Dialing Up Sustainability Dials Up Returns: Trillium’s “Sustainable Opportunities” Turns Three
In early 2008, nearly a dozen Trillium clients asked us to develop a new investment approach – one that seeks companies providing solutions to growing global sustainability challenges. Evolving from “do no harm,” their mantra became “invest in the innovators,” supporting only those companies actively creating positive change through their core business. Heading their call, Trillium’s portfolio managers went to the chalkboard and “Sustainable Opportunities” (SO) was born. As Managing Partner Cheryl Smith affirms, “We heard the message loud and clear. We thought the next natural step was to create a portfolio of companies leading the transition to a low-carbon, sustainable, and equitable economy.” Now, three years later, we have a commanding track record that shows these leaders are delivering financial performance above their peers. SO achieved a three-year average net annual return of 5.1 percent, compared to 3.4 percent for its underlying benchmark, the S&P 1500, for the period ending July 31, 2011.
Investment Process
For nearly three decades, Trillium has pioneered products that combine both negative and positive sustainability criteria, culling out the best names in the investable universe. But Sustainable Opportunities sets the bar higher. To make the cut, a company must demonstrate it is directly creating positive change in one of three core areas: Economic Empowerment, Green Solutions, and Healthy Living. The thematic approach avoids companies significantly involved in fossil fuel production and distribution.
The portfolio team is led by Laura McGonagle, CFA, who has been with the firm for 10 years and has covered companies in the healthy living space since 1998. Like all of our products, the investment strategy is driven by rigorous fundamental analysis from a team of analysts looking for companies with strong growth prospects that are also trading at reasonable valuations. Sector experts embed an examination of key sustainability drivers into the full analysis of expectations for long term company financial performance – with a focus on how these drivers impact both risk and opportunities. But with the SO portfolio, we shift the emphasis to highlight the opportunities side of the equation. Trillium CEO Matt Patsky says, “At Trillium we believe that the companies revolutionizing the fields of energy efficiency, clean energy, sustainable agriculture, and preventive medicine will have the highest growth prospects and benefit from profound secular changes in the global economy.”
While the strategy is benchmarked to the S&P 1500, the SO strategy, by design, takes bets that deviate from the benchmark. As a thematic, high-conviction approach, SO has higher tracking error and fewer holdings than our other portfolios, as well as no set sector constraints. In addition, SO has higher international exposure than our core domestic strategies, at roughly 20 percent of the portfolio. Along with great individual client interest in SO, we are also seeing increasing institutional consultant interest in this strategy – particularly from consultants looking to pair it with a passive index product in a core satellite approach. SO has emerged from its incubation period as our fastest growing investment strategy, with nearly $50 million in assets under management.
Company Stories
Current holdings in the portfolio range from large companies with deep sustainability commitments, like Intel, Google, and Whole Foods, to smaller companies with a specialized focus on a particular product niche, such as Green Mountain Coffee Roasters, Johnson Controls, EcoLab, Fresenius, Waters Corporation, and Zipcar.1
Johnson Controls, Inc. (JCI) – Based in Milwaukee, Wisconsin, Johnson Controls is known as a leader in automotive interiors, such as seating and door panels. But the company has also established leading businesses in two core sustainability areas: batteries for hybrid and electric cars and high-efficiency heating and cooling systems for commercial buildings. The company’s building efficiency unit, for example, is responsible for reducing the carbon dioxide emissions of other companies’ buildings by 15 million metric tons since 2000, while generating savings of $7.5 billion. The company recently partnered with the Rocky Mountain Institute and the Clinton Climate Initiative on a demonstration project to make the Empire State Building more efficient, with total energy savings of 38 percent a year.
Fresenius Medical Care (FMS) – Based in Bod Hamburg, Germany, Fresenius is the world’s leading kidney dialysis company. With 2,757 locally-based dialysis clinics in North America, Europe, Latin America, Asia-Pacific and Africa, Fresenius helps more than 214,000 dialysis patients around the world gain easier access to treatment. The company serves a growing population of people with chronic renal failure. Two million people worldwide suffer from this condition, which is increasing 5 to7 percent per year due to greater life expectancy, and the growing prevalence of diabetes and high blood pressure. The company’s new generation of dialysis machines have eco-efficient features that reduce the water and electricity required for operation by 30 percent.
ZipCar, Inc. (ZIP) – Based in Cambridge, Massachusetts, ZipCar provides an alternative to car ownership. Individuals become members to participate in a car-share, where they pay a fixed price to use a car for a specified period of time, with gas included. The company estimates that each ZipCar takes 15 owned vehicles off the road and that members drive fewer miles – with 90 percent of members driving 5,500 miles or less per year. Members save more than $500 a month versus traditional car ownership. Many take advantage of access to the company’s growing fleet of hybrid and plug-in models, allowing them to test and promote the new technology. In April, the company’s initial public offering raised $174 million to fuel further expansion efforts beyond its current 605,000 members and more than 9,000 vehicles.
Advocacy Approach
With a portfolio of change-makers, our advocacy focuses on the emerging challenges that come from breaking new ground. Shelley Alpern, Director of ESG Research and Shareholder Advocacy, says: “Companies in the vanguard can encounter challenges for which there’s no standard blueprint for action and by default, their actions set a precedent. During this process, we’re encouraging them to establish new leadership standards rather than simply muddle through.” For example, under pressure from Trillium, other social investors, and human rights advocates, Intel (INTC) and Dell (DELL) are among a number of technology companies working together to create a verification process for Congolese mineral smelters that use “conflict free” metals. We are also participating in the Global Network Initiative, a multi-stakeholder group, alongside companies like Google (GOOG), to develop protocols to protect freedom of speech and privacy on the internet.
The second theme that runs through our advocacy in the SO portfolio is pressing companies that are standouts in particular areas to broaden their sustainability goals, or to become better at publicly reporting their achievements. We pressed former SO holding Chipotle Mexican Grill (CMG), a leader in serving hormone-free sour cream and antibiotic-free meats, to adopt stronger pesticide reduction goals. We also urged past holding Whole Foods Market (WFM) to reconsider its longtime anti-union stance.
Conclusion
By investing in tomorrow’s leaders, the SO strategy makes a strong case that focusing on sustainability can indeed help drive investment returns. We are optimistic that our newly minted 3-year track record will help a growing number of investors realize that this type of thematic investing should be an integral part of their investment portfolio.
—
1. The use of specific companies does not represent investment advice. They are used as examples to assist in the explanation of the SO investment process.
