ESG Equity Monthly Report | March

10 March 2022

Sustainable ETF Monthly Report: Key Takeaways

  • It would be disrespectful to begin anywhere other than the tragedy of Ukraine and its people. Saturna Capital stands fully in support of Ukraine and in total opposition to the criminal Russian invasion. While heartbroken over the pain and suffering caused by the invasion and concerned over what the future yet holds, we take some solace from the knowledge that Putin’s long-term goal of splitting the West has backfired spectacularly, while the scales have fallen from the eyes of those who believed he acts with anything other than malicious intent.
  • Multi-decade highs for inflation in the United States and the Eurozone insured that rising prices remained a focus for investors. US Inflation hit a 40-year high of 7.5% annualized in January as strong consumer demand collided with continuing supply chain bottlenecks. [1] In February Eurozone prices jumped a record 5.8%. [2] With oil prices rising sharply in the wake of Russia’s aggression, inflation seems likely to remain elevated and we expect US/European policy rates to move higher.
  • Stock markets were generally holding steady in February before the invasion of Ukraine. That said, except for Russian stocks, the reaction was muted. For the month various regional markets declined in neighborhood of 3%, with Europe performing slightly worse and Japan less affected. Some investors seemed to adopt the perverse notion that the Ukrainian war would delay interest rate hikes, with a continuation of easy money supporting equities. [3]
  • In February the Saturna Sustainable ESG Equity HANZero™ Equity UCITS ETF declined 4.5%. PayPal, a strong ESG performer, reduced its growth outlook, while margins came under greater than anticipated pressure. Adidas was another weak performer, despite completing the disposal of Reebok. Russia accounts for less than 3% of Adidas sales and the reaction seems overdone. On the positive side, Vestas Wind Systems, which declined sharply in Q4 of last year, rebounded strongly on the realization that alternative energy not only addresses climate change but can also eliminate dependence on fossil fuel producing rogue nations. We note that the ETF had no exposure to Russian equites as we have long considered Russian governance inadequate. [4]

 

Macro Outlook

Few topics have received more attention the past few months than soaring inflation and the outlook for prices. Fiscal and monetary stimulus, along with myriad kinks in the supply chain due to COVID have received most of the blame. Less discussed has been the effects of climate change, or rather, the second derivative effects of climate change including droughts, massive fires, and floods. Take housing in North America. From 1997 through 2017 the lumber price (USD/1000 board feet) mostly traded between $200-400, with rare excursions to either side of that range. [5]

In 2018 prices briefly spiked to $600 before falling back below $400. Since COVID, however, we seen multiple spikes; first to $900+ in August 2020, before retreating, then to $1300+ in April 2021 before dropping back below $600. Prices now stand at $980. COVID certainly played a role in 2020 but there were also fires, especially in Canada, as well as multi-year outbreaks of bark-eating beetles as temperatures warm. And let’s not forget, significantly fewer homes are being built in North America than 15 years ago. [6] And it’s not just wood. Starbucks has already implemented price hikes and plans more according to the CEO. [7] 

Are coffee prices rising because of surging demand from consumers flush with stimulus dollars? Unlikely. Rather, the intense drought in Brazil followed by a rare frost damaged coffee trees and slashed harvests. Similarly, Vietnamese production has been hampered by drought. It’s not only agricultural commodities at risk. Last Spring Taiwan experienced a severe drought and nearly resorted to water rationing. Taiwan is home to the world’s largest semiconductor producer, TSMC, and making semiconductors is a water-intensive process. [8]

We have no idea what weather extremities will emerge over 2022 but it is becoming more difficult to ignore the effects of a warming world. Climate resiliency, in terms of preparing for both the physical effects of weather disruptions and the transitional effects of the inevitable policy responses to address climate change must be a key element in the analysis of any investment candidate. 

 

Sustainable ETF Performance

1M

3M

6M

YTD

12M

SI

Saturna Sustainable ESG Equity HANzero™ UCITS ETF (Acc)

-4.03%

-7.56%

-11.05%

-11.67%

NA

-8.47%

Please note that all performance figures are showing net data. Source: Bloomberg / HANetf. Data as of 28/02/2022

Performance before inception is based on back tested data. Back testing is the process of evaluating an investment strategy by applying it to historical data to simulate what the performance of such strategy would have been. Back tested data does not represent actual performance and should not be interpreted as an indication of actual or future performance. Past performance for the index is in USD. Past performance is not an indicator for future results and should not be the sole factor of consideration when selecting a product. Investors should read the prospectus of the Issuer (“Prospectus”) before investing and should refer to the section of the Prospectus entitled ‘Risk Factors’ for further details of risks associated with an investment in this product. Please note that all performance figures are showing net data.

 

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