Daniel Lurch, portfolio manager of the Luxembourg-based JSS Sustainable Equity Green Planet fund at J. Safra Sarasin, thinks that “protecting nature makes sense” because our economies rely on a thriving ecosystem. He noted that this is true for sectors such as agriculture, tourism, insurance and the financial industry, which are “heavily dependent” on a natural environment that functions well.
“We want to invest into solutions that protect air (coal alternatives, carbon capture), water (efficiency use, treatment, recycling) and soil (smart agriculture, circular economy),” said Lurch, speaking at an investor presentation in April.
Source of the recent success
Martin Fenner, managing director, head wholesale at JSS, thinks that the outperformance of the fund in the last three years came from a diversified exposure to “green transition mega trends.” The main contributors--Clean Harbors, Republic Services, Stantec and Veolia Environnement--were “less cyclical” and “defensive industrial companies” operating in water treatment and waste management, which performed well irrespective of the market gyrations, he told Delano during a recent interview.
Despite its green credentials, Fenner admitted that it was not all green shoots in financial terms for the sector. He noted that solar panel and windmill engine manufacturers have suffered quite a bit on the back of short-selling activities by the hedge fund industry.
Lurch pointed out that that they made the “conscious decision” to avoid clean energy providers, a prescient call given the “disastrous trade” in the last years. In fact, Fenner noted that semiconductor businesses got a greater allocation than cleantech companies in 2023.
Structural factors to underpin green investments
Lurch takes comfort that the green transition will continue on the back of strong societal support reflected by political will, public demand for clean solutions and a green agenda driven by regulations and fiscal stimulus. Second, he noted that green solutions are becoming more affordable, a development that was not visible 5-10 years ago. As a result, a much larger “addressable market” enables firms to achieve greater economy of scale. Finally, he observed a trend in Europe and the US “to control key clean technologies through reshoring.”
A balanced strategy
Fenner specified that the overall strategy is split into two large buckets:
1) investment in “green winners,” which are large cap and well-established companies that provide products and solutions to help the economy to become greener;
2) the other 30%-40% exposure is in profitable small and mid-cap companies. Lurch explained that the fund has also small holdings in early-stage companies such as Carbios, a biorecycling company offering, “if it works, exceptional technologies.”
It is not only about data but also about staying ahead of the curve in terms of new ESG regulations and implementing them across the firm and across our strategies
Fenner explained that the latter companies tend to be disrupters in the value chain, with breakthrough technologies that provide solutions to the green winners and typically have higher growth rate potential.
Challenges managing an article 9 fund
“A9 needs to have a specific sustainability objective,” Fenner said of SFDR article 9 funds. In the case of the green planet fund, JSS set the minimum level of green revenues at 30% for the companies in the fund. He reported that 60% of the revenues in the portfolio are considered “green,” a level that is two and a half times higher than the MSCI World, according to Fenner.
Fenner explained that the green revenue criteria will often be a decisive factor when deciding about investing into a company. Yet he considers data as a key challenge, as it needs to demonstrate that these green revenues are truly generated while achieving attractive financial returns.
In addition to using the data from its external provider Vigeo Eiris, a team of 12 ESG analysts support the portfolio managers with qualitative analysis, ensuring that no significant harm occurs when achieving SFDR minimum requirements. “It is not only about data but also about staying ahead of the curve in terms of new ESG regulations and implementing them across the firm and across our strategies,” said Lurch.
J. Safra Sarasin runs five thematic strategies implemented in as many funds: green planet, disruptive technologies, future health, sustainable development goals and the climate 2035.
This article was published for the Delano Finance newsletter, the weekly source for financial news in Luxembourg. .