How sustainable innovation is tackling climate change and securing our economic future
The strategy of TT Global Environmental Impact Fund was created to provide opportunities for investors to not just support carbon reduction but fund the innovations that will help make the world a better place for future generations. Co-portfolio manager Harry Thomas took a moment to answer key questions about the fund and the opportunities for your clients.
Where did the idea for the fund come from?
The TT Global Environmental Impact strategy began as a personal passion in the summer of 2019 when I was looking to invest for my children. I wanted to invest in an environmental solutions strategy, however the offerings were quite poor when looking around at the available funds. The funds were focused on low carbon rather than biodiversity and other environmental challenges. Thinking beyond carbon is vitally important to securing not just the economic future of our children but also helping to ensure they inherit a thriving planet. So we founded a global environmental impact strategy to tackle climate change and biodiversity, problems that we think are mutually reinforcing.
What’s the purpose of the fund?
The TT Global Environmental Impact Fund has three main objectives. The first is to generate strong long-term returns for investors. The fund’s position sizes are actively – and aggressively – managed. Second, we want to drive capital to companies that are delivering the green transition. Companies with a single-minded focus on creating products that solve environmental challenges. And finally, it’s impact. We give a third of our management fees to environmental charities and our goal is to be one of the biggest private donors in the UK to environmental issues.
Where are the opportunities for environmental impact?
Serious issues face humanity around the globe such as troubling biodiversity. Ocean fish populations have halved since 1970 and the global extinction rate is 10,000 times higher than the natural extinction rate. This is due in no small part to ecological changes. Over the last century, the planet has lost 70% of its wetlands. The deforestation of the Amazon rainforest – the home to 10% of the known species in the world – continues to pressure global systems. Natural prairies in North America have been converted to farmland or suburbs, removing native plants and animals. Higher global temperatures have put pressure on key global systems including the Amazon rainforest and melted Arctic sea ice. These changes have flow-on effects that have created radical changes in rainfall distribution. Although the reality is confronting, there’s a great deal that can be done to address global climate change by driving capital to the companies that are delivering the green transition and protecting against ecosystem destruction.
What makes the fund different from other ESG-focused investments?
While the TT Global Environmental Impact Fund strategy isn’t the first to consider sustainable innovation, there are some key points of differentiation that make it a unique offering for investors.
The portfolio is diversified across seven themes, largely focused on energy transition, biodiversity and climate change solutions. While our analysts specialise in different aspects of the strategy, such as emerging markets, there’s an enormous degree of synergy that allows everyone to collaborate.
The themes are:
Forestry and agriculture
Recycling and circular economy
Electrification, energy and industrial efficiency.
It’s important to recognise every step in a company’s value chain and address all aspects of it. For example, we ask about company exposures to significant harmful activities, like coal, plastics and the internal combustion engine. Our requirements are strict. A company that’s powered 85% by wind and 15% by gas is a failure for us. The fund also considers social governance in line with the United Nations Global Compact (UNGC). There doesn’t tend to be a lot of overlap with our holdings and those held by competing funds. This is because the TT Global Environmental Impact Fund is focused on finding and holding opportunities that other funds overlook. We have a very high standard for environmental inclusion because capital is scarce. We desperately want to direct investor capital to companies that have a big environmental impact.
Can you summarise the fund’s investment process?
All TT environmental strategies follow a top-down, bottom-up process. We think about three layers.
Firstly, we examine the environmental trends, which we think of as consumer, technology, regulatory and climate. Here we’re trying to identify the technologies that are outcompeting the others, taking a greater share of research dollars, scaling faster or offer better solutions. Secondly, we work at a macro-economic level, particularly around growth, stimulus and rates. Finally, we look at the market and consider risk exposure and cross asset considerations.
Each week, these three layers frame the research agenda for our analysts, making sure that their time is spent on the areas of the portfolio that we're most excited about. We use a process called ESG VVC, which stands for valuation, verification and catalyst. The valuation and catalyst elements are especially critical. They’re how we differentiate ourselves from other funds. Because of our strong valuation focus, we’re not going to hold good companies beyond fair value. We’ll aggressively reduce their exposure.
We believe there’s a strong difference between a good company and a good portfolio holding. That’s why we’re looking for catalysts – reasons why a share, which hasn’t caught the market’s attention so far, is going to capture the market’s attention in the future.
As a high-conviction manager, holding about 40 stocks, we spend time evaluating factor exposure when structuring the portfolio. We are aware that our investment universe, while offering growth, comes at high multiples. Our investment universe often has volatility that’s like small cap markets.
In summary, we smooth returns by investing across a broader range of environmental themes than our peers. This is combined with our very strong valuation discipline that makes it less likely that we’ll be stuck with expensive companies.
What’s the investment outlook for sustainable innovation?
Energy efficiency and renewable energy will be a key priority over the next five years. It’s a theme further expedited by global supply chain disruptions and Russia’s invasion of Ukraine. Renewables are the key beneficiary of the accelerated green energy transition. There are second and third order effects for companies in this space. The transition is going to come in many forms, including retrofitting buildings to incorporate renewables. There’s enormous growth in hydrogen energy and at-scale battery storage to supply the global electricity grid. Although there’s volatility around the global energy transition, the companies we are involved with provide critical energy infrastructure and are a vital part of the future of energy, both in established and emerging markets.
Looking at other themes, we’re seeing expanding valuations in recycling goods that weren’t previously recycled – like clothing, novel proteins – such as lab-based or vegan proteins and electric vehicle brands. We’re remaining active, seeking opportunities that’ll make a difference to the future – not just for investors but for the planet as well.
Environmental solutions offer long-term outperformance
Environmental solutions represent arguably the biggest alpha generation opportunity of the next two decades. The goal of the TT Global Environmental Impact Fund is to provide investors with exposure across high-impact themes, making it easy for clients to access this growing area of opportunity.