Alison Porter, portfolio manager in the UK-based Global Technology Team explains the significance of ESG when it comes to investing in tech stocks and how the team proactively engages and manages their portfolios with this in mind.
For the team, environmental, social and governance (ESG) considerations are not only about responsible investing but also key to identifying opportunities and generating returns for clients.
Technology companies are providing solutions to many key challenges facing the world today such as the ageing population and climate change - from artificial intelligence in hospitals to ride sharing, and electric or autonomous vehicles. ESG factors are crucial to the team’s decisions to invest in companies that can execute in line with these key solutions.
Responsible behaviour is important to sustain and trust in new technologies that are very disruptive. Being proactive on ESG factors helps sustain the virtuous cycle for technology and the potential for delivering attractive returns to investors over the longer term.
Why is ESG important when investing in the tech sector?
ESG is an increasingly important aspect of how we invest in technology. And it's not just about being responsible investors. It's actually key to how we think about identifying opportunities and generating returns for clients.
When we think about some of the key challenges facing the world today we think about the ageing population, population growth, resource constraints and climate change and in addressing all of those the solutions often come from technology and many of the areas that we look at. From artificial intelligence that’s deployed in hospitals, at home and in workplaces, next generation infrastructure that’s inherently more energy efficient or the transport revolution; from ride sharing to electrification through to autonomous vehicles.
These are all technology solutions to some of these major challenges that we face. So ESG factors are crucial to our identification of the companies that can execute against these key solutions.
As an active manager how do you engage with companies on ESG?
As technology specialists we think we have a distinctive insight into how to look at ESG factors for the technology sector. For example, for governance, whilst in many sectors people equate governance issues with voting rights, we see it as much more than that. In technology, investors would have missed out on some of the great founder-led businesses like Amazon or Google over the years.*
* Any securities, funds, sectors and indices mentioned within this video do not constitute or form part of any offer or solicitation to buy or sell them.
We align ourselves with the long-term vision, often of founders, that are aligned to finding solutions in the longer term and not just short-term shareholder desires.
So governance has a different implication within technology. When we think about human capital, we think about the full supply chain; retaining the right talent within the business. In the environment, energy efficiency is core as technology is inherently very disruptive. So it’s important that companies, whether they think about privacy or whether they’re thinking about human rights that they take all of that into account with the solutions that they build.
Proactive engagement feeds the ‘technology flywheel’
We don’t just analyse these factors in a snapshot, we actually try and impact on them. We don't consider ourselves just active investors. We consider ourselves to be proactive investors. We meet senior level management of our companies and discuss with them their approaches on all of these different types of ESG factors.
Companies’ management of these important factors are key to us establishing the culture at those companies. A culture of innovation is likely to see companies that can execute on long-term growth opportunities and not just try to benefit from short-term hype cycles.
Providing proactive engagement on ESG is very important because it’s one of the protective guards of the ‘technology flywheel.’ The ‘technology flywheel’ is built as technology takes share from the rest of the economy.
Technology equities have been outperforming for over ten years1. They have been growing earnings at a superior rate versus the rest of the economy, and in doing that they’ve generated superior cash flow and built up [the strength of] their balance sheets2, which in turn has [often] been reinvested into (research and development) R&D3. R&D investment goes into providing new technology solutions.
Proactive ESG engagement really helps to sustain the ‘technology flywheel’. Responsible behaviour is important to sustain and trust in new technologies that are very disruptive.
So being proactive on ESG factors we believe helps sustain this virtuous cycle for technology.
Past performance is not a guide to future performance.
1 Source: Morningstar, gross total returns in USD for the 10-year period to 31 March 2020. MSCI ACWI Information Technology Index (technology equities) versus MSCI All Country World Index (broader equities).
2 Source: Credit Suisse as at 1 April 2020. Information technology sector versus other MSCI World sector indices excluding financials.
3 Source: Bloomberg as at 31 March 2020. Top 10 global spenders on R&D (in USD billions).
Next generation infrastructure: this theme is closely linked to the investment team’s focus on artificial intelligence as the next wave in computing. This includes cloud infrastructure (provision of servers, storage, a network, visualisation software) that is needed to manage IT services remotely by renting these facilities from specialised service providers over the internet.
Flywheel: a concept used to describe the process and enormous effort taken to transform a business; the concept illustrates pushing a heavy flywheel until it builds up enough motion and momentum to break through.
Balance sheet: a financial statement that summarises a company's assets, liabilities and shareholders' equity at a particular point in time. Each segment gives investors an idea as to what the company owns and owes, as well as the amount invested by shareholders.
These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. Any securities, funds, sectors and indices mentioned within this article do not constitute or form part of any offer or solicitation to buy or sell them.
Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.
The information in this article does not qualify as an investment recommendation.
The Janus Henderson Horizon Fund (the “Fund”) is a Luxembourg SICAV incorporated on 30 May 1985, managed by Henderson Management S.A.
Shares can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
If a Fund has a high exposure to a particular country or geographical region it carries a higher level of risk than a Fund which is more broadly diversified.
The Fund is focused towards particular industries or investment themes and may be heavily impacted by factors such as changes in government regulation, increased price competition, technological advancements and other adverse events.
This Fund may have a particularly concentrated portfolio relative to its investment universe or other funds in its sector. An adverse event impacting even a small number of holdings could create significant volatility or losses for the Fund.
The Fund may use derivatives with the aim of reducing risk or managing the portfolio more efficiently. However this introduces other risks, in particular, that a derivative counterparty may not meet its contractual obligations.
If the Fund holds assets in currencies other than the base currency of the Fund or you invest in a share class of a different currency to the Fund (unless 'hedged'), the value of your investment may be impacted by changes in exchange rates.
Securities within the Fund could become hard to value or to sell at a desired time and price, especially in extreme market conditions when asset prices may be falling, increasing the risk of investment losses.
The Fund could lose money if a counterparty with which the Fund trades becomes unwilling or unable to meet its obligations, or as a result of failure or delay in operational processes or the failure of a third party provider.