Staying the course for a more sustainable future

WHEB’s tenth impact report published in early June provides a detailed account of the impact associated with our investment strategy during 2023. Since 2014, when WHEB was one of the first asset managers to produce an impact report, the quality and extent of our reporting has improved dramatically. Initially entirely voluntary, in the last few years regulatory requirements have stepped up significantly. This year, for example, we have included an account of WHEB’s performance against the ESG metrics for asset managers as set out by the International Sustainability Standards Board (ISSB).

Next year this will be a requirement of the FCA’s Sustainability Disclosure Requirements (SDR). The SDR also requires a sharpening of impact reporting. In this year’s report we outline WHEB’s ‘theory of change’; a step-by-step explanation of how WHEB’s investments and our stewardship and engagement activities lead to real world positive outcomes.

Improving ESG

With many years of reporting now under our belts, trends in performance are now visible. The clearest of these relate to the environmental, social and governance (ESG) performance of the portfolio. Some of the key trends that we see include:

• Steady improvements in the gender diversity of senior executives and board members. This has improved from just 17% in 2018 to 27% in 2023
• A dramatic increase in the proportion of the portfolio’s scope 1 and 2 greenhouse gas (GHG) emissions that are covered by a net zero carbon target. This has risen from just 2% in 2019 to 82% in 2023
• A dramatic reduction in the financed GHG emissions of the strategy which are down by 79% since 2019

At the same time, some things remain the same. For example, the strategy has had no exposure to products and services that create social or environmental harm over all these periods. This remains the case today.

Trends in impact

The principal objective of the strategy is to invest in companies that have a positive impact by providing solutions to critical sustainability challenges. We then use our power as owners of these companies to advocate for changes that enhance this positive impact. We first published data on the positive impact associated with investments in our strategy in 2017. In 2022 we started to source data from an independent group¹. Throughout this time we estimate that approximately 85% of the revenues earned by companies in the strategy come from products and services that have a positive social or environmental impact. With only two years of reasonably consistent data² it would be premature to draw too firm a conclusion on the direction of underlying performance. However, on a normalized basis many of these metrics have improved over the past year. For example, from 2022 to 2023 the avoided carbon emissions that are associated with a £1 million investment in the strategy increased from 201tCO2e to 211tCO2e. Similarly, the amount of renewable energy generated also increased from 314MWhs to 322MWhs. These changes are likely to be due to improved performance from underlying companies as well as portfolio changes including sales and purchases as well as changes in position sizes. We hope to provide more detailed attribution analysis as we build up a longer time series of data, and as the quality of the underlying data improves.

Data quality, while much improved in the seven years that we have reported impact data, can still move materially year on year as underlying companies improve their own reporting. This is a point that we explored in an interview with five portfolio companies and contained in the report. It is also underlined by our reporting of wastewater treated per £1 million invested which jumped from 2.8 million litres in 2023 (based on 2022 data) to 15.4 million litres in 2024 (based on 2023 data). This was due to a trebling of the impact reported by one underlying holding and by new data from one company that was spun out from a larger conglomerate that had not previously reported this data.

Stewardship and engagement

We complement the impact delivered by the companies in which we invest by advocating for improved performance on key issues at investee companies. We also seek to influence regulators, standard-setters and other market actors to make more positive outcomes possible in future – another subject that we address in an interview contained in the report.

Stewardship and engagement is an area of reporting that has also become increasingly standardized over the years. Much of this unfortunately has focused on engagement activities, rather than reporting on real world outcomes. There is a real danger of overclaiming here though. We do not think it is possible – nor desirable – to claim causality. It is extremely rare that a company will change their approach due to WHEB’s engagement. Any claim is more likely have been driven by hubris than objective assessment, in our view. Nonetheless, we do seek to report extensively on our engagement activities and seek to draw correlations with the outcomes that we are seeking. In this way we aim to show our contribution to the positive change that we are seeking. We provide an example this approach in our work on net-zero.

Staying the course

While WHEB has been collating impact data and publishing impact reports for ten years, several of us on the team measure our sustainable investing careers in multiple decades. This longevity provides us with an important perspective on the current travails facing the sector. Disruptions caused by COVID and war in Europe continue to create significant volatility. Meanwhile the advent of artificial intelligence has sucked huge amounts of attention and capital away from sustainability. As a consequence, the ‘ESG tourists’ – asset managers that stampeded into the sustainability market just a few years ago – are now packing their bags. We are confident though that these markets will return in due course. We have seen these cycles before.

Meanwhile, we plan on staying the course and remain focused on sustainability impact investing. No doubt the tourists will eventually return as markets cycle back in favour of the impactful companies that we continue to support. By then regulatory standards will be higher and early adopters will be established and striving to deliver even stronger social and environmental impacts for our investors.

¹ We use data supplied by Net Purpose (https://www.netpurpose.com/) which include a combination of reported data by underlying companies and modelled data.
² Before 2022 we collected and reported data ourselves and had this data independently reviewed by the Carbon Trust.