How to think about Impact Investing. A Q&A with Ted Franks

Matt Mimms talks to Ted Franks, Fund Manager and Partner at WHEB Asset Management, the investment team behind the Pengana WHEB Sustainable Impact Fund.


WHEB is a specialist fund manager that invests in companies that engage in activities around the sustainability theme and solving sustainability challenges. Firstly, could you tell us a little more about WHEB?


WHEB has a core mission which is to advance sustainability and create prosperity through positive impact investments. With this single strategy focus, a long-only equity strategy,  it’s all about sustainability and the impact-end of that, the deepest green part of sustainability. This is all we do and,and although it’s become very popular recently, we’ve been doing this at WHEB since 2009, and the strategy itself has been going since 2006 – so we’ve seen a few cycles.

We’re pleased to say we’re £1.25 bn under management now, in the single strategy. So we’re no longer the small fund we used to be, but we also remain very dedicated to running things the right way. 

We’ve got some core principles at WHEB. We’re a B Corporation, which means we take all our stakeholders into account, rather than just the shareholders in the business itself. We’re also very keen on radical transparency, and we want everyone to know exactly how we’re investing, and why. We like to think of ourselves as part of the solution to some of the big challenges in sustainability that the world faces. 


How do you see the sustainability challenge – and how does this translate into investment opportunities?


2020 was a great year with these net-zero carbon commitments, and a lot of people are thinking about sustainability. This slide below, sums up the core thinking about how WHEB thinks about it.

We see, and have seen for a couple of decades, that we’ll require a whole new industrial revolution to get to the point where the world is genuinely sustainable – not just solving climate change, but moving to a point at which our use of global resources is in balance, future generations can live a good standard of life, and there’s space for everybody on the planet.

We’ve had these five big industrial revolutions, with the IT revolution still ongoing, and we’re now moving into a sixth one, around sustainability. The challenge for the next few decades is to stop doing some negative things, and do lots more of the positive things, and try to find a balance.

There are a few ways to invest around that – you can either disinvest or ‘short’ the bad stuff. Broadly speaking, you can have strategies around the demise of the fossil fuel complex. The big thing that a lot of people do, ESG investing, is invest in the companies that are best placed to make the transition, no matter what they do.

But for us really, the focus is on what we call impact investing, and that’s in the companies that provide the products and services which are going to solve this sort of challenge. That’s where we see the opportunity in this big sustainability industrial revolution.

Companies like Aptiv, that make components for electric vehicles, Arcadis, a consulting engineer focussed around climate adaptation, and tpi composites who make the blades for wind turbines


If you look forward a decade, how do you think the world is going to be coping with climate change and the broader sustainability challenge given the world’s limited resources?


That’s a critical question – and my answer would have been quite different in 2019. Because in my career of sustainability investing, we’ve seen nothing like these symbolic political commitments before – and now there is a real political will to solve these challenges.

I would say in a decade we’ll be doing much better. We’ll still be a long way from solving it, but I am an optimist – and fundamentally if you invest with us you need to be a technological optimist that humanity can find a way to solve these problems. Over the next decade I would say if you think of where the big emissions come from, energy generation and transport, we have a technological pathway now. We have renewable energy and it’s become very cheap, and I also think we’ll see good progress on electric vehicles.

Other things, like buildings, aviation and food, in particular, are big challenges for us. We’ve still got an awfully long way to go, though the companies we invest in already have solutions to try to help with that. And then there’s a whole raft of other sustainability issues such as reducing the use of plastics, and the many social issues that have a long way to go.

I would say by 2030 things will look better, and by 2040, I hope by then we’re really much further down the track.


Can you give us a flavour around WHEB’s approach to investing – what you’re trying to achieve and a taste of what the portfolio looks like?


Fundamentally, we’re trying to achieve two things 

  • a superior alternative to global equity investing and to show that we can outperform through sustainability
  • at the same time as being truly authentically impactful.

Some people who invest with us do it purely for the investment opportunity, but you should know that your capital is doing something impactful, and we want to help you understand why.

So we have these twin goals – let’s outperform, at the same time as being as authentic as possible. We put a lot of work into making sure we really understand the company is authentically providing a sustainability solution and that’s giving it a superior growth opportunity.

There are three points to understand about that. 

First, we’re always looking for companies where the equity story is the sustainability story. We want those companies where the management’s talking about the sustainability challenge and solving it. 

Secondly, we think you have to be pretty long-term to do it. We try to be a participant in capital markets to solve these issues. 

Lastly, we try to engage with our companies to help them along the journey. 

So that’s the overarching philosophy of it.

In terms of the process, we look for high-quality companies, pure-play providing these solutions, and at an interesting point of their growth where they’re about to inflect and their solution is going to become a big thing globally and solve a lot of the challenges at the same time. So we tend to go for higher quality mid-cap companies providing these solutions.

We have nine sustainability themes we invest in. Some of them are social, some are environmental, and we think of those when putting the portfolio together.  


Typically when you look at the portfolio how many positions do you hold and can you give us some examples of the type of company?

We’re going for 40 to 60 positions, currently 45. We don’t do particularly high technology risk – we like companies that have at least demonstrated some level of profitability. So it’s not the highly speculative growth companies, nor is it the fully established ones. It’s the ones that are in the growth phase. We’re a global portfolio, deliberately so, and match global equity exposure generally. Higher quality franchises and good cash-flow return on investor capital.


Can you give us some examples of a couple more companies that are currently within the portfolio?


As you might expect, the renewable energy complex is important to us, but it’s not as big as you might think because we haven’t got so many high-quality business models in there, so it’s about 5% of the portfolio. TPI Composites and Vestas are helping drive down the cost of wind energy by helping the blades become longer, which increases efficiency.

We’ve got quite a lot of exposure to the electric vehicle transition, companies such as Hella, Infineon, and Aptiv. The growth rate for people buying electric vehicles is increasing quite dramatically. We like this opportunity, and we have done since 2017/2018, so we have around 12% of the portfolio exposed there.

We like to get into all kinds of different angles of climate change, such as DSM, a Dutch speciality chemicals company. Decarbonizing food is a huge issue, and they’re working on reducing the methane production from cows as well as several other really interesting sustainability breakthrough products. We’ve been backing them for a few good few years now.

So that’s a taste of some of the sort of companies that we invest in.


The impact, and the measurement of the impact of the investments that you make, is obviously an integral part of what you do – why is that and how do you measure it?


This is obviously a really big, and still evolving question, and there are big philosophical debates about what impact an investor can claim to have, and we do try to be very careful not to over-claim that it’s the investor that’s ultimately doing this because it’s the individuals and the entrepreneurs that make the solutions happen. But that said, we are trying to be as transparent as possible to try to show our investors where those connections could be. Firstly, because this helps investors understand why they’re having a positive impact and potentially quantify that, but also from the investment team’s point of view it’s very important because the idea is that the opportunity set to make a big difference in the world, if you can find a company that’s got good barriers to entry, a good IP position, and is a real market-leading spot, then you should have a better opportunity.

So we do quite a lot of work around this, both from the point of view of communicating externally but also from the point of view of investing.

For more than five years, we’ve tried to gather the data where we can reasonably say there’s a relatively clear case in terms of how our companies are impacting the world in a positive way. We have an impact calculator which can be accessed on our websites and advisors can use this with their clients. But that quantitative aspect, in many ways, doesn’t capture the complexity of it, so we also have a qualitative approach, called the impact engine, where we try to derive a sense of how impactful the companies we invest in are. Every year we show this in our Impact report.


We’ve obviously identified that there’s a lot of opportunity in investing in the sustainability area, but could you give some thoughts on what the risks look like, and how you deal with them?


Absolutely, with everything, there are risks to think about. The fundamentals are that because we are investing in companies that the world needs more of, on a very core level we consider that to be somewhat de-risked. Even within that though, these are still evolving areas and se there is clearly a risk of disruption. There are lots of people looking to solve these challenges, particularly now there’s been a lot of capital flowing in, so there’s clearly a risk around valuations and potentially getting the wrong name. So it’s about trying to be careful around valuation, quality and the stability of a company. 

There’s always a chance that some disruptive tech-enabled solution will come up which would be terribly exciting – of course, we’d try and get into investing in that if we thought it made sense, but that’s a clear risk. 

We’ve always been a ‘growth at a reasonable price’ strategy, certainly if you look across the ESG market as we do, we see ourselves, compared to some of the other strategies, as more value aware, and that’s a particularly big question now as we speak at the start of 2021, there are thoughts about inflation which feeds into valuations as well, so that’s another risk.

So those are the absolute risks, and then there is also the relative risk. We don’t invest in consumer technology as we don’t think it provides a solution to the sustainability challenge, and can in fact, in many ways, create further sustainability challenges, but it has been an area of huge equity growth over the last decade. We think the next few decades belong to sustainability, but certainly, if you look at global equity markets, and the big FAANG mega-cap tech stocks, we’re not invested there too, so it depends on your frame of relative risk.


That’s all the time we have for today, wondering if you have any final thoughts or comments more generally around what you do and the opportunity ahead?


We’ve covered a lot of key areas. I guess the obvious thing is that the Strategy’s been going for the last 15 years, and we’ve had to consistently be trimming our sales for a skeptical market environment. Then in 2019 and 2020 the frame of it all changed. Not just politically at the top, but also the individual’s experience, and lock down, etc. has changed people’s frame about sustainability. Certainly we’ve never seen such a positive environment as we currently have.

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