Hari Balkrishna is on a mission to find listed companies that seem to achieve the impossible.
According to the portfolio manager at American investment firm T Rowe Price, these companies generate positive environmental and social impact solutions, in addition to delivering strong financial returns compared to the MSCI All Country World Index (ACWI).
“I think the two can go handin-hand,” says Balkrishna to The Edge Singapore. “The companies that are providing solutions have a reasonable business moat around themselves. [They] tend to be companies with meaningful business model tailwinds.”
Balkrishna oversees T Rowe Price’s Global Impact Equity Fund, which turned three last month. According to him, the fund’s holdings go a step beyond the typical sustainability label — instead, they generate measurable impact.
Explaining what goes into this rather vague “impact” label, however, gave rise to this week’s cover story on the risks of impact-washing.
“We find that in a lot of interviews, there is a lot of confusion about where impact sits and very often it just gets branded along with environmental, social and governance (ESG) investing, which, personally, I find a very confusing term, because there isn’t a widely accepted definition,” says Balkrishna. “Whereas impact — sure, it is a form of ESG investing, but it’s very specific to actually finding companies that measure, report and deliver that impact.”
See also: Investing for impact? Learn these lessons from ESG investing
According to Balkrishna, this filter cuts the stock universe from more than 3,000 in the MSCI ACWI down to “about 400–500” names.
The universe also excludes companies involved in adult entertainment, alcohol, fossil fuels, gambling, tobacco, for-profit prisons and weapons.
“It’s a much smaller universe that we’re looking at, but it’s an attractive universe in terms of growth prospects. I don’t believe we’re sacrificing growth prospects as a result of investing for impact.”
See also: ‘Strong storytelling, clear visual aids’ help ABC Impact explain impact of investments
Measuring that impact is easier said than done. Balkrishna says T Rowe Price has a “pretty robust” impact measurement practice, which involves applying principles from the non-profit Global Impact Investing Network (GIIN) and the five dimensions of impact: what, who, how much, contribution and risk.
“[For] a healthcare company, we’ll look at that company’s own estimation of its patient lives impacted or surgeries provided, for example… That’s our first port of call.”
Should company data be lacking, T Rowe Price also has an inhouse team of “nearly 30” responsible investment analysts who engage the companies, he adds. “We also work with a third-party measurement agency, and they help us measure the impact.”
While ESG ratings agencies look at the “internal footprint” of a company, Balkrishna’s team examines the “external impact” of a company.
Take for example, Linde, a Nasdaq-listed industrial gases and engineering company, which, incidentally, is among the top holdings in the Global Impact Equity Fund.
“What we focus on is the 80 million tonnes of CO2 they have mitigated over time… What an ESG rating will look at is Linde’s own footprint. Linde would probably rank less well on a traditional MSCI or Sustainalytics ESG rating, because it shows up as an emitter. But actually, it’s mitigating much more than it’s emitting because it’s helping heavy industries to decarbonise.”
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‘Offensive opportunity’
The Global Impact Equity Fund has an “official” range of 55 to 85 holdings, says Balkrishna, “but we typically end up in the 60 to 65 range”. As at Feb 29, besides Linde, which takes up 2.7%, the rest of the fund’s top holdings are Eli Lilly and Co (3.16%), ASML Holding (2.6%), Roper Technologies (2.51%) and Thermo Fisher Scientific (2.25%).
Rounding out the fund’s top 10 holdings are Danaher (2.09%), Waste Connections (2.09%), Taiwan Semiconductor Manufacturing, or TSMC (2.06%), Keyence (2.05%) and Bank Central Asia (2.04%).
Of these 10 names, four of them have their headquarters outside the US: ASML in the Netherlands, TSMC in Taiwan, Keyence in Japan and Bank Central Asia in Indonesia.
Across sectors, the fund has a strong tilt towards healthcare, which makes up 25.4% of holdings. This is more than twice the benchmark MSCI ACWI’s weight of 11.22%.
Balkrishna thinks there is an “offensive opportunity” in healthcare names over the next decade, but this has not been priced in by the market today. “I think about where I’m seeing the greatest prospects for positive surprises on innovation. Healthcare is right up there.”
Healthcare also provides “defence and ballast” to the portfolio, he adds. “If we just had industrials and tech, we would be running a very high-beta, high-risk portfolio.”
Information technology names make up 23.02% of the fund, slightly below the 23.87% weight in the benchmark, while holdings in the industrials and business services sector make up 19.59% of the fund, nearly twice the benchmark’s weight of 10.78%.
T Rowe Price uses the MSCI/ S&P Global Industry Classification Standard (GICS) for sector and industry reporting. According to Balkrishna, the holdings under the industrials and business services sector label include companies that decarbonise heavy industries, such as Trane Technologies and Ingersoll Rand, as well as waste management companies and electrical equipment manufacturers like Schneider Electric and Hubbell.
Across markets, the fund is dominated by US names, which make up 55.54% of holdings. That said, this is still lower than the benchmark’s 63.6% US representation. Canada and Japan place second and third, at 4.75% and 4.5% of holdings.
Outside of the top 10 holdings, the fund’s Asia names as at Dec 31, 2023, are: India’s HDFC Bank, HDFC Life Insurance and Axis Bank; Japan’s Daiichi Sankyo and Hamamatsu Photonics KK; Vietnam’s Asia Commercial Bank; China’s Li Auto and Kanzhun; Hong Kong’s AIA Group; Taiwan’s Chailease Holding; and the Philippines’ BDO Unibank.
In the three months till Feb 29, the fund returned 11.93%, higher than the benchmark’s 6.33% return.
Since inception, however, the fund has underperformed the benchmark on an annualised basis, at –3.03% against 4.21%. The cumulative performance of the fund from inception has lagged the benchmark since December 2021.
Photos and Infographic: T Rowe Price
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