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For today’s soundbites, we talk about environmental, social, and governance investing with Tim Woodhouse, portfolio manager with J.P. Morgan Asset Management’s Global Sustainable Equities Fund. We asked him what regions he’s looking at and what companies he likes for sustainable investing.

Tim Woodhouse (TW): We focus a lot on the quality of the business. And really, ESG is a critical building block for understanding that. We believe the combination of a durable business and a strong, sustainable leader creates a truly sustainable business model for the long run. And it’s only when we’re confident that we can underwrite a company as having both of those qualities, that we own the stock.

So, really one of our biggest holdings and it has been for a long time is a company called Schneider Electric [Schneider Electric France, based in Villeneuve-d’Ascq, France]. It’s a French company. Firstly, its business model is inherently sustainable. They’re a global manufacturer of energy management, industrial automation, parts and systems. And they’re all about helping other companies meet their sustainability targets. You can see this on the operational side too. They have a AAA rating by MSCI [MSCI Global Sustainability Indexes]. They have very strong governance practices. And, importantly, all employees and executives have part of their variable compensation based on ESG targets.

Another European company which we’re very excited about is a company called DSM [Koninklijke DSM N.V., based in Heerlen, Netherlands]. This is a Dutch life sciences company that makes nutritional products and performance materials. Nutrition is a core business. It’s two-thirds of revenue. And on the animal nutrition side, there are some really exciting initiatives actually around some of the ways to reduce emissions. One great example, which they originally termed “Project Clean Cow” is a feedstock for cows which reduces the methane emissions by up to 90%. The reduction of methane is going to be an incredibly important challenge. Simply telling people don’t eat beef is not really addressing the whole problem, and I don’t think you’re going to persuade a lot of people to do that. So, by reducing the emissions involved in producing beef, that’s going to be a very important step.

Then I’ll give you Walmex [Walmart de México y Centroamérica, also known as Walmex, is the Mexican and Central American Walmart division]. So, this is the Walmart of Mexico. And this is an example on the social side, actually, and it’s something during the pandemic we were very impressed with. So, within all of their stores they have people helping with bagging the groceries. Pre-pandemic those people weren’t actually employees. They worked for tips. I think they felt, whatever the risk to themselves from Covid, they had to go in. What Walmex did was they paid those people a salary and they sent them home. They felt that was the responsible thing to do to protect them from the virus, and really made everyone within the store much more comfortable, just by reducing the number of people that were there.

And the final one I’ll give you is HDFC [HDFC Bank Limited, headquartered in Mumbai, Maharashtra, India] which is the largest private Indian bank. So, they’ve been lending to consumers that otherwise had no access to finance for years. But they do so in a very sustainable way. They put small branches in towns all around India. They put advisors there who actually get to know their customers, and then they give them the opportunity to own their own home, or to build a business. So, by positioning themselves close to those that they are lending to, they can ensure that they lend the appropriate amount, and they ultimately protect the consumers from taking on too much debt. So, it’s a very sustainable way of lending and really expanding access to financial products for those that never had access to them before.

What regions are promising from a sustainability perspective?

TW: From a sustainability perspective, it’s interesting for us when we look around the world to see the different focuses in some ways in different regions. Europe is clearly leading on ESG overall, and that certainly started with the focus on the environment a couple decades ago. The U.S., I would say, is making real progress. We have a lot more conversations with companies now around every aspect of sustainability. There’s still an awful long way to go, but it’s been encouraging to see the number of companies really starting to step up in a major way there. On the other side of things though, Japan is a region that we really continue to avoid. There are some very high-quality businesses in Japan, but you pay a premium for them because there is a bit of a scarcity in Japan. Local investors have congregated in them, and it has driven valuations up. And that’s consistently the problem we find in in Japan. And so right now while we continue to look for ideas, we remain underweight Japan.

And finally, what’s the bottom line when it comes to picking equities for sustainability?

TW: We firmly believe there is no trade off between returns and sustainability. You can absolutely have the same return as in a non-sustainable fund but in a way that really drives a better future.

Well, those are today’s Soundbites, brought to you by Investment Executive, and powered by Canada Life. Our thanks again to Tim Woodhouse of J.P. Morgan Asset Management.

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