A change of climate in the boardroom

From 12 foot deep snow drifts in spring to melting roads and wildfires in summer, extreme weather is becoming the new normal. At what point does the unexpected become the expected?

While the theory of global warming has been around for many years, making a direct link between individual extreme weather events and climate change has been difficult. Climate researchers, however, are now explicitly stating that some weather events could never have occurred without the warming influence of human-induced greenhouse gas emissions.

Companies and investors are taking notice. In 2017, 15% of S&P 500 companies publicly disclosed an effect on earnings from weather-related events. 4% of them quantified that effect, resulting in an average materiality on earnings of 6%.

Over the past decade the terms “climate” and “weather” were among the most frequently used words in the transcripts of the quarterly earnings calls of S&P 500 companies, beating “oil,” “the dollar,” “recession,” and even “Trump”.

As ever, there are winners and losers at a company level. While British wines were once laughed at, they are set for a vintage year in 2018. But not all companies are raising a glass:

  • Stora Enso, the Scandinavian paper company, reported lower than expected profits this month, warning that forest fires in Scandinavia will cause raw material disruptions as a result of the tight Nordic timber supply
  • Ryanair reported that recent bookings have been impacted by warm Northern European weather. Why go to Tenerife when you can go to the Lake District?
  • Rank Group issued a profit warning in April, blaming poor weather for reduced visits at its Mecca bingo halls
  • Greggs issued a profit warning at its AGM in May, following the period of extreme cold weather in the UK. We expect the recent spell of hot weather in the UK to get a mention in their next announcement

Disclosing the impact of extreme weather in company announcements is one thing, but many companies are also taking action around climate change. Industries such as logistics and transportation rely on weather and climate data to stay on schedule and reduce risks. UPS even has its own meteorology department, which helps it to prepare for major weather events. Do more companies need to adapt to keep things moving?

We expect more companies to be discussing climate change at the highest level. For sustainable investors, that should be warmly welcomed.

About the author

Georgina Laird is a sustainable investment analyst. She is responsible for analysing and monitoring environmental, social and governance factors within the Global Sustainable Equity Strategy. Georgina joined us in 2015 from Russell Investments where she was an index analyst. She joined Kames as a performance analyst before moving to the ESG Research team in 2016. Georgina has a BSc in Mathematics from Heriot-Watt University in Edinburgh. She has the IMC professional qualification and has 6 years’ industry experience (as at 30 June 2018).

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Chocolate’s Dark Secrets

Chocolate is one of our favourite foods but cocoa farming comes with significant challenges. Primarily grown in Asia, Latin America and Africa, cocoa is a delicate crop which thrives in tropical climates. Unlike many other crops, which are benefitting from modern crop management techniques, thus enabling lower costs, higher yields and increased scale, 90% of the world’s cocoa is grown on small family farms, which rarely reap the benefits of the profitable global cocoa trade (cocoa farmers get just ≈6% from the sale of an average chocolate bar, down from 16% in 1980).

And the average age of cocoa farmers is steadily increasing. Younger generations don’t see a future in growing cocoa due to the complex farming process and low returns. Between this, illegal deforestation for growing ‘dirty beans’, and rising temperatures affecting yield, we might actually run out of chocolate. Not that it’s about us….

Sweet Success

(beware, the following statements may cause you to be able to eat chocolate and actually feel good about yourself…!)

Hotel Chocolat has defied high street woes with rapid store expansions and profit increases since its IPO in 2016. But what really sets it apart is the company’s disruptive approach and transparency around its mission to “democratise chocolate”. Hotel Chocolat has created its own sustainable supply chain management system through its ‘Engaged Ethics’ programme.

“You work too hard for bad chocolate. They work too hard for cheap cocoa. We’re reconnecting our love of chocolate with its roots – with the people who grow it and the natural world it comes from” 

Hotel Chocolat

Most of Hotel Chocolat’s cocoa comes from Ghana, where the company pay a premium of approximately 50% above the open market cost per tonne in order to source cocoa that meets its Engaged Ethics standards for sustainability. But let’s talk about the small (but impressive) percentage which comes from St. Lucia, used specifically for its premium Rare and Vintage range. The only company in the UK to actually grow its own cocoa, Hotel Chocolat owns a 250-year-old estate in St. Lucia where it works with over 180 farmers directly. The farmers benefit from advice and technical assistance, are provided with high quality St. Lucian Trinitario cocoa seedlings and, crucially, have a guaranteed market for their entire crop at prices above those available in the world market. St. Lucian farmers can now work with confidence, invest in their land knowing that they will see the benefits.

Hotel Chocolat thinks of chocolate much like wine, with the flavour reflecting where the beans were grown and how they were processed. They aren’t Fair Trade, and that’s ok. Whilst Fair Trade has been monumental in raising awareness of the problems farmers face in developing countries, it doesn’t work with this direct approach Hotel Chocolat has adopted in St. Lucia. Only smallholdings are eligible for Fair Trade accreditation, not company-owned plantations. It also doesn’t lend itself to the close management Hotel Chocolat want in terms of the specific beans used and the resulting flavours. Hotel Chocolat’s level of investment actually goes beyond many fair-trade agreements, but as with everything related to ESG: One size doesn’t fit all!

Oh and 95% of Hotel Chocolat’s products already meet the Public Health England targets to reduce sugar in products by 2018. The company’s “more cocoa, less sugar” philosophy, coupled with no artificial colours or flavourings, means its chocolate is as guilt-free as chocolate can be…

About the author

Georgina Laird is a sustainable investment analyst. She is responsible for analysing and monitoring environmental, social and governance factors within the Global Sustainable Equity Strategy. Georgina joined us in 2015 from Russell Investments where she was an index analyst. She joined Kames as a performance analyst before moving to the ESG Research team in 2016. Georgina has a BSc in Mathematics from Heriot-Watt University in Edinburgh. She has the IMC professional qualification and has 5 years’ industry experience*.

*As at 28 February 2018.

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Mental health – signs of progress

The approach to mental health has changed significantly in recent years, with the stigma that is often associated with it diminishing somewhat.  

Imagine you’ve broken your arm, but you shouldn’t tell anyone or ask for help. What if it makes you look weak and unstable? People might question your abilities, worry about whether you’re ‘capable’. It sounds ridiculous doesn’t it? But if you replace ‘broken arm’ with ‘depression’ or ‘anxiety’, people often feel they are in a different, helpless situation.

Attitudes seem to be changing though. A 2015 study showed that 2.5million people in the UK have improved attitudes towards people with mental health problems, compared with 2011. Not quite there yet, but improving.

The World Health Organisation defines mental health as “a state of well-being in which an individual can realize his or her own potential, cope with the normal stresses of life, work productively and make a contribution to the community”. This is not just about the absence of a specific mental health condition, but is inextricably linked to the concept of human development: the creation of an environment in which people can develop to their full potential and lead productive and creative lives which add value.

A recent NHS study showed that one in three ‘sick notes’ handed out by GPs are now for mental health problems, with more than 5 million people being signed-off work every year. It is estimated that mental ill-health costs the UK around 4.5% of GDP per year in lost productivity at work, higher benefits spending and health care costs. Numerous studies have shown that a positive work environment supports productivity both in and out of the workplace, which in turn reduces stress and anxiety.

Throughout our sustainability analysis for the Kames Global Sustainable Fund we look at three dimensions:

  1. The product (the what)
  2. How the company operates (the how)
  3. The direction in which the company is going in terms of sustainability (ESG momentum)

We assess these three dimensions through factors which we believe are of material value to the particular company / sector.

We believe that employee health and wellbeing is material to every company we invest in. All of the companies we have classified as sustainability ‘leaders’ have established employee welfare programmes for staff to utilise both in and out of the workplace. These programmes include support available through private health schemes to in-house initiatives with a focus on mental healthcare.-

 

Leader As well as access to environmentally rich surroundings, Mohawk have provided 13 Healthy Life Centres for staff with health coaches. Around 80% of staff have used the facilities at one point whilst employed.
Leader Many health issues associated with hearing difficulties such as cognitive decline, falling and depression can be helped by hearing solutions. Amplifon has designed its whole retail experience around reducing the anxiety often associated with medical experiences.

Improver Mindbody connects consumers with local therapists, providing a range of activities with proven positive mental health benefits: yoga, meditation, pilates and more.

About the author

Georgina Laird is a sustainable investment analyst. She is responsible for analysing and monitoring environmental, social and governance factors within the Global Sustainable Equity Strategy. Georgina joined us in 2015 from Russell Investments where she was an index analyst. She joined Kames as a performance analyst before moving to the ESG Research team in 2016. Georgina has a BSc in Mathematics from Heriot-Watt University in Edinburgh. She has the IMC professional qualification and has 5 years’ industry experience*.

*As at 28 February 2018.

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An ounce of prevention is worth a pound of cure

The 2018 Winter Olympics is upon us and all over the world people are making piecrust promises (fragile and easy to break) to take up skiing, or at least go ice skating this weekend. But instead of just buying a token tennis racquet when Wimbledon is on, people are more conscious now than ever about the long-term health benefits of a fit and healthy lifestyle.

It is the prescription drug that can reduce stress and anxiety, forestall many chronic illnesses, help to control blood pressure and cholesterol, make you happier, and it doesn’t need to break the bank… all for just a little bit of dedication. Not to mention it’s totally on trend.

It seems every day there is a new study reaffirming the profound positive health benefits of regular physical activity. And doctors are able to prescribe exercise as treatment for a range of conditions, through social prescribing schemes. The health and wellness scene has grown exponentially over recent years, and continues to do so. Everyone has a fitness tracker on their wrist and is your phone even a phone if it’s not recording your steps? ‘Wellness’ now means far more than being free from illness, it’s dynamic, encompassing a state of complete physical, mental and social well-being.

Below are two examples of companies that we believe are both investable and promote wellness.

Technogym
The leading fitness equipment and technology supplier, Technogym, is pioneering connected wellness solutions. As an official supplier to the Olympics, the company’s founder Nerio Alessandri has been talking of ‘wellness’ in this sense as far back as the 90s.

Technogym launched the first cloud-based fitness platform, ‘mywellness’. The app can do everything wellness related. It can talk to the machine you’re running on, use its AI-driven coaching platform to set goals and targets for users, allowing them to compare themselves to others through its ‘Movergy Index’. It can connect to wearable devices like Fitbits and other health apps allowing it to track heart rate so you can see all things wellness in one hub.

Technogym’s founder is also working to transform the Romagna region in Italy into the first international wellness district, with a broad focus on both physical and mental health.

Planet Fitness
Offers low-cost gyms that are self-branded ‘judgement-free zones’. Planet Fitness has been successful in creating affordable judgement-free gyms. How do we know? Well if anyone in the gym is caught grunting, flexing, topless, dropping weights or judging others they will sound their ‘lunk alarm’, a staff-operated siren designed to encourage the offenders to stop…

Mindbody
Provides an integrated software and payments platform to the wellness industries. Mindbody connects consumers with local wellness providers, allowing wellness entrepreneurs globally to run, market and build their business with ease. Fast Company recently ranked Mindbody #2 most innovative company in wellness in 2018.

About the author

Georgina Laird is a sustainable investment analyst. She is responsible for analysing and monitoring environmental, social and governance factors within the Global Sustainable Equity Strategy. Georgina joined us in 2015 from Russell Investments where she was an index analyst. She joined Kames as a performance analyst before moving to the ESG Research team in 2016. Georgina has a BSc in Mathematics from Heriot-Watt University in Edinburgh. She has the IMC professional qualification and has 5 years’ industry experience(As at 31 October 2017).

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Fashion! Turns to the right…

David Bowie, Madonna, and Depeche Mode all made a song and dance about fashion, at a time when more and more designers became household names. But it coincided with a backlash against the use of furs and the appalling working conditions of those as far removed from the catwalk as it may be possible to get.

But in an inside pocket of the modern fashion industry there are further problems. Clothing costs have risen slower than other consumer goods, enabling fast fashion and feeding our insatiable appetite for the latest trends. The number of times a garment is worn before being tossed has fallen 36% in the last 15 years.

Which means a lot of waste (a truckload of clothing is wasted every second across the world apparently – yes that did say ‘second’). Very little of it is recycled (less than 1% of clothes are recycled into new clothing).

And much like China doesn’t want dirty air, it no longer wants to have dirty water either. The China link? Well, the fashion industry needs both China’s raw materials (thirsty cotton – 4x more water intensive than rice and dirty from pesticide overuse) and its textile processing (also both thirsty and dirty). Beautiful China + limited water ‘budget’ = only one likely winner in a food/energy versus fashion showdown.

The sustainability leaders in the fashion industry have recognised this and have begun to move towards a more circular economy. Inditex has committed to a circular economy model through all phases of the product cycle, from offering free returns of old garments to supporting research into technology that can turn recycled garments into new textile fibres. Adidas AG, Stella McCartney and the Ellen MacArthur Foundation, Vivienne Westwood, Gucci and more leading brands are all at the forefront of driving the industry towards higher standards and a more circular economy.

A Nielsen global survey showed that 66% of respondents were willing to pay more for sustainable goods, with millennials being the most willing to pay more for sustainable goods at 73%. Consumer behaviours are potentially changing, and China is getting serious about pollution. Fashion’s dirty secrets are out.

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