Socially responsible investing has been around since the 1960s. But in recent years, some investment managers have adopted a variation known as fossil-fuel-free investing, or fossil-fuel divestment, which aims to move away entirely from investing in conventional energy companies.
Involved for more than 20 years in environmental analysis, as a scientist and investment manager, Martin Grosskopf has moved in this direction and has gradually realigned AGF Global Sustainable Growth Equity. (The fund was renamed on May 20 from AGF Clean Environment Equity.)
"We are looking at environmental solutions," says Grosskopf, vice-president at Toronto-based AGF Investments Inc. "Many companies that are exposed to fossil fuels don't fall within the themes we invest in."
The epicentre of the fossil-fuel divestment movement in the U.S. is www.350.org, which arose out of university endowment and pension funds. "The Stanford University endowment fund was one of the first to divest and a number of others have followed suit," says Grosskopf, noting that in May 2014 the US$19-billion endowment fund announced its divestment from 100 coal companies.
Referring to the notion of keeping fossil fuels in the ground in order to meet emission standards, Grosskopf notes that in December the United Nations will hold a meeting in Paris of the Parties to the Kyoto Protocol that will consider adopting that concept. "If we take this idea seriously, there will be significant carbon assets in the ground that won't ever get produced," says Grosskopf, adding that advocates of fossil-fuel divestment argue that it is risky to invest in conventional producers because declining production will affect their stocks.
Grosskopf admits there was no so-called Eureka moment that prompted him to restructure the fund. "It has always focused on environmental solutions. But as the fund became more global, we had far more opportunities to reduce exposure to resources generally. So it was more of a transition over time."
Launched in 1991, by Acuity Investment Management Inc. (which AGF acquired in 2011), the fund historically had some exposure to energy producers such as Suncor Energy Inc. (SU), if they were leaders in environmental management within their sectors. However, the fund has moved away from the concept of "best in sector" and is now committed to being free of fossil-fuel producers. "In the past it has never been a marketing focus for the fund to say it's fossil-fuel free. We are really responding to clients who are increasingly interested in knowing that we're avoiding these areas."
Working alongside associate portfolio manager Hyewon Kong, who has 10 years of international experience, Grosskopf has also drawn on a global pool of analysts for investment ideas. "We now have a unique fund in Canada that is solely focused on environmental solutions -- and it's one of the few funds globally."
Adopting a thematic approach, Grosskopf divides the portfolio into four high-growth areas: energy and power technologies, waste management and pollution control, water and waste-water solutions and environmental health and safety. In a portfolio with about 60 names, one representative holding is Acuity Brands Inc. (AYI), a U.S.-based manufacturer of commercial lighting systems that has benefited from introducing light-emitting diode (LED) technology in 2011. "They have dramatically improved their growth profile. LEDs went from under 5% of sales to close to 50%. And they are getting incredible uptake from primarily commercial space development in the U.S."
Acuity Brands, which is based in Atlanta, is enjoying earnings growth in excess of 20%. "We expect that to continue and margins will improve over the next few years," says Grosskopf. "For us, this company typifies the benefits of energy-efficiency technologies."
Another favourite holding, in a sub-category of environmental health which Grosskopf calls "healthy living," is WhiteWave Foods Co. (WWAV). "There is a trend to healthier eating and that means improvements in agriculture, less pesticides and herbicides and more natural products," says Grosskopf. "We're interested in companies that are leveraged to that."
Based in Denver, WhiteWave produces non-dairy products and "has some of the leading brands in this category," says Grosskopf, adding that the spinoff from Dean Foods Co. went public in 2012. "We think they'll be able to grow 20% at the bottom line over the next five years because they are getting into more grocery chains and getting more shelf space."
Notwithstanding the environmental merits of its strategy, the fund ranks as a performance laggard within its current peer group. As of April 30, it has a one-star Morningstar Rating for risk-adjusted returns in the Global Small/Mid Cap Equity category.
However, the fund's holdings profile has changed markedly over the years. Once dominated by Canadian holdings, the fund has reduced its domestic exposure to about 7% of the portfolio, while the U.S. accounts for about 65% and the rest is held in international markets.
Grosskopf argues that the themes he's pursuing are broad in nature and offer a wide investment universe. "It's not limited by categories that might be considered only solutions-based," he says. "It's moving across all the sectors. These solutions are becoming mainstream to all industries. If you think of lighting technology, LEDs are actually the only growth area."
In focusing on smaller companies, is Grosskopf supporting the Davids of the world, versus the mega-sized oil-company Goliaths? "Each of these large resource players is looking for ways to reduce their environmental footprints," Grosskopf responds. "We're interested in companies that are providing solutions, such as reducing waste. Demand for these companies is tremendous over the next few years."
