Diluted Disclosures

“We don’t have a sustainability strategy that sits separate from our business strategy, they go hand in hand.”

These were the words of Patrick K. Decker, President, CEO & Director of Xylem Inc, speaking during their Q2 earnings conference call on the 1st August this year.

If you don’t know Xylem, well the clue is in the name. They transport water. Xylem is the tissue found in plants that transports water from the roots to the leaves. Xylem (the company that is), says its mission is to solve water problems globally. They transport, treat and test water for government, municipal and industrial businesses. The name Xylem then, seems perfectly apt to us.

Some of this is less than glamourous. If you’re reading this in London then you have a lot to thank them for – they have delivered on huge infrastructure projects to upgrade waste water pumping and treatment infrastructure over recent years.

Given their end market (what we would call their product), then it’s not surprising that the company attracts a strong ESG investor base. It’s also not surprising to hear them talk about it during earnings calls.

Mr Decker’s words were music to our ears;

“In many industries and business models, positive sustainability outcomes are a cost of doing business. For Xylem, positive sustainability outcomes are a result of doing business.”

move well beyond, kind of, motherhood and apple pie – it always makes us cringe a little inside when we read sustainability reports and the emphasis is on cook-outs, cake bakes and fun runs. These are what we would class as ’immaterial’ disclosures and we see it all too often, these types of disclosure are so diluted, as it were, that they are irrelevant.

But companies such as Xylem understand that material ESG topics are now as important as any other financial disclosure.

 “All about making sure that we attract, retain the top talent across the landscape. And people nowadays, as you all know, they want to believe in something larger than themselves, and they want to work for a company that has a purpose.”

Investors more and more want to invest with a purpose too and like Xylem, we do not believe that ESG analysis is separate from our investment strategy, it is our bread and butter.  We spend as much time thinking about ESG as we do total addressable markets, competitive advantages, valuation, P/E multiples and cash flows.

“But that’s what’s really driving the sustainability goals. It’s good for business, it’s good for the planet, it’s good for everyone involved, and we have a unique opportunity and a role to play here in doing so“, Mr Patrick Decker.

At date of writing – Kames holds Xylem across a number of investment strategies

About the author

Jonathan Parsons is an Investment Manager in the Equities team with responsibility for North American equities. He also manages a global technology portfolio and contributes to the idea generation process for our global equity portfolios. Prior to this, he worked as a Quantitative Analyst, also in the International Equities team. Jonathan joined us in 1996 straight from university and has 23 years’ industry experience*. Jonathan studied Mathematics & Computation at Loughborough University of Technology and is a CFA charterholder.  *As at 30 April 2019.

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Short & Distort

Forget “pump & dump”… boiler rooms of dodgy salesmen convincing poor retail clients that a stock is going to the moon is soo 1980s. This decade is all about “FAKE NEWS” … and as we know, fake news is much more effective when it’s bad, very bad, maybe the worst EVER!

Enough of the Trump references Craig! What do you mean more effective?

The tangible fear response to potentially losing money on something you own is always greater than the equivalent greed response to missing out on something you don’t. The incremental energy required to shake out weak holders is therefore less than that to encourage an incremental buyer. There is a short-term asymmetry that can be taken advantage of.

Wait a minute… where are you going with this? Is this some moral crusade against shorting?  

No no no… I have no problem with short sellers operating in the market and we operate funds at Kames that short stocks. At its best shorting can help push up the cost of capital for unsustainable businesses.  If short sellers uncover the next Enron early, they will do the market and investors a great service. But short & distort schemes do exist and are a bigger issue today than in the past. This is a negative second order impact of the ease with which Information (including misinformation) can be spread these days and this needs to be better understood. Controversy sells and is often thoughtlessly distributed.

But market manipulation is illegal, so bad actors will be caught in the end. Don’t you know *SEC Rule 10b-5? Surely this covers it? 

Ahemmm….. of course I do (*cough*) and there are other rules too. The FCA Market Abuse code is also very clear but proving “intent to deceive” can be very difficult. Market participants can have their opinion (free speech) and are allowed to be just plain wrong (plead ignorance). It is very tough to untangle a story that deploys a web of fallacies. For example, manipulation of factual content that encourages faulty deduction (e.g. red herrings), garbled cause and effect (e.g. conflating timelines or confusing past issues with the business now) or making personal attacks (e.g. unfairly attacking management integrity or suitability) can be layered together.

I get it…. Bad stories are tricky to regulate and prosecute but the truth will out in the end.  Does this not give the smart long-term investor the chance to buy more?

Most of the time yes and we would certainly try to buy such opportunities.  But short ‘attacks’ also create real and often lasting costs for the companies in terms of management time, legal expenses and / or perceived reputational damage. It can impair the valuation for an extended period. At worst, a share price fall can create a “reflexive” negative spiral which triggers debt covenants and takes a perfectly innocent company down.

Ok, you win. But what do we do about it?

No easy solutions. For one, I would welcome a more aggressive stance by regulators against the schemes. We have started to see this happen more in the US as regulators recognise the increasing risk. In the meantime, I guess I’m just reminding investors to be wary of those posing as experts and spinning scary stories. From a sustainability perspective, we try extra hard to protect ourselves against investing in companies which deserve to be shorted. We do this by doing an extra layer of due diligence on every company we invest in. We call this sustainability analysis. We believe it’s an underused method of quality assessment that takes into account strategic product risk, second order impacts, material operational performance risk factors, business culture and governance analysis. At the very least….. it’s all grist to the mill.

About the author

Craig Bonthron is an investment manager in the Equities team, responsible for actively co-managing high conviction global equities portfolios. He focuses on analysing disruptive and sustainable investment trends within the technology, healthcare, industrial and consumer sectors in order to identify high conviction stock specific investment ideas.

He joined us in 2014 from SWIP, where he was an investment director in global equities. Prior to SWIP, he was a portfolio manager at Kleinwort Benson Investors. Craig has a 1st Class honours degree in Building Surveying and an MSc with Distinction in Business Information Technology Systems from Strathclyde Business School. He has 18 years’ industry experience.  *As at 30 April 2019.

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Nothing new under the sun

Every single second, the sun furnishes the earth with more than six thousand times the energy produced by all our power plants, engines, factories, furnaces and fires combined!

And as far back as 2000 years ago, Chinese architects were aligning windows and doors with the southern sky to let sunlight flood into rooms during winter, heating cold interiors. The Greeks and Romans expounded similar architectural principles. Then coal came along and these design principles fell out of favour…unlucky for us.

But, there’s nothing new under the sun (as they say). Fast-forward to 2019, and take a look at the world. Homeowners in many markets are increasingly warming to the idea of solar panels on their roofs- particularly in California, Germany, and Australia.

  • In Australia more than one in five homes now use solar panels.
  • California was the first state in the US to require that from 2020, every new home is built with a solar system (and California builds about 100,000 housing units each year).

Plus, a recent survey* by CITE research suggests that, regardless of politics, built-in rooftop solar in every new home is an idea that appeals to 70% of Americans.

Solaredge Technologies Inc. has been a beneficiary of this demand. By making each solar panel ‘intelligent’, the company’s technology optimises the power generation of a rooftop solar system. In the residential space, Solaredge provides an array of features: its own smart inverters, cloud-based monitoring systems, solar-based water heating and third-party battery storage systems.



Source: Solaredge

And as the economics of batteries fall and the proportion of electricity generated by renewables rises, home energy storage technologies (solar + battery) become increasingly compelling/necessary. Wall mounted batteries are already relatively low cost ($2500-$10,000), often with short pay-back periods in certain markets and if you’re in California, one can imagine why it might be attractive to have backup power in the event of a brownout or blackout, (the frequency of which are expected to increase as utility PG&E implements cautionary measures to reduce the risks of wildfires).

In Germany, one out of every two orders for rooftop solar is already sold with a battery storage system.



Source: Bank of America Merrill Lynch

4 reasons why energy storage will win

We have previously written about the disruption of the traditional centralised power generation model of utilities. But it’s not just technology disruptors like Solaredge** that are interested in this new market. Ikea have offered solar + storage products (which one assumes doesn’t come flat-packed) and Shell*** recently purchased Sonnen, Germany’s leading maker of home batteries. The future is 4D , Decarbonised, Decentralised, Digitised and Democratised. It’s not yet clear who will provide it, but it probably won’t be long until having rooftop solar, a battery and an EV car will be a genuine reality for many.


*CITE Research (www.citeresearch.com), on behalf of Vivint Solar, conducted a nationally representative online survey of 2000 US adults age 25+ from June 13-16 2019.
**Solaredge is held in the Kames Global Sustainable Equity Fund, as well as other Fund portfolios.
***Royal Dutch Shell is held by sever Kames portfolios, but is not held in our Sustainable or Ethical funds.

About the author

Ryan Smith is Head of ESG Research. He joined Kames Capital in October 2000 as an SRI analyst and was appointed to his current position in September 2002. He has 18 years’ industry experience*. His role involves managing the team that conducts the ESG screening process for our Responsible Investing funds. Ryan’s team also provides corporate governance screening and research for all equity investments, and conducts research into environmental and social issues. Before joining us, he worked as an environmental chemist for Severn Trent Water. Ryan has an MSc in Environmental Chemistry from Nottingham Trent University and is a CFA charterholder.  *As at 30 April 2019.

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Soapbox Speaks: Amplifon podcast

In the latest Soapbox Speaks podcast, Craig Bonthron meets Enrico Vita, the Chief Executive the world’s largest hearing aid supplier. Since joining Amplifon 5 years ago, Enrico has taken on the challenge of running the business while also meeting sustainability standards, and launching the company’s not-for-profit research centre. Listen for more.


About the author

Craig Bonthron is an investment manager in the Equities team, responsible for actively co-managing high conviction global equities portfolios. He focuses on analysing disruptive and sustainable investment trends within the technology, healthcare, industrial and consumer sectors in order to identify high conviction stock specific investment ideas.

He joined us in 2014 from SWIP, where he was an investment director in global equities. Prior to SWIP, he was a portfolio manager at Kleinwort Benson Investors. Craig has a 1st Class honours degree in Building Surveying and an MSc with Distinction in Business Information Technology Systems from Strathclyde Business School. He has 18 years’ industry experience (as at 30 April 2019).

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Dark patterns: Abuse of power is a strategic mistake

Have you ever found that perfect hotel for your holiday online, only to click on it and find out you MUST BOOK NOW as they only have 2 rooms left? Of course you have- we’ve all been there.

Consumer products and media companies are well aware of human psychological frailties… and have been for decades.  This is a great video that highlights some of the techniques that are commonly used to exploit us (Kate Cooper: The Secrets of  Food Marketing).  Cleverly worded phrases to mislead us, techniques to make us believe that what we’re seeing is positive progress, and that mixed with our own willingness to be ignorant allows us to be exploited. Technology circles refer to these processes as “dark patterns”; there’s even a website devoted to uncovering the practice (Dark Patterns Hall of Fame). 

Consumers are increasingly aware of nefarious online practices and are beginning to ask the questions….

  • What do these platforms know?
  • What value am I giving away?
  • Is my “free” access to this platform worth that cost?

It is very hard for consumers to answer these questions and perhaps they will continue to wilfully ignore them… indeed Facebook and Instagram user data suggests as much. However, it is evident to us that bad practices eventually damage the strategic power of a business. Unsustainable practices are a form of long-term market friction that will eventually be discounted in share prices.  Frictions encourage regulation, slow growth or encourage disruptive competitors to arbitrage the incumbent’s unwillingness to change. As investors, the emergence of such strategic risk should (all else equal) lead us to change our view. For example, whilst we can still see positive social merit in social media platforms, we are now increasingly wary of the negative impacts and thus potential erosion of their strategic power. After all, the social impact of a social network is strategically important to them… the clue is in the name!  A recent example which has reached its ‘end game’ is fixed odds betting machines. These allowed people to ruin themselves financially for the dopamine rush of a fixed-odds bet reward.  This profiteering practice was unsustainable and has largely been regulated out of existence in the UK. Betting shops are now being closed with the ultimate cost evident in both job losses and falling share prices.

The ultimate tonic is transparency. Whilst consumers can be somewhat forgiven for being “wilfully ignorant” (as Kate Cooper explains), this makes us reflect on whether active investors should be doing a better job of identifying these unsustainable “dark patterns” when analysing companies. Why? Because being wilfully ignorant to negative second-order impacts doesn’t just damage society or the environment… it damages long-term shareholder value too.

About the author

Jonathan Parsons is an Investment Manager in the Equities team with responsibility for North American equities. He also manages a global technology portfolio and contributes to the idea generation process for our global equity portfolios. Prior to this, he worked as a Quantitative Analyst, also in the International Equities team. Jonathan joined us in 1996 straight from university and has 23 years’ industry experience*. Jonathan studied Mathematics & Computation at Loughborough University of Technology and is a CFA charterholder. *As at 30 April 2019.

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Soapbox interview: Technogym

In a world where people are becoming increasingly conscious of their health, diet and fitness, they also seem to be ever more willing to pay top dollar for the equipment they use to keep in shape. And as technology advances the desire to have the best equipment grows. One of the leaders within this premium equipment space is Technogym, so while I was over in Italy I thought why not visit the Technogym Village in Cesena and grab a quick coffee with the founder.

Below you can read the Q+A with Nerio Alessandri, Founder of Technogym (pictured).

What are you most proud of in terms of what the business has achieved from a positive impact perspective?

Alongside our business we have been promoting wellness lifestyle for over 25 years and every day 50 million people train with Technogym products and digital solutions in 100 countries around the world. In a global scenario in which health issues related with sedentary and other bad lifestyles are seriously threating economic and social sustainability, we are really proud to give a contribution in making society more active and healthier.

Do you think a sustainability mind-set has ever had a role in helping to build a competitive advantage?

Definitely yes! In the Technogym case, we have always promoted health and wellness, so sustainability mindset and corporate social responsibility are naturally part of our business strategy.

Some might say your equipment is quite expensive- are there any plans to increase access and the ‘inclusiveness’ of your products?

Technogym is a premium brand with a full range of innovative solutions to improve end-users lifestyle not only through equipment. Beside our home offering, with an exclusive positioning, today Technogym is available in over 80.000 wellness and sport centres offering different programs and services for different people with different needs and different economic clusters: from public hospitals and community centres to exclusive clubs or resorts.

Technogym has historically been an early adopter in the fitness space. With the increasing use of fitness ‘wearables and trackers’, how does Technogym plan to maintain its relevance?

On this respect we have a precise strategy: Technogym is a Total Wellness Solution Provider. We are not only interested in developing new and more innovative smart equipments but we have been able to develop dedicated services, digital solutions and more recently contents to offer consumers a personalized training experience and operators a complete solution for the different market segments (fitness clubs, hotels, corporate, medical centres, schools, condos, private homes). That’s why we have created our unique Technogym Ecosystem – made of connected smart equipment, our Mywellness cloud platform, apps and digital training contents) – to offer our unique experience anywhere and anytime, also leveraging on the already available technologies such as the wearables and trackers you mentioned above. Our platform is in fact already automatically connectable with all the major outdoor tracking devices or Apps. Moreover with the launch of the Technogym Live platform we will make professional training contents accessible at home by the end users, thus supporting a further increase in people interested in training at home and not only in public venues.

Do you care what ESG ratings (MSCI, Sustainalytics, ISS or others) agencies say about Technogym? And do they consult with you before they rate you?

We respect these agencies but we believe that their ratings give no justice to our sustainability level. Unfortunately they never consulted with us to give us the opportunity to explain and provide material elements to their analysts; we definitely hope this will change in the near future.

What are your most material sustainability risks & opportunities with regard to how you operate the business day to day?

In a scenario in which non-communicable diseases, exclusively caused by unhealthy lifestyle, represent the first cause of premature death we have a great opportunity of spreading awareness on the benefit of regular physical exercise and of helping people in being active every day. This represent an incredible social opportunity for Government, businesses and citizens. In terms of risks, our industrial footprint is pretty low compared to other sectors, and we believe our potential sustainability risks are pretty low both in terms of environmental and social sustainability.

What sort of environmental impact does the business have? And what typically happens to a Technogym machine when its useful life ends? Can it be recycled or reused?

Despite a usual lifecycle inside a Club can be estimated in c. 5 years all our products have a second life and we have a specific second hand program called Still Novo. Most of our sales contracts include a buyback option which allows the customer to keep the location updated with the last models and resell to Technogym the equipment after a specific period of time pre-defined at the signature of the contract. Once back, those equipment are completely reconditioned and sold to customers willing to accede to more affordable options.

What is the philosophy around talent acquisition (e.g. staff education and engagement) to maximise quality and minimise turnover?

Human resources is very high positioned in our priority list. Since years we are running a project called “Working 4 Wellness” which includes a very strong training component and a corporate wellness program ranging from medical check-ups and nutrition programs to sport activities and educational seminars. We strongly believe that a trained and motivated staff do represent a strong asset for the company and for the business in terms of innovation and productivity.

Pay and incentives are an important part of the governance process. How do you feel as a public CEO being interrogated over how much you and your leadership team are paid?

We have no problems with this, this is part of a listed company transparency. Our pay and incentives are in line with industry standards and company sustainability.

Has the change in media changed the risk / reward dynamic with regard to being sustainable?

Reaching and gathering around our products, services and brand, different communities – united by passions, for sport, fitness or health – is a key element of our marketing strategy, that’s why social media represent a very important opportunity for us.

Have you ever taken a cost in the short-term purely for social or environmental reasons?

We do not have an example on this respect. We tend to invest / focus in mid-long term strategies.

Can you see ways to profit from providing solutions or being relatively proactive on certain issues vs competition?

Yes. A good example is our “Let’s Move for a Better World Campaign” our global campaign which leverages our digital ecosystem to involve fitness clubs in a social project to tackle child obesity. People, inside fitness clubs, can track their movement on Technogym equipment and contribute to a donation of Technogym equipment to schools or community centres running sport educations projects for the young generations. This campaign on one side generate a concrete impact in local communities and on the other side promotes Technogym’s digital services business.

What is your biggest ambition for the company from a sustainability perspective…. And will this make shareholders money?

We strongly believe that wellness is an opportunity for all stakeholders – Governments, Companies and Citizens – both under the social and economic standpoint. Today, thanks to Technogym, 50 million people train every day all over the world. The more people we will be able to involve in regular physical activity in the future, the more we will contribute to a more sustainable future for the entire society. Technogym is one of the few companies that can really support the world in becoming a better place and in improving the quality of life of millions of inhabitants: Healthy people, healthy planet. Our 2021 goal, which we shared with the entire team in our global convention few months ago, is to be able to double our user’s community and to reach 100 million people.

 

Kames Capital invests in Technogym in its fund range.

About the author

Craig Bonthron is an investment manager in the Equities team, responsible for actively co-managing high conviction global equities portfolios. He focuses on analysing disruptive and sustainable investment trends within the technology, healthcare, industrial and consumer sectors in order to identify high conviction stock specific investment ideas.

He joined us in 2014 from SWIP, where he was an investment director in global equities. Prior to SWIP, he was a portfolio manager at Kleinwort Benson Investors. Craig has a 1st Class honours degree in Building Surveying and an MSc with Distinction in Business Information Technology Systems from Strathclyde Business School. He has 18 years’ industry experience (as at 30 April 2019).

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