INVESTMENT PROFILE: Edinburgh-based Stewart Global Investors has some firm guidelines for their investment process. In this profile by Kate Burgess they share some of their insights plus six of their favourite property technology solutions that will contribute to net zero targets in buildings.
Any fund manager worth their salt has an ESG strategy these days. But few have been investing sustainably since their inception.
Edinburgh-based Stewart Global Investors was somewhat of an anomaly when it began investing in emerging Asia-Pacific markets in 1988. Back then, it was uncommon for European investors to look so far eastwards.
From the beginning, the fund manager has selected companies via a bottom-up approach that transcends stock universes and indices. It looks for companies that will positively contribute to sustainable development in the markets they serve. Portfolio managers carefully screen company management to ensure they demonstrate good stewardship.
“We have always been interested in integrity and trustworthiness of companies we invested in, Sydney-based investment specialist Pablo Berrutti told The Fifth Estate in an interview.
In the 1990s, the manager experimented with an India-focused fund, before moving closer to home in Europe. In 2005 it launched a sustainable development fund, focused on companies that have products and services designed to make the world a better place.
Picking the best shells
Rather than invest according to themes or macro trends, the manager uses a “boots on the ground approach” to build knowledge of local markets, sectors, companies and management.
“It’s very much an inclusive as opposed to an exclusive process to select investments. Rather than try to whittle a universe down, we work with a blank sheet of paper and work upwards,” Berrutti said.
He likened the investment selection process to scanning for shells on a beach. “We don’t try to pick up all of the shells, we focus on the ones that are the best quality.”
Today, the manager is exclusively focused on sustainable development equities, and maintains a focus list of around 300 companies globally, that can be viewed on its Portfolio Explorer. All investments are aligned with the 17 UN Sustainable Development Goals.
Within that, it is always on the lookout for value. “We want to pay a reasonable price for the companies we invest in – if they get too expensive, we might sell out of them,” Berrutti said. A disappointing earnings report or share price fall might provide an opportunity for a countercyclical buy.
Many of the 300 companies are middle market plays who provide services to the major sectors of the economy. Berrutti characterises them as “pick and shovel companies” who provide an essential service or components to an end product, and have a unique technology, process or specialisation.
Stewart’s sustainable six
Stewart Investors does not target Real Estate Investment Trusts or hold direct property but gains an exposure to the built environment through providers of novel technologies that make buildings more efficient.
- Graco and Nordson are producers of liquid dispensing technologies which operate like spray paint. The product is used to stick solar panels and batteries together, and to sprays insulation into buildings or industrial-sized refrigerators and coolrooms. “Using the liquid to stick solar panels together makes them more efficient,” Berrutti said.
- Spriax Sarco is a manufacturer of steam systems that are used in building heating and by pharmaceutical and food and beverage companies for sterilisation of products at high temperatures. “The company has developed an electric furnace to replace gas boilers so they are going to play an essential role in retrofitting buildings with electric heating,” Berrutti said.
- Glodon is a provider of construction management software in China. It has developed a platform that can measure embodied carbon in materials and plot a course for materials use during a construction project to minimise waste. Their software can also be used to efficiently manage HVAC systems within buildings once they are operational.
- Belimo provides actuators, which are air and water valves used in building HVAC systems. The company also makes sensors to measure indoor air quality, temperatures, humidity, volatile organic compounds and CO2.
- Inficon manufactures gas detection equipment in refrigerant and other building systems, helping to reduce and prevent leaks and the greenhouse gas emissions associated with this.
- Watsgo is a distributor of airconditioning, heating and refrigeration equipment in the US. “A large part of the business involves retrofitting older systems with heat pump technologies, and so they are benefitting from subsidies under the Inflation Reduction Act,” Berrutti said.
To engage, or not to engage?
Like most ESG-conscious fund managers, Stewart is prepared to roll up its sleeves and engage with company boards where it sees potential to improve practices to meet more sustainable and ethical outcomes.
Current areas of interest are helping portfolio companies understand their exposure to climate risk and to set emissions targets, and helping electronics manufacturers build conflict minerals strategies.
Before engaging with a company, the manager queries whether a company is able to change without derailing its core business. If it is able to change, the question becomes “is the board willing to change? If yes, that’s an open door you can use to engage with them,” Berrutti said.
If the company is not willing to change, the manager will focus on ways it can force upheaval, such as voting against certain company directors.
“But if you can’t vote against directors and the like, what is the point of your engagement? You’re probably not worth staying invested in the company.”
The manager’s investors have become a lot more pro-engagement over the past five years, and are now highly engaged on issues like the carbon footprint of portfolio companies, and the possibility of divesting if the manager is not able to persuade a portfolio company to shift direction. “We have a very engaged client base,” Berrutti said.
The manager has begun producing reports aligned with the Taskforce on Climate-Related Disclosures (TCFD) and welcomes the opportunity for companies to make more upfront disclosures on climate risk, carbon emissions, and social issues like employee safety and diversity.
However, Berruti said the TCFD is heavily focused on scenario analysis which he describes as “unhelpful” and not much of an improvement on previous frameworks like the Carbon Disclosure Project. “It’s forward looking, very subjective with huge assumptions baked into it – it’s a rubbery exercise as a disclosure tool.”
He would also like the TCFD to be expanded to incorporate other sustainability issues, so companies do not singularly focus on emissions reduction at the expense of other important matters such as biodiversity.