Nanuk Asset Management, which co-founder Paul Chadwick refers to as a “10-year old overnight sensation”, has started to ride the wave of global interest in sustainable investing. Its funds under management have doubled in the past year.
This is both good and bad – good for the partners who run the Sydney-based boutique but bad for the rest of the world. As Nanuk speakers put to about 100 mainly-wholesale investors at an industry lunch in Sydney last week, “this is not a good-news story – it’s about survival”. However, while an important part of future performance for Nanuk and probably all managers will come from avoiding sustainability risks, there will also be opportunities.
Introducing the subject, Paul Chadwick, chief executive and chair of the risk and oversight group, said that 10 years ago he and his partners thought the world was changing and most conventional fund managers were overlooking the changes. “We put our views to a group of investors and, as it turned out, our predictions were probably conservative. We are actually competing on the world stage against the biggest and best managers in the world, which is not easy – especially from Australia,” he said. “To arrive at where we are and with our track record is remarkable.”
He asked the audience to try to imagine what the next 10 years would look like, not just from an investment perspective but also from a global and societal perspective. He said the world had entered the “second wave” of a revolution of change resulting in sustainable investing. The problems are getting worse, not better, and if the world doesn’t act, we will all be in as much trouble as Nanuk’s polar bear logo.
Tom King, the CIO, said that the problems that necessitated a second wave of change were very clear. The causes of those problems were also clear. “Generally speaking, this is not a very positive story. But we don’t apologise for that.”
Most of the Nanuk partners have a close relationship with the sea, as surfers and/or sailors. And it is no coincidence that they came together in the funds management business. King, for instance, is an Olympic gold-medal winner in sailing. Chadwick is an avid surfer and proud owner of classic American yacht moored at Sydney’s leafy northern beaches suburb of Newport. The problems of the world tended to stare them in the face when they were out on the water: plastic bags and other rubbish stifling marine life and clogging up the world’s arteries.
King said: “We are at the point of no return. The world cannot go on using up all the resources it does. We’re at the beginning of a sustainability revolution and it will have a similar impact to all the other revolutions,” he said. “The second wave we are entering is much broader and will have more significant investment implications.”
He said the ‘first wave’ had happened much more quickly than expected. The second wave was underway. The problems were clear, as were the causes. The solutions were also mostly clear and the technology generally in existence.
King said that governments had started to act. “The policies will drive widespread, and necessary, changes in the global economy over the coming decades.”
He said the investment implications of all the changes in the second wave were generally negative. However, avoiding negative impacts and capitalising on the opportunities would make a significant difference to long-term investor outcomes. “Active management has an important role to play,” he said.
Nanuk, which has a stellar global equities performance to point to, aims to avoid structurally challenged industries and focus on financial quality and value creation. It uses evidence-based investment cases in its stock-selection process, typically medium term in nature. Sector allocation is driven by perceived opportunities.
The ‘second wave’ will play out over about 10-15 years, as the ‘first wave’ did. The likely winners will be:
- Solar, wind, energy Storage
- Smart grid technologies (demand response)
- Electrification of heat
- Hydrogen (power to gas)
- Sustainable materials
- Controlled Environment Agriculture (CEA)
- Plant based protein
- Waste management / Processing Technology
- Electric vehicles
- Rail transport
- Big Data and AI, and
- Advanced manufacturing
The likely losers are a bit more obvious. They are likely to include:
- Fossil fuels – coal, oil and natural gas
- Centralised electricity networks
- Petrochemicals and plastics
- Traditional ‘Portland’ cement
- Blast furnace steel production
- Air transport
- Crop-based biofuels
- Agricultural chemicals, and
- Livestock production.