Redwheel’s O’Toole Q&A: Why some clean economy businesses have a negative outlook

Amanda O’Toole discusses the funds she set up at Redwheel last year


Michael Nelson

Amanda O’Toole, portfolio manager at Redwheel, joined the company from Axa Investment Managers in April 2023 to lead two new funds – the Biodiversity fund and the Clean Economy fund. Here, she discusses the objectives of those funds and reflects on the instability of 2023.

What objectives have you set for the funds that you manage?

We’re focused on delivering capital growth over the medium and long term. We do that by investing exclusively in solutions providers, by which I mean that neither of the funds I manage invest in best-in-class businesses; they’re not strategies that look at consumer goods companies that have the lowest carbon footprint or lowest water intensity, for example. Instead, we prioritise investment in what I describe as ‘the enablers’; the businesses that have a growth opportunity because other businesses need to deploy their services. For example, tech businesses will need the services of renewables and off-grid energy storage to lower their carbon intensity. We don’t buy the tech company, but we do buy companies providing energy storage and efficiency solutions.

The objective for me, therefore, is to identify areas where that market growth is long-term and durable in nature, but it’s also about securing them at a low valuation. That involves sorting through companies that are just along for the ride, where their valuation is elevated because there’s excitement around the theme, and identifying the businesses which will make this opportunity their own and translate it into returns.

What opportunities are you seeing in the biodiversity space?

We invest across four areas for that fund: sustainable materials, aquatic ecosystems, terrestrial ecosystems and waste management. The idea behind that breadth is it gives us access to all the solutions that enable us to live and interact with the natural ecosystem in a way which is realistic and viable for humanity. So, it’s about producing materials we need but doing it in a way that does the least harm, and then managing a company’s interactions with land and water. There are newer apparel materials that do less harm than conventional materials, and there are businesses providing better packaging solutions than what we’ve historically relied upon, for instance.

On terrestrial ecosystems, a lot of that is about agriculture. There’s a lot of room for improvement in food production, and technology such as AI could make a big difference quickly. That’s an interesting opportunity, alongside thinking about different ways to irrigate, breeding programmes that produce more drought-resistant crops, etc. In aquatic ecosystems, we don’t have many holdings in aquaculture because there are still so many challenges there and it doesn’t yet feel investable to me. But there’s a lot of interesting water tech, both in the UK and around the world, that aims to address water scarcity issues.

Finally, I find the opportunities in circularity and waste management fascinating. We look at a lot of niche businesses that have found a vertical in the market where they deal with problematic waste streams by making something from the material the collect that they can sell. So, an obvious example is a company that collects hazardous material from the production of aluminium and steel and converts it into zinc oxides to be re-used in the production of galvanised steel. So, they’re replacing virgin extraction with something that has a lower carbon intensity and would otherwise have gone to waste. And, importantly for us, they’re able to generate attractive margins over the long-term, translating that into a good return on invested capital.

Last year, the CSO of J Safra Sarasin said that biodiversity funds are not that much different to traditional ESG funds because there aren’t enough companies dedicated to pure solutions in this area. Do you agree?

It’s a valid question to ask, and it’s something that I encourage clients to think about it when they’re looking at these strategies. I think it’s a fair assessment of those best-in-class, lowest environmental footprint approaches, because a business that is thinking about lowering its footprint from a carbon intensity perspective often also is working to reduce waste and other things like that. So, the things they’re trying to address align with a broad ESG footprint.

What we do is different though, for two reasons. First, we focus on specific solutions for biodiversity such as reducing the need for land and deforestation, reducing the need to pollute waterways or the physical land and soil, etc. They’re not necessarily the same businesses that you would get in a broad ESG strategy.

Secondly, our investment universe excludes businesses which have exposure to any of the five accepted vectors which facilitate the destruction of nature and biodiversity – things like land use, invasive species, pollution and climate change. The reason we do that is because we run a Clean Economy strategy that does invest in solutions for climate change, and it doesn’t make sense to ask our clients to double down on the same exposure.

What metrics do you use to report your results, and are you considering using the Taskforce for Nature-based Financial Disclosures (TNFD) guidelines in the future?

We’re not yet at the point where we’ve committed to TNFD reporting across Redwheel. It’s obviously still early stages, and there’s time for that in the future, but at the moment we haven’t committed to that.

For me, the most relevant thing for us to be doing right now is disclosing information around whether companies should be part of our investment universe and how it differentiates its solutions, and therefore has a USP that we think can solve a problem. The way we do that is by writing a theory of change, which is an overarching concept of what a biodiversity constructed future would look like, what the opportunities and risks are, as well as the obstacles, from which we build our universe. Then, we select KPIs that are relevant to the specific activities of that company that we can track and monitor. Reporting against those things that are stock specific and bespoke holds the most value for our clients.

Having said that, obviously there is a need for higher-level metrics, for which we use some external data providers that give us the ability to report around both the dependency on natural ecosystem services, but also the impact that companies have on that.

Did your Clean Economy strategy feel the impact of the headwinds for clean energy equities in 2023 at all?

We launched in November, so missed a lot of the market exposure through the last year. Our philosophy is that we’re trying to select businesses where there’s a greater opportunity than the market is giving credit for, mindful that we’re doing that in a space where there are often stocks which are overvalued because people have got excited about the trend without really thinking about the business and the returns that will be generated from it.

Last year, you can see the market coming around to that way of thinking, with parts of the market where valuations were challenging and expectations were too high, and I think it’s been quite a healthy reset. Now, we’re looking forward with perhaps a more realistic set of expectations in some parts of the market. But, in other parts of the market, there’s an unreasonably negative outlook for some of these businesses, because what hasn’t changed is the clear need to make investments around energy security, and around a future which is more electrified and more robust. That’s clearly still the case.

What does the future hold for these two funds, and what are you working on going forward?

There’s a lot happening. Within biodiversity, I am quite focused on the breadth of opportunities within the water space, and the public are being more vocal about how upset they are over the pollution of our waterways. I think it’s going to force the hand of some of the big polluters, and they’re going to be strongly incentivised to invest and do better. That presents us with a huge amount of opportunity in terms of all the different types of tech that can help address this.

If you look to the US market, particularly, there’s a growing focus around forever chemicals and the extent to which they’re sitting in waterways. We talk to businesses that have specialised solutions to try to extract the PFAS from water, and they have noticed an increase in customers who are concerned about the potential for litigation if they do nothing. And so, ahead of any regulation coming in, they’re starting to look to clean up the mess that they’ve made. So, I think that’s a significant opportunity, alongside the adoption of more holistic solutions encompassing businesses that do the consulting and planning for big picture projects.

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