50 shades of green…

The EU Taxonomy is a legal classification framework being introduced in stages, to help define what is (and isn’t) a sustainable economic activity. It will require companies to make new disclosures on the extent to which their activities are associated with taxonomy-aligned activities and it will require fund providers to describe the extent to which their products are also taxonomy aligned. Yawn…..yes, it is as dull as it sounds (591 pages but hey, there is a handy 67 page summary…..). However, because of the impact it could have on sectors, companies and share prices, every investor (not just the ESG guys) will need to get to grips with it. And by the way, the timing for its implementation is by the end of 2021 (assuming it gets sign-off from the European Parliament).

Why bother?
Two reasons, both of which required the taxonomy to be science-based. Firstly, the investment required to address the challenges of climate change is huge; the European Investment Bank (EIB) estimates that to address transport related climate issues needs Euro80bn, water and waste Euro90bn and energy Euro100bn. To close the gap, the EU needed to define ‘green’ in order to direct capital towards it.  The second reason is fund green-washing. ESG is very popular right now. The taxonomy will blow a hole in some of the claims that some fund providers are making.

What does it actually mean for corporates and investment firms?
It all hinges on corporates reporting the right stuff that investors can use. For corporates, financial and non-financial companies will need to disclose, in their annual accounts (or dedicated sustainability report), any turnover and capital or operational expenditure associated with taxonomy-aligned activities. At the fund level (or other financial products), fund providers will be required to disclose the extent to which the portfolio is aligned (if they have sustainability as an explicit investment objective) or for those funds which don’t have a sustainability objective, it’s comply or explain.

Do companies even report this information?
No….nope…not even close. Or rather they may do some to regulators e.g. for purposes of the EU Emissions Trading Scheme (ETS), but certainly not currently to investors. The statement, ‘In cases where full disclosure is not made, the TEG acknowledges the hurdles involved in assessing compliance’ somewhat understates the problem.

What is defined as ‘green’?
In its first iteration, the Taxonomy is focused on climate change. In due course, it will be broadened out to address other environmental concerns e.g. ‘sustainable use and protection of water and marine resources’ and ‘transition to a circular economy, waste prevention and recycling’. In the first round, activities are classified as ‘green’ (already low-carbon), ‘transition activities’ (that contribute to net-zero emissions in 2050, but aren’t themselves there yet) and ‘enabling activities’ (that enable low-carbon performance or substantial emissions reductions). Things like low carbon transport or battery storage are included in the latter category. Manufacturing of batteries for electric vehicles is taxonomy eligible, but lithium mining isn’t. Go figure. So-called ‘brown’ activities aren’t currently included, although the taxonomy is open to considering this area in the future (think oil & gas transition).

 It’s part of a whole bunch of other green regulatory stuff
The EU is at the forefront of global financial system reforms that aim to incorporate sustainability. As such, the EU taxonomy shouldn’t be viewed in isolation, but as one part of a series of actions, which it could provide a framework for, including new capital requirements for taxonomy-aligned projects, a green quantitative easing program from the European Central Bank, or a haircut for brown assets in the European Central Bank’s collateral policies.

Well done for reading this far
Will it work? We have said before that ‘perfect is the enemy of good’. There is a strong element of idealism in the very comprehensive technical recommendations made by the taxonomy, like there is only one shade of green. Given that no corporates currently report in this way, the new regulation will be both challenging and potentially burdensome. Will there be sufficient end-user (investor) demand to make companies report this stuff? Does its complexity mean it will simply get ignored? Will the easiest way to conform be to invest in pure-play climate solution providers (;0)? Time will tell.

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Sustainable FOMO!

“The tipping point is that magic moment when an idea, trend, or social behaviour crosses a threshold, tips and spreads like wildfire”
Source – Malcom Gladwell, Tipping Point

In the four years that we have been talking about our global sustainable equity strategy, our conversations with prospects have changed markedly. Back when we started, many were concerned about what we excluded – the perceived opportunity cost of investing sustainably (no tobacco, oil and gas etc.) Fast forward and we are now experiencing sustainable FOMO! Increasingly the conversation is around the opportunity cost of not investing sustainably. This is a significant change in attitudes.

Are we at a sustainable investing tipping point? Many (especially those with funds to sell) think we are. But if we are approaching it, climate change is the key driver. Scientific and policy consensus on the issue is driving more sustainable behavioural changes (not just climate related), opinions (despite the bots), knowledge, technologies, social norms and investment. All of which are inter-related, complex and like Malcolm G. says above, difficult to stop.

And climate policy itself is only accelerating – the Paris Agreement has a so-called ‘ratchet mechanism’ designed to crank-up policy ambition over time and keep global temperature increases to well below 2 degrees C. In 2023, there will be a global stocktake to assess collective progress (not that good by the way). As we have written previously, the process of decarbonisation will not be linear and growing awareness and momentum makes a near-term forceful policy response more likely (in part, enabled by more favourable clean energy economics).

The Paris Ratchet Mechanism

Source: The Inevitable Policy Response, Vivid Economics

Investors are not immune to this sustainability contagion. The regulatory push on investors to consider ESG is strong. And while the full implications of various ESG capital markets policies are unclear, proposed and adopted regulation has the potential to fuel significant asset reallocation. Global ESG capital market policies and regulations have nearly doubled globally since 2015 (to September 2019), according to Goldman Sachs.

Which all means that as we enter a new decade, we anticipate the strong momentum in sustainable investment (demand pull) at the end of the last 10 years will accelerate. It feels like we are at an inflection point (there, we have said it too now…). And if we are, we would also expect to see a greater focus on, and analysis of, sustainable investment strategies. Investors will become more discernible about who they entrust their money to and authenticity will be key. Sustainable investing is not a badge but a discipline, and by disciplined investing at the intersection of disruptive innovation and sustainability challenges, we believe we can meet this expected demand; delivering positive impact and alpha, with authenticity to our clients.

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“You don’t own enough windmills!”

It’s a comment that was made to us recently in a meeting with a prospective client. It’s also occasionally inferred in some commentary from other clients. So first, let’s set the record straight……. We like windmills!

But. It’s a tough business to be in right now (see recent profit warnings from Siemens Gamesa and negative commentary from GE). Vestas are the clear sector leader, and have better managed unit pricing and cost pressure, but even they struggle to consistently execute (especially offshore). Project risk is significant, delays can be costly and unit economics often dependant on variables outwith company control. As we have said previously, just being exposed to a theme is not enough. In renewables, long-term competitive advantage requires cost and technology leadership plus price discipline.

We won’t invest in anything just to appear virtuous! And we believe there are other ways of having a positive impact. The positive sustainable impact of technology might not be so obvious as a wind turbine, but we strongly believe it is no less important. Don’t get us wrong, technology alone can’t sort all our environmental ills, but we are more wizard than prophet. So called Fourth Wave Technologies, including artificial intelligence, automation, blockchain, data analytics and sensors are allowing businesses to lower resource consumption, decrease pollution, carbon emissions and waste AND boost their bottom line. Boom! They are functionally better and virtuous!


Nearly every CEO and VP we surveyed agrees that emerging technologies have at least some potential to improve their organization’s environmental impact, and 92% of all leaders agree that these technologies can help businesses improve their bottom line as well as their sustainability.’
Source – Business and the 4th wave of environmentalism, Findings from Environmental Defense Fund’s 2019 Fourth Wave Adoption Benchmark Survey.
Source – Making things better: Advanced Analytics and Manufacturing, Oct 2019, Bloomberg New Energy Finance

Energy reduction from software analytics, by industry (case studies)

And whilst the rate of adoption varies, companies across every industry are employing technology to drive efficiencies. Business leaders ignore at their peril. With benefits to retailers (data analytics to predict online purchasing trends), suppliers (blockchain to better track products and transactions for improved efficiency) and manufacturers (artificial intelligence for safer, more precise output), uptake of Fourth Wave technologies is surging.  Previous industrial revolutions have radically improved our standard of living but they have also borrowed from the future. Today’s technological revolution might just help break this pattern.

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Transport connectivity

Back in the 80’s, when Chris Rea crooned about driving home for Christmas, he probably wasn’t aware of the environmental impact of his travel advice.

Source IEA 2019

Energy intensity of different transport modes in 2017. The left-hand chart shows energy intensity of passenger transport, in tonnes of oil equivalent (toe) per million passenger km travelled. The right-hand chart shows energy intensity of freight transport, in toe per million tonne km transported.

Transport accounts for one quarter of the EU’s total greenhouse gas emissions of which road transport is 82%. Seamless connectivity between different modes of transport is key to enabling travellers to make more sustainable transport choices.

And connectivity between different modes of transport is what Trainline (held across Kames ethical, sustainable and UK equity portfolios) does. In fact the company explicitly states that, ‘Trainline’s ambition is to bring together rail, coach and other travel services into one simple mobile experience so that travellers can easily find the best prices for their journey and access smart, real-time information on the go. By making rail and coach travel easier, our aim is to encourage people all over the world to make more environmentally sustainable travel choices.’ Trainline covers approximately 80% of the supply of rail in the European Union and 60% of coach services. And people love their app (e.g. 4.9 out of 5 stars iOS rating) which Trainline invests significantly in.

In London, transport connectivity is critical for economic success. Readers will perhaps be unsurprised to know that more than 1 million people travel into central London by rail or Tube every morning. Insufficient rail and tube services for central London will constrain future economic growth, but also compromise economic fairness by limiting access to jobs, education and training leading to less social integration.

Transport for London, TfL (held in the Kames Ethical Corporate Bond Fund) is the enabler of the Mayor’s Transport Strategy, a vision of high quality public transport services that connect seamlessly to other forms of active, efficient and sustainable travel across the city. Whilst also making London’s transport network net zero emission by 2050.

Source – London Mayor’s Transport Strategy, 2018

We have previously written about the #Flightshame phenomenon. High-speed rail offers one solution and the IEA suggest that high-speed rail lines can reduce aviation transport on the same routes by as much as 80%. As the chart below shows, the opening of the Brussels-London Eurostar reduced the number of km travelled by plan on that route by 55%. Getlink (held in the Kames Ethical Corporate Bond Fund) is the operator of the Channel Tunnel and estimates that journeys that are shorter than four hours tend to be dominated by rail… assuming connections between the cities exist.  Market share drops significantly with additional journey time.

Average change in passenger activity on selected air routes after high-speed rail implementation. Source – IEA, 2019

Unlike Chris, many people are beginning to reconsider their short-haul travel choices. But more sustainable alternatives also have to be convenient and cost-effective. Transport connectivity is critical to enable travellers to make more sustainable choices.

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Is there an ESG bubble?

Are too many investors chasing the same names? It’s a question we’ve had from a couple of clients and prospects in recent meetings. We’ve previously written that we believe that the Kames Global Sustainable Fund investment philosophy is different which means we invest in different things to the majority of our peers…………but of course we would say that!!! Are we actually just investing in the same stuff?

These questions make a recent research note from Goldman Sachs timely. Goldman’s have completed a couple of exercises now looking at the most widely owned stocks in ESG orientated funds globally. The table below is taken from the most recent piece and shows those names which appear most frequently- specifically in two ways, firstly based on the stock’s weight relative to their market capitalisation and secondly the absolute percentage point overweight, relative to their share of a global benchmark (MSCI ACWI)).

Source:Revisiting the ‘ESG Nifty Fifty’: The Rise of Impact, Goldman Sachs Equity Research, 2 Dec 2019

Some well-known and loved ESG favourites. And on reading this, naturally our next question was, ‘How many of these companies does the Kames Global Sustainable Equity Fund hold?’ (The answer is two btw – Kingspan and Relx). Albeit, we have held some of the others in the past, but sold them, often because of their valuation. That’s right, just being sustainable doesn’t necessarily make something a good investment! (Although we do believe it can help). We are passionate advocates for ethical and sustainable investing, but we mustn’t ignore the risk of an ‘ESG bubble’ developing in any asset class.

Which also makes Christine Lagarde’s first speech as the incoming European Central Bank’s President worth flagging here. In it, she hinted she may want to harness the institution’s asset purchase program to fight climate change. What does this mean in practice? Assuming the EU can agree more standard definitions of ‘green assets’, it likely means buying green bonds, albeit the green bond universe is still small. It’s a radical proposal and departure from traditional monetary policy (specifically the principle of market neutrality to avoid bubbles)… albeit consistent with the narrative of other central bankers. But the climate crisis requires radical solutions and the ECB’s balance sheet could play a significant role in speeding up the green transition. Investors just need to be mindful of the potential unintended consequences of a desire to do the right thing.



Kingspan Group Plc and Relx Plc are held in the Kames Global Sustainable Equity Fund as well as other Kames Fund portfolios. Other company names listed in the table above whilst not held in the Kames Global Sustainable Fund, may be held in other Kames Fund portfolios.

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