Sustainable impact fund typically 10-15% of portfolio for ethical investors

Advisers have been key supporters of Harbour Asset Management’s impact strategy with 70-80% of its sustainable impact fund sold through the channel, says multi-asset portfolio manager Chris Di Leva.

Friday, November 24th 2023, 6:10AM

by Andrea Malcolm

Advisers who recommend the fund will typically have 10-15% of a client’s portfolio in the strategy due to its concentrated investment universe.

In the last year, the actively managed fund has reported positive environmental and social gains but a financial loss against its benchmark - a gross one year return of 4% against the benchmark’s 8% at the end of Q3. After fees (1.2% estimated), charges and tax, the return was 1.42%.

The fund, which has a 60/40 split of equities and fixed income (mostly green bonds), has around 150 securities - all of which map to one of the United Nations’ sustainable development goals (SDGs).

Di Leva says most of the performance of equity markets in the last 12 months has been with the largest companies (including the so-called magnificent seven which drove 85%), most of whom don’t meet the stringent criteria for an impact fund.

He says most of the fund's investors recognise that over a short period of time,it will deviate from the benchmark, due to its uniqueness.

While the fund benchmark is made up of a mixture of indices which are typical for a balanced fund, it also tracks the MSCI sustainable impact index where it outperformed by 0.2%.

“So when energy's gone really well or social media companies, as they have over the past 12 months, that’s a really tough environment for this fund.

“The key barometer for investors is making market returns relative to other impact type funds.”

Di Leva says the fund has been growing slowly and steadily and gaining support and has never lost an investor.

“Longer term, we absolutely think this fund will achieve market returns; it has all kinds of back testing.

“Interestingly over the past five years the performance of the impact style benchmark and broad market benchmark are identical, reinforcing our view that delivering impact and strong returns is achievable.”

With a valuation of $6.35 million, up from $4.15m in 2022, the impact fund, which began in Nov 2021, is still small compared to Harbour’s Sustainable NZ Shares fund valued at $2 billion and Harbour’s $7.7b worth of assets under management overall.

It has attracted a lot of interest from charities, says Di Leva, with one recently coming on board.

“I think in five years time the bulk of the fund will probably be with charities and foundations who want to be at the forefront of best in class ethical investing.”

Making a difference for good

Impact funds must invest with the intention of making a measurable positive impact, which wouldn’t have happened without the funding. On those metrics, as shown in Harbour’s second impact report, the Harbour Sustainable Impact Fund Fund has delivered.

The fund’s targets are to be consistent with a 1.5oC scenario, and to have at least 35% allocated to social and health impacts.

Environmental highlights include the mitigation of 669m tonnes of CO2 emissions by 23 companies, 1.4b m3 of water saved by six companies, four added 8904 MW of renewable energy capacity and three saved 155m tonnes of waste.

Looking at social impact, lending went towards providing 17, 763 social housing homes and 36 million jobs. There were 13 million student and early learning placements, provision of banking services to 117 million customers in underserved markets, drug or health tech treatment for 622 million patients and US$18.5b in biotech research and development.

The fund’s impact strategy is ESG integration and company engagement, with a team that checks for ESG risk and develops an impact thesis for each security - all of which are listed in the report. Harbour also uses independent impact assessment from ISS ESG to help quantify impact across the entire portfolio.

Until now nearly all fund managers have limited carbon reporting to equities because of the lack of data. This year, Harbour has included fixed income so that the entire fund is measured and reported on for climate change impact.

Balancing act

Part of managing the sustainable impact portfolio is balancing negative and positive impacts of all holdings.

ISS flagged landfill company Waste Connection for having some ageing sites which risk leaching into the environment, but Harbour has kept it in the fund because it is converting landfill gases to energy.

Tesla was also flagged but stays because despite being flagged for lawsuits alleging racial discrimination and controversy around anti-labour behaviour are mitigated by the positive impact of its EV and battery technology.

Engagement

The fund’s main touchpoint for engagement is an annual corporate behaviour survey (CBS) to start conversations with management and the board on corporate behaviour standards plus impact focused engagements such as visiting Contact Energy’s geothermal plants to learn about capturing and reinjecting carbon dioxide which the energy company has started doing at some sites. Using the knowledge gained, Harbour then engaged with Mercury on practice and it has made progress .

In its first year, these engagements were focused on gathering information but future engagement will be to encourage more progress.

Tags: Harbour Asset Management