that the investment approach must offer solid financial returns in addition to social and societal results. ‘Ultimately, a good long-term return is important for investors and therefore for the growth of the strategy. And with more invested capital, we can achieve more social impact.’
With assets under management now approaching EUR 100 million, the strategy is well on its way. ‘It is proving to be highly scalable and by no means a niche,’ says Rozing. ‘If you do your research properly, you will find plenty of companies that can really make a difference to children's welfare. For children now, but also for future generations, hence the strategy's name.’
Finding the right companies
'Since its inception, we have been working with UNICEF* to put child welfare on the agenda of investors and companies', explains Rozing. While the UN children's welfare organisation shares its extensive knowledge and experience in children's rights and welfare, Triodos Investment Management contributes its experience in impact investing. For investors who want to improve the lives of children, UNICEF has developed the Child-Lens Investing (CLI) framework, which provides guidance for an investment strategy.
‘Our Future Generations strategy is the first to apply this framework on a large scale’, says Rozing. ‘Together with UNICEF, we are currently looking at methods to measure the extent to which companies contribute to, for example, the number of children who receive a good education or have access to clean drinking water.’
When selecting companies, Rozing bases his decisions on five themes related to child welfare: healthcare and nutrition, good education, protection and safety, a healthy living environment and social inclusion. To be included in the portfolio, a company must demonstrably contribute to at least one of these five themes. This goes beyond bold statements in an annual report: there are strict requirements.
Clear contribution to child welfare
Rozing: ‘At least 33% of the turnover of the companies in which we invest must contribute to one of the themes. For the entire portfolio, at least 50% of the turnover must contribute, based on a weighted average. In addition, all companies must meet our strict sustainability criteria. So the bar is set quite high.’
Nevertheless, translating themes into investments results in a wide range of companies. For example, the strategy invests in childcare, which also demonstrably contributes to gender equality by enabling women to fully participate in the labour market and men to contribute to parenting. It also invests in companies active in water purification and clean air. Rozing: ‘You can't invest in child welfare without thinking about the planet. Without clean air, clean water and a healthy living environment, a child cannot grow up properly.’
Almost all SDGs directly or indirectly affect children and future generations, but SDG 4 – quality education – is explicitly dedicated to this. Education is therefore a key theme in the fund. One of Europe's largest providers of educational resources, Sanoma, is included in the portfolio. The company supplies schoolbooks, online platforms and management systems that directly contribute to the quality of education. Furthermore, the healthcare and consumer goods sectors are well represented in the strategy’s portfolio.
Not every investment is immediately recognisable as “child-oriented”, Rozing acknowledges. ‘An investment in water infrastructure sometimes raises questions. However, clean water is more important for children than for adults. If adults drink contaminated water, the consequences are unpleasant, but usually temporary. For a child, it can cause lasting damage.’ Rozing does not want the fund to become a copy of other impact funds. “We clearly stand out because child welfare is truly the common thread. We do not compromise on that unique character. This means that we can offer investors clear diversification benefits.”
The power of engagement
Engagement is another key part of the strategy. ‘We don't just invest to achieve tangible impact, we also want to bring about change within companies, encouraging them to see children as stakeholders. For example, by pointing out the importance of family-friendly work policies. That means taking good care of your employees so that they come home less stressed, but also, for example, arranging good childcare close to work.’
According to Rozing, family-friendly policies are also beneficial for the companies themselves. ‘A better connection with satisfied employees has a direct positive impact on results. And better career opportunities for women ultimately translate into more diverse organisations, which also has a positive impact on the workplace and business outcomes.’
When it comes to engagement, Rozing hopes for the support of large investors such as pension funds. "With their influence through active ownership, they could really make a difference.
A scalable strategy in small and mid-caps
According to Rozing, the Future Generations strategy is ideal for a pension portfolio, as the fund has a timeline of 60, 70 or even 80 years. ‘This fits in well with the long-term horizon of pension investors. We also have a genuine buy-and-hold strategy.’
Scalability is essential for institutional investors, who often invest large amounts. Rozing: ‘We have already had quite large tickets and we can certainly handle them. There are sufficient liquid investments in the portfolio and the universe is large. We have been able to put together a portfolio that has no pronounced sector tilts, performs well, has a low correlation with other investments and therefore also adds value from a diversification point of view.’
In addition, companies that fit well with themes such as education, health and a safe living environment offer a stable investment portfolio with defensive qualities that is less dependent on cyclical sectors.
The strategy focuses on small and mid-cap companies. Rozing: ‘It is precisely this category that has lagged behind large caps in recent years and is historically undervalued. For investors, this offers an opportunity to invest relatively cheaply in companies that, due to their smaller size, can often respond more quickly to changing circumstances and make a clear contribution to sustainable transitions.’
In addition, the trend towards lower interest rates will play into the hands of smaller companies. ‘For long-term investors, this could be a natural moment to slightly increase their exposure to small and mid-caps.’
* Neither UNICEF, nor its partner in Luxembourg, Comité luxembourgeois pour l’UNICEF, is acting as an investment adviser and neither of them has had or will have any role in the design, structuring, development, management or operation of Triodos Future Generations Fund. UNICEF, and the Comité luxembourgeois pour l’UNICEF, have not been and will not be involved in the management of Triodos Future Generations Fund, including its investments decisions. Neither UNICEF nor the Comité luxembourgeois pour l’UNICEF has endorsed Triodos IM, Triodos SICAV I, Triodos Future Generations Fund or any investment by the Fund. UNICEF and the Comité luxembourgeois pour l’UNICEF make no recommendation as to investment in Triodos Future Generations Fund.
The sole role of UNICEF, and the Comité luxembourgeois pour l’UNICEF, is to receive the donation from Triodos IM and apply such donation to UNICEF’s programmes for children. UNICEF and the Comité luxembourgeois pour l’UNICEF will have no liability to Triodos Future Generations Fund or investors in the Fund in relation to investments in the Fund, the performance of the Fund or otherwise in connection with the Fund. UNICEF is immune under international law from every form of legal process.