Impact Investing & Stock Selection
WHEB Asset Management

We speak to George Latham, Managing Partner at WHEB Asset Management, about the company’s approach to impact investing. He explains the sustainability criteria WHEB applies to the listed companies it invests in and describes how the firm assesses the level of impact and sustainability factors they require in an investment.

What sustainability criteria do you look for in the companies you invest in?

Our starting point is to think about the way the economy is transitioning over the very long term to a zero carbon and more sustainable basis, and what impact that’s going to have on the shape of the global economy and the markets that companies operate in.

We only invest in companies where we can define the product or service as solving a sustainability challenge. We ask, ‘Is the product or service that the company is deriving revenue from having a positive impact on society or the environment? We then focus on five environmental themes (clean energy, environmental services, resource efficiency, transport and water management) and four social themes (education, health, safety and well-being) as ways of organising the universe of companies that comes from that description.

Over the last fifteen or sixteen years we’ve built a universe of 730 companies that fit these themes and that are listed on global stock markets, mostly in developed markets. They fit the definition of 50% or more from products or services that meet the definition of providing a sustainable solution. We then go into much more detail and explore what we mean by having a positive impact or solving a sustainability challenge, and that’s where we use what we call our ‘impact engine’ which explores the different dimensions of having a positive impact.

Can you give an example of how the impact engine can be applied?

Yes, for example, you may be building wind farms in Norway and displacing hydro-electric power for a generally wealthy population. The extent to which you’re having a positive impact on society and the environment is going to be different compared to building a wind farm in India and displacing coal fire power generation for an underserved population. So, the same product could be having a different intensity of positive impact. Our impact engine is an analytical framework that we use to explore that difference.

How does the impact engine analyse this difference?  

It asks five key questions of companies and their products or services which include ‘how vulnerable is the client or the beneficiary to the positive impact’, ‘how central is the technology to enabling the beneficiary to survive and thrive in a more sustainable world’, ‘how central is the product or service to delivering that impact’ and ‘how large is the impact compared with the baseline’.

These are the five questions around that which we score companies and that allows us to assess across different markets, themes and types of impact, what we call the ‘intensity of positive impact’. For each question we score companies from one to three, three being more intense and one being less intense. There is a range both at the thematic level and at the sub-theme level; so within health and safety or resource efficiency, for example, there is both buildings efficiency, materials efficiency, manufacturing efficiency.

In each of those different contexts, giving scores from one to three allows the analyst to have a framework and a frame of reference. We then come up with a percentile ranking around this for every company that we analyse and every company that ends up in the portfolio.

How do you measure such intangibles as health and well-being?

If it’s safety that you’re analysing, your starting point is asking how vulnerable is the end client and how significant is the safety impact? Is it life-saving or is it at the margin? An example is a company like MSA Safety which provides breathing equipment for people in the emergency services. We’ve been looking at the extent to which this is life-saving equipment, where it is used and who the beneficiaries are.

Another question we ask is where is the value? Is this product the active ingredient, or is this part of the value chain or is it a component within the technology that’s ending up being used. These questions allow us to assess less tangible impacts.

How do you ensure that a company continues to meet your investment criteria when it is in your portfolio?

Along with the impact engine, there’s a whole other framework of analysis which goes into business and management quality and in both of these we expect certain levels of quality. For every stock in the portfolio we have one of our investment team responsible for that stock, so it has continuous analytical coverage. Most companies in the portfolio report quarterly, and so we update our analysis on a very regular basis even though our average holding period and our investment time horizon is around five years.

There are various trigger points that would make us go and re-visit the suitability of a company in the portfolio. A company is more likely to be sold because it has started to move down rather than because it has actually fallen below a threshold. In fact, it’s probably going to exit the portfolio well before it hits any threshold.  Should a company make an acquisition or have a change in their exposure that means they no longer qualify, that can be a reason for removing the company from the portfolio as well.

To what extent do you analyse the supply chains of the companies you invest in? Do ESG ratings help in this respect? 

As well as the impact engine, we also look at the quality of business, the attractiveness of markets, the competitive position, value chain analysis, quality of management and the growth strategy. Within the value chain analysis, supply chain analysis is part of that, and that’s something that the analysts on the team are going to be looking at. Supply chain data will either come from company data, from ESG research sources, or it may come from analyst’s research from external analysts as well, so we have a range of research inputs that go into that analysis.

We only have 45 stocks in our portfolios with an average holding period of over five years. An investment team of five, soon to be six, means each analyst is only covering seven or eight companies with direct contact with the management teams. This means that we go into a lot of detail and explore different angles on the companies that we invest in.

So our approach is very different to the challenges that are faced by the general ESG data providers. If you are an ESG data provider, and you’re trying to cover 10,000 companies and have continual coverage on all of those companies, then trying to get supply chain data on any one of those companies is difficult; they just don’t have the resource to get to that level

Also, ESG ratings providers are often applying a generic framework to analyse all of those companies, whether or not the data is relevant or not. We’ll find, within our framework and our analysis, there will be companies for which there are aspects of the supply chain that are critically important and material to us. We will then go into a lot of detail in terms of our research into those issues.

Alternatively, there will be other companies in the portfolio where the supply chain issues are less relevant, such as a software company or perhaps a service company where there aren’t such issues. Because our analysis is bespoke and detailed on a small list of companies, we have two advantages: Firstly, we try to establish what is important, relevant and material to each situation. Secondly, we have the analyst to company ratio and the level of resources to allow us to exercise in-depth research to finding the relevant information.

So we’re not reliant on data that the company publishes, although that’s helpful and we’re always looking for ways for companies to be more transparent. But if it’s not directly published by the company then we’ll use the various channels to either ask directly, or to explore through other routes.