The WHEB investment strategy has evolved considerably over the past fifteen years. But the core has always been quite simple. We invest in companies that provide solutions to sustainability challenges. The companies’ products and services are good for society or the environment, and because of that, they have the potential to grow profits and generate strong investment returns.
That’s the idea. And there is beauty in the simplicity. It shouldn’t take too much effort to see whether a company is genuinely having a positive impact.
The investment community has moved further in our direction in the last five years than we ever thought was possible. But we are still often amazed that some investors make this so complicated.
During the quarter we read some great research from Morningstar and Morgan Stanley. They looked at the top holdings in EU registered funds classified as “Sustainable” under the Sustainable Finance Disclosure Regulations (SFDR).
A “sustainable” holding that stands out
Under SFDR, sustainable funds should mostly be classified under either Article 8 or Article 9. Technically, Article 8 funds promote environmental and social characteristics. Article 9 funds on the other hand have a sustainable investment objective. You can think of them as lighter vs. darker green, or ESG vs. impact, although neither distinction is perfect.
Alongside the names of many holdings highlighted in the analysis that make logical sense, there were plenty that hit the eye as odd. News this month also made one name in particular stand out. Amazon is apparently held by 30 per cent of the Article 8 funds the researchers looked at. More incredibly, 13 per cent of the Article 9 funds somehow justified including it too.
To include Amazon in an Article 8 fund, investors need to look past quite a roster of troubling supply chain issues. These are environmental, social and governance (ESG) concerns, which we separate from how it actually generates revenue – its impact. Aggressive tax and labour practices, and ubiquitous plastics and packaging use, all look like pretty meaningful ESG red flags to us.
But we classify WHEB’s strategy under Article 9 of SFDR. To include Amazon in an Article 9 fund is an even bigger stretch.
Amazon’s destruction policy
Also in June, some intrepid undercover reporting by ITN uncovered the horrors of Amazon’s destruction policy. At a single site in Scotland, they found that Amazon was targeting the obliteration of 130,000 perfectly good items every week. Surplus to requirements, these products were mostly unused and largely still in their wrapping. It is not clear how many were even having parts recycled.
This is the problem of Amazon in plain sight: it is at the centre of rampant, turbo-charged consumerism. Their whole retail business is geared up to make it as easy as possible for everyone to consume more. The smallest number of clicks, the cheapest products, the easiest returns policy. Whatever they can do to encourage you to buy things that you only half-want. And even some that you don’t.
And to feed this beast, they constantly push competition on price alone. Which means, running the kind of stock policy which results in throwing away perfectly good stuff.
The environmental and social cost
And it also means turning to manufacturing sources where the true environmental and social cost of the production isn’t reflected in the price.
Analysis from Marketplace last year estimated that somewhere between 28 per cent and 58 per cent of Amazon’s sales volumes came from Chinese sellers. This number excludes resellers of Chinese products. How many of those suppliers operate to standards that their western consumers would approve of is an open question. And that is before you even factor in the emissions to ship those products to us.
So this is what Amazon does. In the rather plaintive words of the Greenpeace activist interviewed in the ITN film: “Each of these items requires natural resources and carbon emissions and human labour to make. That is why, as long as Amazon’s business model relies on this kind of disposal culture… things are only going to get worse.”
To us, this feels a very long way from a sustainable investment objective. We look for a lockstep relationship between unit sales growth and positive outcomes for society and the environment. For us, growing consumption is nearer the opposite of that description.