Case Study

Alliance Trust Investments: The materiality story is changing rapidly

Alliance Trust is one of the largest and oldest investment trusts in the UK, and it houses its own fund management arm (Alliance Trust Investments) serving both institutional and retail clients. Since acquiring its range of award-winning ‘Sustainable Future Funds’ in 2012 it has become a leading mainstream voice on ESG integration.

An integrated process

Alliance believes that there is financial sense in sustainability. It has a range of screened (Sustainable and Responsible Investment) products under its ‘Sustainable Future’ range, but Alliance’s team of 12 investment analysts conduct fully integrated ESG and financial research across all of their equity products. Animal welfare issues are among the many topics covered by this ESG research.

Alliance analysts measure the sustainability of each potential investee company using a range of criteria, and then apply their ‘Sustainability Matrix’ to help determine investment decisions. The Matrix gauges a company’s products; what it sells (on a scale of A-E), and its management; how it operates (on a scale of 1-5). The evaluation by the Alliance team on whether the company’s products and management are genuinely sustainable has a major bearing on the buy, sell or hold decision.

As the diagram on this page demonstrates, companies need to be categorised higher than C4 in order to gain access to one of Alliance’s Sustainable Future funds. These funds maintain a set of screening criteria for sectors that rank below this threshold and intensive meat farming is one activity that is screened out. This is because Alliance argues that intensive farming practices raise serious animal welfare, health and hygiene concerns. In short, its analysis finds that intensive farming presents numerous environmental and social risks, and the team expects a public backlash against the industry in the future causing significant financial impact.

The Alliance Trust Sustainability Matrix is part of a process that has led them to screen out the intensive farming sector

The start of the materiality story

Neil Brown, Investment Manager at Alliance Trust Investments argues that we are in the early stages of a transformation in consumer behavior that may dramatically affect farm animal-related investments. He explains, “The way we eat is changing rapidly. We have hard evidence of how increased education and awareness is driving consumers away from high sugar and high salt food & drink to demand ever healthier products. Companies have been evolving their product portfolios toward lower fat and sugar for some time and are now moving into ‘ethically sourced’ and away from factory farmed or untraceable meat. Multinational bank Berenberg looked at 10 themes including natural, fat reduction, salt reduction and ethical sourcing and found that 65% of new food and beverage products were in these categories. That’s up from 35% in 2005 and ethical is now the third highest trend within them.”

“Crises such as the 2013 horsemeat scandal have created a market where consumers want untraceable or intensively-farmed meat taken out of their products”

– Neil Brown, Investment Manager at Alliance Trust Investments

Brown argues that this is creating exciting opportunities to invest in companies developing the technology and infrastructure for more sustainable alternatives. He gives the example of Kerry Group, an international food business based in Ireland. “We invested in Kerry because it’s developed a highly successful reformulation business. Consumers are demanding reduced sugar and fats in our foods but none of us want
to sacrifice taste or texture. Kerry provides complete solutions using natural products such as milk proteins to deliver the nutritional profile their clients need with the taste and texture that consumers demand. They allow food and beverage companies to re-launch brands or launch entirely new product lines straight into these trends and we believe they are perfectly
placed to exploit the move to ethically and locally sourced.”

Brown argues that growing interest in provenance alongside public crises such as the 2013 horsemeat scandal have created a market where consumers want untraceable or intensively-farmed meat removed from their products and Kerry are ready to exploit that trend. “We like the business fundamentals, we believe there is more sales growth here than the market fully appreciates and when we bring that growth into our earnings forecasts we believe it is attractively valued. We started a holding last year and it is already a significant position in my funds,” he adds.

Brown argues that you can also see opportunity in companies such as US-based restaurant chain Chipotle. They have made sustainability and high animal welfare standards a key part of their brand identity and have seen revenues rise as result. “By their own admission Chipotle are not perfect”, says Brown, “but they recognise that as a major buyer and seller of meat they are part of the problem and the solution, and they are making improvements in an effective and sensible way. It is incredible to see a major chain remove pork from a third of its restaurants this year when a supplier failed an animal welfare audit. That is a significant decision, it is the right decision and we also believe it will be a profitable decision if they
can capture the good will of customers in the long term.”

A potential elephant in the room

Brown argues that animal welfare is a systemic issue that doesn’t always get the attention it should. He explains, “Investors will always be focused on the three or four things that drive a company’s materiality and to be honest animal welfare has rarely been one of those. But if you look at how these issues are now influencing consumers, from concerns over the chemical and nutritional content of our food to concerns over the use of antibiotics, transportation and how animals are cared for then we don’t see these issues going away. Roll that forward to the forecast growth in populations and the changing diets of a rising global middle class and if you ask the question can we continue like this. The answer is clearly no. So that shapes our investment philosophy”.

Brown points out that the full impact of these issues is not yet totally clear and that creates the opportunity. “When the materiality is fully understood every investor will be integrating these issues and that may make for a less attractive investment proposition.” He argues that when a change is almost inevitable over the long-term, and material impacts are beginning to be felt already, that is an ideal time to assess these issues.

For change to happen, Brown says that it is likely to be increased information and awareness that moves markets and consumer behaviour, rather than regulation. He also adds that it is important not to underestimate the role that investors can play in making a difference to civil society’s actions and decisions. “It is the public that owns these companies and we want everyone to engage in this process. Our clients monitor sustainability issues that could impact their investments and frequently question and pressure us to make sure we are on the right side of these trends. Whether you have modest savings, significant investments or a pension we would encourage everyone to do the same.”

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