Reinoud van Ieperen Bokhorst

Managing Director Absolute Return Strategies

Matthew D. Kaplan

Managing Director Absolute Return Strategies

How does this strategy align with Anthos’ values? 

In the selection of managers and investment strategies for the absolute return portfolios, the Anthos values are fully integrated. In 2022, several strategies in our portfolios generated strong returns because trends in the global economy increasingly demand sustainable behaviour. 


For example, rising inflation has pushed input costs higher across the board for all companies, putting their profitability under pressure. In this environment, companies with the most efficient production processes outperform peers creating much more waste, using much more energy and/or water. Two equity market neutral strategies in our portfolio have explicitly picked up on this company characteristic and apply it to select companies for their portfolio. In 2022, resource efficiency has been a more powerful driver of returns than it has been in years prior. 


What were your greatest responsible investment challenges in 2022? 

The inflation pressures in 2022 were in part caused by a lack of supply of a wide range of commodities. This development became clear to us in 2021 and has been a theme for us to explore. Because a large part of the commodities market comprises fossil fuels, we were hesitant to invest in funds that would potentially benefit from and facilitate increasing use of the dirtier fossil fuels such as coal.


Searching across the wider commodity sector and meeting specialists in the investment teams of managers we already invest in, we identified an opportunity to invest in a way that aligns with the energy transition and fight against climate change. The core thesis of the strategy is that demand for aluminium, copper as well as several specialty metals like lithium will materially accelerate in the coming five to ten years as a result of the energy transition. Although this is widely recognised in the industry, mining companies have made very limited investments in new production capacity. Because it takes several years to develop a new mine, a significant scarcity of those metals is likely.


In summary, investing in those commodities, the mining companies owning reserves and the currencies of countries that stand to benefit from increasing exports, is a profitable way to align with the energy transition and benefit from the general rise of commodity prices.


Describe the opportunities for responsible investment for your portfolio? 

We strive to select managers that indirectly align with macro sustainability trends such as decarbonisation, resource efficiency and certain segments of the commodity sector where specialist materials are needed for the clean energy transition. 


One example is a London-based quantitative equity market neutral strategy that uses ESG insights as an investment edge. Through their investment into companies that are more resource efficient (and shorting those that are most resource intensive), the firm supports companies that are more beneficial for the environment, which are expected to outperform over time. 


Assess how the ESG and IMP assessments have changed from 2021 to 2022? 

Of the total portfolio, 69% of assets are allocated to funds and managers that score as ‘Leader’ and ‘Professional.’ Within the absolute return space, a ‘Novice’ ranking often refers to managers that are careful not to overpromise in terms of ESG. 


In 2022, a key lesson learned was that, in the absolute return space, managers are very mindful of the ESG challenges but also of the changing regulatory landscape. They want to be clear to their clients that their primary promise is to deliver optimal risk-adjusted returns. We know from our monitoring that the managers we select don’t invest in harmful activities. It is difficult to code this into an unambiguous investment restriction.


Based on our review of 2021 versus 2022, it appears that our overall ESG score increased marginally. Of the managers that were held in the portfolio for both years, the scores of all except for two either stayed constant or increased. The two whose scores fell was due to the restructuring of the calculation between the two years (i.e. different categories and/or different weights to each category).


Overall from 2021 to 2022, some trends we observe:

  • The rate of progress is largely correlated to the size of the manager. Large investment managers are able to allocate significant resources to expand and enhance RI integration, ESG, and reporting in many ways. Medium size managers seem to make consistent progress. Most smaller managers have the aspiration to progress, but simply don’t have the resources to make much headway. These firms have employee counts of less than 20 and many of them do not invest in strategies that lend themselves easily to ESG integration.


For the firms where scores increased, we saw the biggest improvements in:

  • Creating or enhancing ESG, RI, diversity, equity and inclusion (DEI), and/or corporate responsibility policies and/or leadership
  • Building or creating dedicated ESG teams/resources
  • Expanding or starting relationships with external vendors such as MSCI, Sustainalytics, TruCost, etc.)
  • Beginning or enhancing ESG reporting

ESG and IMP assessments


O

ESG assessment

Leader

13.67%

Professional

48.16%

Novice

33.55%

Laggard

0.00%

Not scored

4.61%


O

IMP assessment

Contribute to solutions

0.00%

Benifit stakeholders

2.57%

Act to avoid harm

28.79%

May/Does cause harm

33.79%

Not scored

34.85%

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