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Investing in breakthroughs

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The ESG ‘stampede’

The WHEB team has a fifteen-year track record in sustainable investing. Looking back over this period, we can say that this is undoubtedly the most exciting period in this history. We say this with the scars still-fresh from fighting what was, until very recently, a lonely battle. Many of our clients have also been on this journey and are now enjoying what we’ve been calling the ‘ESG stampede’.

You can see the evidence of this stampede in the share prices of strongly thematic companies. Ty Lee commented on this in the October monthly update. He pointed to the share price performance of companies like ITM Power and Ballard Power1. These companies are thought to be strong beneficiaries of the growth in green hydrogen. There are similar patterns in the share price performance of other companies involved in, for example, alternative meat and plant-based protein food product. Excitement is in part driven by the much lower carbon footprint that these products offer compared to traditional meat products.

The companies behind these and other sustainability-oriented products represent extremely exciting opportunities to reduce greenhouse gas (GHG) emissions. They also represent high risk investment propositions. The majority of these businesses operate in intensely competitive markets. Most are also heavily loss-making and are likely to remain so for many years. Green hydrogen and alternative meat technologies are still at an early stage in their development. The current exuberance is, in our view, likely to evaporate as the timescales for real change become clear. The familiar ‘Gartner hype cycle’ is, we believe, still apposite in this context.

hype cycle
Figure 2. The climate-tech hype cycle[2]

“Quality will out”

At WHEB we believe there is a better and lower risk approach to accessing some of these breakthrough developments. Our focus is in finding companies that have existing established franchises with a solid positive impact story. Companies where the core product has matured and provides a predictable return profile.  These are companies that have already gone through the ‘hype cycle’.

The WHEB portfolio is characterized by companies that have strong cash-flow returns and relatively low levels of leverage (see figures 2). They are also adept at managing the environmental and social footprints of their operations and have strong governance structures. They are, in short, high quality businesses. But on top of this, and perhaps even more importantly, we seek to find businesses that have vision and ambition. These are companies that have a strong quality foundation and energetically pursue and invest in breakthrough applications alongside their core business.

Presentation1
Figure 2: Cash flow returns on invested capital [3] (Left) and Leverage (net debt: Ebitda) [4] (Right)

Three companies in the portfolio that exhibit many of these characteristics are listed below. Each of these has an existing franchise with a strong competitive position and established products. At the same time, they are building new high impact franchises in adjacent markets.

Renishaw and the treatment of Parkinson’s Disease

Renishaw, the UK engineering champion, displays many of these characteristics. It’s a world leader in industrial metrology equipment. Renishaw has a long track record in probes and gauging systems which improve quality and reduce wastage in manufacturing operations around the world. Using their knowledge in precision measurement, the company has also developed a novel system to treat sufferers of Parkinson’s disease. This system is still undergoing clinical trials and involves very precise delivery of drugs into the patient’s brain. With ten million sufferers today, this product has the potential to revolutionise treatment of this disease.

Tackling greenhouse gas emissions in agriculture

DSM is a Dutch specialty chemical business with a specific focus on sustainability and nutrition. Alongside their core business in human and animal nutrition, DSM is developing several breakthrough products. One of these is called Bovaer and is a feed additive for ruminants and particularly dairy cows. Livestock as a whole are responsible for 14.5% of total global greenhouse gas emissions. The vast majority of this comes from cows – specifically cows burping. Bovaer works by suppressing the enzyme that triggers methane production in a cow’s rumen. It reduces enteric methane emissions by approximately 30%. It takes effect immediately and it’s safely broken down in the cow’s normal digestive system. Following 30 on-farm trials and more than 25 peer-reviewed studies the product is due to launch in Europe in 2021.

Industrial gas giant positioning for the hydrogen economy

Linde is one of the giants of the industrial gases industry, whose products are used to reduce pollutants or improve efficiencies in many downstream industries. The company currently produces hydrogen from natural gas which is used to desulphurise fuels to reduce air pollution.

Hydrogen is also emerging as a potential solution in decarbonising steel-making, heating in buildings and heavy goods transport. In order to play this role, the carbon emissions from hydrogen production need to be eliminated. This can be done either through capturing the carbon and storing it underground (‘blue’ hydrogen) or by producing hydrogen from electrolysers which do not produce carbon dioxide emissions (‘green’ hydrogen).

Neither of these technologies is currently competitive but Linde is bringing its knowledge of handling hydrogen to reduce costs in its manufacture, distribution and use. It is currently involved in over one hundred projects ranging from pilot projects with electrolysers through to the storage and distribution of hydrogen for fuel cell vehicles. The market is still tiny in comparison to the rest of Linde’s business.  With anticipated cost reductions, the market is expected to grow by fifty to one hundred times in the next ten years.

https://www.whebgroup.com/is-it-time-to-jump-on-the-hydrogen-bandwagon/#_ftn1
2 https://www.gartner.com/en/research/methodologies/gartner-hype-cycle adapted by Energy Impact Partners and WHEB.
3 WHEB/FactSet data as of September 2020
4 Ibid

Important Notices:
Risks include: the price of shares (“Shares”) in FP WHEB Sustainability Fund, WHEB Sustainable Impact Fund or WHEB Environmental Impact Fund may increase or decrease and you may not get back the amount originally invested, for reasons including adverse market and foreign exchange rate movements. Past performance does not predict future returns. The Fund invests in equities and is exposed to price fluctuations in the equity markets, and focuses on investments in mid-sized companies in certain sectors so its performance may not correlate closely with the MSCI World Index (the benchmark). For full risks, please see fund prospectus on www.whebgroup.com

 

General: This information, its contents and any related communication (altogether, the “Information”) is issued by WHEB Asset Management LLP (“WHEB Asset Management”). It is intended for information purposes only and does not constitute or form part of any offer or invitation to buy or sell any security including any shares in the FP WHEB Sustainability Fund or WHEB Sustainable Impact Fund, including in the United States. It should not be relied upon to make an investment decision in relation to Shares in the FP WHEB Sustainability Fund or WHEB Sustainable Impact Fund or otherwise; any such investment decision should be made only on the basis of the Fund scheme documents and appropriate professional advice. This Information does not constitute advice of any kind, investment research or a research recommendation, is in summary form and is subject to change without notice. The performance shown does not take account of any commissions and costs charged when subscribing to and redeeming shares. WHEB Asset Management has exercised reasonable care in preparing this Information including using reliable sources, however, makes no representation or warranty relating to its accuracy, reliability or completeness or whether any future event may or may not occur. This Information is only made available to recipients who may lawfully receive it in accordance with applicable laws, regulations and rules and binding guidance of regulators. WHEB Asset Management LLP is registered in England and Wales with number OC 341489 and has its registered office at 7 Cavendish Square, London, W1G 0PE. WHEB Asset Management LLP is authorised and regulated by the Financial Conduct Authority with Firm Reference Number 496413.

 

FP WHEB Sustainability Fund

FundRock Partners Limited (formerly Fund Partners Limited) is the Authorised Corporate Director of the Fund and is authorised and regulated by the Financial Conduct Authority with Firm Reference Number 469278 and has its registered office at 6th Floor Bastion House, 140 London Wall, London, EC2Y 5DN. The state of the origin of the Fund is England and Wales. The Representative in Switzerland is ACOLIN Fund Services AG, Leutschenbachstrasse 50, CH-8050 Zurich, whilst the Paying Agent is NPB Neue Privat Bank AG, Limmatquai 1/am Bellevue, P.O. Box, 8024 Zurich . The relevant documents such as the prospectus, the key investor information document (KIIDs), the Articles of Association as well as the annual and semi-annual reports may be obtained free of charge from the Representative in Switzerland.

 

WHEB Sustainable Impact Fund

The Manager of the Fund is FundRock Management Company S.A., authorised and regulated by the Luxembourg regulator to act as UCITS management company and has its registered office at 33, rue de Gasperich, L-5826 Hesperange, Grand-Duchy of Luxembourg. The Representative in Switzerland is ACOLIN Fund Services AG, Leutschenbachstrasse 50, CH-8050 Zurich, whilst the Paying Agent is NPB Neue Privat Bank AG, Limmatquai 1/am Bellevue, P.O. Box, 8024 Zurich. The relevant documents such as the prospectus, the key investor information document (KIIDs), the Articles of Association as well as the annual and semi-annual reports may be obtained free of charge from the representative in Switzerland. The state of the origin of the Fund is Ireland. The Fund is registered for distribution to professional investors in Austria, France, Germany, Italy, Luxembourg, Norway, Singapore, Sweden and the United Kingdom, and is registered for offering to retail investors in Switzerland, Denmark and the Netherlands. The Fund is also available for professional investors in Belgium and Hong Kong. It is not available to investors domiciled in the United States.

 

WHEB Environmental Impact Fund

The Manager of the Fund is FundRock Management Company S.A., authorised and regulated by the Luxembourg regulator to act as UCITS management company and has its registered office at 33, rue de Gasperich, L-5826 Hesperange, Grand-Duchy of Luxembourg. The Fund is registered for distribution to professional investors in the United Kingdom. It is not available to investors domiciled in the United States.

 

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