Saturna targets climate change, contagious disease, social injustice and more through targeted investing
written by Kevin Max
Scott Klimo is the chief investment officer and director of research at Saturna Capital, a fund management company based in Bellingham. His experience with sustainable investing, or ESG (environmental, social and governance) began long before it became the new buzzword in the United States. At this critical inflection point for this planet and capital markets, we caught up with Klimo to get an insider’s perspective on the new flow of money that might just save the planet.
When did ESG investing first come on your radar?
At my previous firm, we distributed funds into the Australian market and Australia has long been ahead of the curve in ESG from an investment perspective. At the time, we investigated joining the UNPRI (United Nations Principles for Responsible Investment) and following its guidelines. That was around 2007 and when I first became aware of ESG investing. Saturna, by the way, is a signatory to the UNPRI and has been since 2013.
Why has ESG become the top investment theme over the past two years?
There are multiple factors. I believe the irrefutable evidence of anthropogenic climate change provided by the record-breaking forest fires in Australia, Brazil and the U.S., along with unprecedented tropical storm activity and the simple fact that every year is warmer than the next, have brought home the importance of mitigating carbon emissions.
Water is another important issue. And let’s not forget zoonotic transmission of the coronavirus or the spread of various tropical diseases into previously safe areas.
Gender, income and racial inequality and the continued risk of simply being Black in America illustrate that socially we have a long way to go.
Corporate malfeasance, such as that demonstrated by Wells Fargo with fake accounts or Vale with its burst dam in Brazil have shown that investors ignore governance at their peril. At the same time, the evidence becomes more and more robust that the supposed trade-off between doing well and doing good is a red herring and that adopting an ESG approach may very well enhance returns, rather than detracting. People want to make the world a better place for themselves and for their children, and ESG investing is one way they feel they can make a difference.
How do you screen companies for ESG?
We have a proprietary quantitative ESG screening tool that we use for stock identification. It utilizes data on roughly 5,000 global companies provided by an external data aggregator. As you are likely aware, data consistency is a major issue. Many companies report differently, incompletely or not at all.
There is a well-known “large-cap bias” in ESG scoring, such that large companies have the resources to report on various ESG metrics, thus their scores look better than a smaller cap company that may be a better actor but doesn’t have the ability to report, for example, on scope 3 carbon emissions. As a result, just as we engage in detailed fundamental analysis of our investments, we conduct detailed qualitative reviews of the ESG characteristics of investment candidates.
Another key point is that we do not have an ESG team that sits off in a corner and passes a list of approved companies to the financial analysts. ESG analysis is integrated into the overall analytical process. Financial and ESG analysts are one and the same.
Can you give us a couple of examples of portfolio companies that embody the mission?
Two of our best performing companies in 2020 were Vestas wind systems and Siemens Gamesa. Both are European manufacturers of wind turbines. As levelized costs for wind and solar power generation have become competitive with fossil fuels, investments in these technologies have increased. With the Biden administration, we see the opportunity for additional support for the industry. Over the next few years, offshore wind power will become a major theme.
Another would be Novozymes, a Danish specialty chemicals company. You might ask, chemicals? In an ESG fund? But Novozymes develops enzymes with multiple uses. For example, the way laundry is done in the U.S. is tremendously wasteful.
We use gallons of water in top loading washers, half gallon containers of Tide that require a large amount of water themselves, a huge amount of plastic packaging and significant carbon emissions to get the product delivered.
There’s a mindset that the more detergent we pour in, the cleaner our clothes will be. In Europe, laundry is far more efficient with front-loading machines, lower water usage and, to the point, enzyme-enhanced detergents so they can use a pod or a tablet like you might in your dishwasher.
Novozymes is targeting that, within a couple of years, the amount of detergent required to do your laundry will be the size of an aspirin. The resource savings would be enormous.
Finally, from a social perspective, we own Wolters Kluwer, a Dutch information software and services company that has been a strong performer. Over the years, they have transformed their business from one that delivered primarily paper-based products to one that is almost entirely electronic. But more to the point, it demonstrates the strength of gender diversity. Four of nine senior executives, including the CEO are women. Additionally, four of the nine supervisory board members are women.
At some point, will ESG or sustainable investing become simply, investing?
One can hope. I once attended a conference where a speaker got up and said he was really depressed to be at this ESG conference and that we’re all talking about it. It shouldn’t be anything requiring discussion or promotion. It should the norm, not a goal. Given the dire situation of the planet, generational attitudes and the clear recent preference of investor dollars, we will eventually get there.
“The evidence becomes more and more robust that the supposed trade-off between doing well and doing good is a red herring and that adopting an ESG approach may very well enhance returns, rather than detracting.”— Scott Klimo, Saturna Capital chief investment officer and director of research