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The EdenTree Blog

Our blog aims to bring you the latest insights and reactive commentary from our fund managers, analysts and responsible investment team as we navigate unprecedented times in financial markets and for responsible and sustainable investors.

Heightened global food insecurity underscores the need for innovative solutions to improve the resilience of the agricultural sector, writes Thomas Fitzgerald

The UN Food and Agriculture Organisation’s (FAO) Food Outlook report has brought the issue of food insecurity into sharp relief. It expects the global import bill for food to reach a record high of $1.8 trillion in 2022, a $51 billion increase from 2021 levels. Prior to the war in Ukraine, global food prices were already climbing. However, the war has exacerbated ongoing supply issues and turbocharged food price inflation.

The UN has also warned that 7.7 million people will face severe hunger in the next three months and, furthermore, a food insecurity crisis could bring about destabilisation, mass migration and social unrest across countries. The UN has suggested five urgent steps that can help combat food insecurity, which are primarily centred on enhancing the resiliency and efficiency of our global food system. It is important to stress that while today’s challenges to the food system have been fanned by wider supply chain issues and Russia’s abhorrent war, they are set against a backdrop of a global agriculture sector that is highly vulnerable to a changing climate.

In our view, the current insecurity underscores the need to allocate capital to businesses whose products help improve resilience and lower the environmental impact of the food system. Examples include Bucher Industries, a diversified industrial group whose products help to minimise the impact of farming on the environment and to enable farmers to produce food and other products from nature as sustainably and efficiently as possible. Another is DSM, which seeks to make animal farming more sustainable while enhancing nutrition and health for all within planetary boundaries. Through its portfolio of animal nutrition products, the company aims to enable double-digit on-farm livestock emission reductions by 2030. Lastly, Valmont Industries is a leader in smart irrigation solutions for farmers, enabling crop producers to save water and energy through precision technology while enhancing yields. The company’s centre pivot irrigation systems save approximately four trillion gallons of water every year.

About the author: Tom Fitzgerald is Co-Fund Manager of the EdenTree Responsible and Sustainable Global Fund and the EdenTree Green Future Fund.

The views contained herein are not to be taken as advice or recommendation to buy or sell any investment or interest. The value of an investment and the income from it can fall as well as rise, you may not get back the amount originally invested. Past performance should not be seen as a guide to future performance. EdenTree is authorised and regulated by the Financial Conduct Authority and is a member of the Investment Association.

This Sunday (5 June) is World Environment Day. Started in 1973 and led by the United Nations Environment Programme the global platform consists of over 150 countries engaging with governments, businesses, civil society, schools, celebrities, cities and communities, raising awareness and celebrating environmental action.

2022 marks 50 years since the 1972 United Nations Conference on the Human Environment, regarded as the first international meeting on the environment. It is also a tipping point on our journey to a sustainable future.

Below Tom Fitzgerald, co-manager of the EdenTree Green Futures Fund, highlights three companies that are paving the way towards a better, brighter and more sustainable future. 

Alfen: Alfen operates at the heart of the energy transition, providing innovative solutions that enhance the power, efficiency, flexibility, reliability and the environmental footprint of the electricity grid of the future. The company is leveraging over 80 years of experience in electrical engineering to develop and distribute energy solutions for smart-grid, electric vehicle charging and energy storage end-markets in Europe. In 2020, the company estimated 1.4 million CO2e emissions were avoided by Alfen charge points that power electric vehicles, while 142,000 households were supplied with renewable energy through Alfen’s smart grid solutions. Alfen operates within a highly competitive and rapidly evolving market but differentiates itself from peers through its long-standing track record (>80 years) and uniquely integrated operational model. These strengths have enabled the firm to establish a ~70% market share in grid solutions and 30% market share in EV charging within its domestic market, providing scale, data insight and intellectual property, which we believe the firm can leverage to expand into adjacent markets internationally.

Advanced Drainage Systems: ADS is a leading manufacturer of high performance thermoplastic pipe and associated components, providing innovative solutions to some of the world’s most pressing water management challenges. The company is also the 2nd largest recycler of plastic in North America, purchasing and processing approximately 550 million pounds of recycled plastic every year, keeping it out of landfill and preventing over 670 million pounds of GHG emissions from being released into the atmosphere. This is equivalent to removing 70,000 internal combustion engine-powered passenger vehicles off the road. As a dominant market leader, with significant scale advantages relative to its nearest competitor, we believe that the company is well positioned to benefit from the rising demand for climate adaption solutions and the long-term shift in the wastewater industry away from traditional, economically and environmentally inferior resources such as concrete and steel (which still represents approximately 60% of the industry).

Veolia Environnement: Veolia is a global leader in resource management, with operations spanning each major global region and a dominant position in European markets. The Group designs and provides water, waste and energy management solutions that contribute to the sustainable development of communities and industries. In 2020, the group supplied 95 million people with drinking water and 62 million people with wastewater service. The company also produced approximately 43 million megawatt hours of energy and provided 40 million people with waste collection services, treating 47 million metric tons of waste. With a strong global presence, deep domain expertise within its core markets, we believe that Veolia is well-positioned to benefit from the continued proliferation of circular economy solutions.

The views contained herein are not to be taken as advice or recommendation to buy or sell any investment or interest. The value of an investment and the income from it can fall as well as rise, you may not get back the amount originally invested. Past performance should not be seen as a guide to future performance. EdenTree is authorised and regulated by the Financial Conduct Authority and is a member of the Investment Association. Firm Reference Number 527473.

 

On April 4th 2022, the Intergovernmental Panel on Climate Change (IPCC) published its latest report titled “Climate Change 2022: Mitigation of Climate Change”, which is the third and final section of the IPCC’s 6th comprehensive assessment of climate science. IPCC’s assessments take about seven years to compile, making this potentially the last warning with a plan of action before the world is set irrevocably on a path to climate breakdown. And while the report found it was now “almost inevitable” that temperatures would rise above 1.5°C, encouragingly it may be possible to bring them back down below the critical level by the end of this century. Here are our key takeaways from the report:

1) Now or Never: The report emphasises the urgent need to limit planetary warming to 1.5°C above pre-industrial temperatures. Achieving the goal would require having emissions peak by 2025, reducing them by 43% by 2030 and reaching net zero by 2050. In order to achieve these thresholds, the global economy would need to use approximately 95% less coal, 60% less oil, and 45% less gas by 2050, electricity grids powered by renewable energy sources would need to meet much more of the world's energy needs and cities would need to improve energy efficiency through better building strategies to reduce urban emissions.

2) Emissions Are on the Rise but Rate of Increase is Slowing: In 2019, global net anthropogenic GHG emissions were at 59 GtCO2e, 54% higher than in 1990. This emissions growth has been driven mainly by CO2 emissions from the burning of fossil fuels and the industrial sector, as well as methane emissions. However, the average annual rate of growth slowed to 1.3% per year in the period 2010-19, compared to 2.1% per year in the period 2000-09.

3) Current Trajectory and Commitments are Insufficient: The report highlights how current emissions trajectories, if unchanged, put the planet on a path to warm by about 3.2°C. And even if current national climate commitments are enacted, they still would fail to limit warming to 1.5°C, instead putting the world on track for at least 2.2°C if not more, according to the report.

4) Global Capital Persistently Misallocated: The report criticises the pace of investor progress on aligning investments with low emission pathways and describes a “persistent misallocation of global capital”, driven by policy misalignment and the perceived risk-return profile of fossil fuel investments. The report finds that financial flows are currently three to six times lower than the level needed by 2030 to limit global warming to below 2C. According to IPCC, there is a systemic under-pricing of climate risk in financial system.

5) Long-Term Benefits of Cutting Emissions Today Outweigh Costs: Containing warming to 2C would require actions that limit global economic growth by 1.3% to 2.7% by 2050, the report says. However, that loss would likely be outweighed by the overall economic benefit of limiting warming.

6) Unlocking Climate Solutions: As per the report, confronting the climate crisis requires a complete transformation of global energy sources, economic models and land stewardship. Decades ago, we may have been able to reduce fossil fuel emissions or implement natural climate solutions to stabilise the climate but now, we must rapidly decarbonise our economies and unlock natural climate solutions. On a positive note, the report highlights the decreasing costs of low emissions technologies in the last decade. Compared to 2010, solar energy is now 85% cheaper, wind is 55% cheaper, while lithium-ion batteries used in electric vehicles are 85% cheaper. The report states that several mitigation options, notably solar energy, wind energy, electrification of urban systems, urban green infrastructure, energy efficiency, improved forest, as well as crop and grassland management and reduced food waste and loss, are technically viable, are becoming increasingly cost effective and are generally supported by the public.

Overall, climate change is disrupting more than simply our natural capital. It is also re-shaping the way in which global society will operate for the next century and beyond. In response, the private sector, governments, central banks and non-profit organisations are racing to find ways to limit the environmental consequences of a warming planet. Consequently, we believe that we are on the cusp of the fastest, deepest and most profound disruptions to the global economy in over a century. We refer to this transformative inflection point as the ‘Green Revolution.’ Within this context, we believe that the outlook for the Green Future Fund remains constructive. Our core belief is that the true value of the planet’s natural capital is inappropriately priced within traditional market conventions, leading to the widespread abuse of natural resources and excessive pollution. As society becomes increasingly aligned with the protection of our natural capital, we believe that those business models that are designed to increase the resource efficiency of the global economy (both in the solutions they provide and the operations they oversee) will be able to deliver greater levels of demand and higher returns on capital over the long-term.

 

 

EdenTree Investment Management Limited (EdenTree) Reg. No. 2519319. Registered in England at Benefact House, 2000, Pioneer Avenue, Gloucester Business Park, Brockworth, Gloucester, GL3 4AW, United Kingdom. EdenTree is authorised and regulated by the Financial Conduct Authority and is a member of the Investment Association. Firm Reference Number 527473.

"Global markets have endured a torrid start to 2022 with severe macro and geopolitical headwinds. Investors face a challenging landscape with a pandemic showing little sign of respite, surging inflation leading to changes in monetary policy, the war in Europe and a Brexit divorce that is still not finalised. The ability to navigate such turbulence is built on constructing portfolios that are resilient, ones that can deliver in the long-term, regardless of the macro and geo-political noise.

UK markets – value and defensive

The UK has not escaped the recent maelstrom with only the FTSE 100 managing to hold its head above water. This in large part is due to the rotation from growth names to more cyclical sectors. The rise in the oil price, which is now heading towards $100 has led to both UK oil majors, BP and Shell delivering a 20% return over the same period. The other defensive sectors, which have enjoyed outperformance, include Mining and Tobacco and winners at a stock level include Anglo American, Rio Tinto, BHP, Glencore, British American Tobacco and Imperial Brands.

ESG Headwinds – challenges and opportunities

The markets have been especially challenging for ESG investors, who are facing a near perfect storm of headwinds, where the sectors they generally avoid are outperforming due to macro and geo-political tensions. The dominance of small and mid-cap companies in most ESG portfolios has been another source of underperformance, with mainstream investors moving into more value and cyclical names. This in turn has led to several high quality businesses with excellent ESG credentials being sold off aggressively, providing an attractive opportunity for ESG investors to add to existing positions or start new ones. Examples include Dechra Pharmaceuticals, Ashtead, Halma and Genus, all of which have been compounders, delivering high quality earnings growth over a long period.

Resilient Portfolios – quality lens

Investors have little or no influence on macroeconomic or geo-political events and need to focus on building resilient portfolios, which in the long-term deliver superior risk adjusted returns. Whilst certain segments of the market may not be available for ESG investors and may lead to near term relative underperformance, there are large areas of the market that are available to investors who have a long-term quality approach to both stock picking and portfolio construction. For example, financials, industrials and healthcare.

Within healthcare, investors have a diverse choice from animal health, biotechnology, pharmaceuticals, diagnostics and medical technology. The change in monetary policy favours financials with rises in interest rates helping the bottom line for both banks and insurance companies. In the industrial space, those high-end engineering companies providing mission critical products and services operating in lucrative end markets are well placed to emerge strongly from the pandemic. In short, ESG long-term investors have seen off these periodic headwinds in the past and a quality lens when selecting companies and constructing portfolios is crucial in delivering superior risk adjusted returns."

 

 

The views contained herein are not to be taken as advice or recommendation to buy or sell any investment or interest. The value of an investment and the income from it can fall as well as rise, you may not get back the amount originally invested. Past performance should not be seen as a guide to future performance. EdenTree is authorised and regulated by the Financial Conduct Authority and is a member of the Investment Association. Firm Reference Number 527473.

"A strong recovery in global demand over the past year looks set to be sustained by fiscal stimulus initiatives, while companies are increasing or re-introducing investment plans which have been encouraged by pandemic supply-chain bottlenecks.

Certain stocks and sectors look vulnerable to the risk of rapid repricing of bond yields. Valuation uplift and low rates have played a key role in the spectacular returns of many growth stocks and extremely elevated valuations are concentrated in some ‘growth’ segments of the market, which are more sensitive to rising rates."

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