Into the Woods, 3rd Issue.

Pick of the Week, SAA in SDGs and Wetlands are not Wastelands are the main topics of my third issue: Into the Woods. This investment series provides insights I gained through networking, meetings, and conference within the (sustainable) finance industry. It aims to help investors to take responsibility for their investments and use them as resources to the resolution of society’s challenges.

This third edition includes insights coming from my collaboration with Sustainable Market Strategies. They provide strategic investment research within sustainability to more than USD 3 trillion of institutional assets, through a series of weekly notes discussing new opportunities within the theme. This week I wrote an article on how to consider the Sustainable Developments Goals from a Strategic Asset Allocation perspective, and I am discussing how they can become an integral part of a portfolio's strategy. I provide an executive summary in this article. Get in touch if you want to find out more.

SAA in SDGs

• The SDGs were designed to be a blueprint for societal challenges, giving them clear objectives to overcome. They are however not an investment roadmap, they say little about the accessibility of solutions, the social and political environment these issues are facing and how private capital can contribute to their solutions.
• Many products have spawned from this initiative, claiming various degrees of authenticity. Much discussion has been drawn on assessing this issue called "greenwashing", but this still frames the theme in a compliance framework. Rather, the SDGs can be seen as a new source of value, from which several investment themes can be carved out and can represent new asset classes in their own right in a financial portfolio.
• The interesting part about the SDGs is that they are pinpointing all the world's challenges in one place and are making the links between one another. They are drawing entire economic maps that encompass supply chains altogether. They are hence a great macro tool that can steer a top-down allocation by connecting dots in novel ways. I usually take the example of water that has its own investment theme along its own supply-chain (distribution, pipes, pumps, cleaning, waste, use) and hence has its own attractive risk-return profile. Moreover, it is also a major resource in other industries such as agriculture, cement, textile, and mineral extraction, from which one can design an allocation based on a water efficiency factor (that is at the end of the day a measure of proper business management). From a bottom-up perspective, environmental and social considerations are (new) measures of investment diligence that can be seen as a hygiene factor.
• In the paper, I discuss 3 different themes where I see the best accessibility and market readiness for institutional capital to have a role to play: Water, Oceans, Agriculture. I discuss the various investment opportunities in these themes, what kind of asset classes they represent, their market and risks environments and how investors can consider them strategically in their portfolio. I further show they have compelling risk-return profiles and interesting correlations to play around.
• Finally, I suggest what is the impact these investments can have on society and how the different sustainable thematics are connected to one another. I motivate that investors can take responsibility for their capital and allocate them to solve their challenges. And usually, where there is a challenge, there is value. This philosophy of investing is about exploring new places and finding new paths on how to get there. The reward is not only getting a meaningful contribution in return but also finding new sources of value. Moreover, in a changing world where the limits of resources and the increase in pollution are eroding the stability of the status quo, it might just turn out to be the best survival strategy as well.

Wetlands are not Wastelands

• Wetlands contribute the most to human development but they are also one of the most threatened ecosystems in the world (Millennium Ecosystem Assessment, 2005). In the context of a general shortage of water, exacerbated by climate change, water quality is a growing concern in many regions of the world. Water pollution results from population growth, urbanization and the intensification of agriculture. Because of the lack of sufficient sewage treatment plants, polluted waters find their way into wetlands, which are connected to (underground) rivers, streams that will eventually affect lakes, seas, and oceans. They not only threaten the numerous ecological services provided to local populations by these ecosystems but also create problems down the line in other regions and development themes (health and food noticeably).
• Restoring wetlands through nature-based solutions can improve water quality, allow the reuse of water and restore eutrophicated wetlands. It is an adaptive and low-cost solution that treats some of the main water issues at his source and put these buffer zones back on the map so that they can function as natural filters for water. They also have a critical role in storing carbon and in increasing resilience to flooding. They act as natural barriers against sea-level rise and the increase in frequency and intensity of sea-surges.
• Tour du Valat is working on a project in Ghar el Melh lagoon in Tunisia. This is an important site for human development and the conservation of biodiversity. It is representative of the situation of coastal wetlands in the Mediterranean. The lagoon provides many ecosystem services supporting the local economy. It is however threatened by the input of low-quality water leading to eutrophication, the decrease of productivity of fisheries as well as agriculture, and that will also ultimately impact tourism. A sewage treatment plant exists but is insufficient and many houses are not connected (diffused urbanization). Tour du Valat's project wants to develop with local authorities an alternative solution for treating these polluted waters. They want to implement a constructed reedbed as a secondary water treatment at the outlet of the existing sewage plant. This nature-based solution has proved efficient in various contexts from large industrial plants (e.g. steel factory) to individual houses and can be customized for diffuse housing. It is thus a solution that does not require a centralized collection of polluted waters, which is solving waste concentration issues before they actually occur. It is furthermore a low-cost and low-technology solution that can easily be replicated and expanded in many other regions in North-Africa and can become a model of choice for water treatment.
• They have another project in Camargue with Conservatoire du littoral (the french national coastal protection agency), which acquired a 6'500 ha estate from former salt factories who close because of strong coastal erosion. They are working on an ecological restoration project since 2012 who aims to restore the initial ecosystem of the region (its dunes, saline grasslands, dry grasslands, and coastal lagoons). This site provides important services such as biodiversity, carbon sequestration and acts as a buffer zone against sea-surges that can protect the inland economies. This is a research project that aims to show the value of this solution and eventually assist coastal management with the problems previously mentioned (flooding, sea-surges, and storms).
• Hermans Consultancy is working on a similar project in The Neman and (connected) Pregolya river delta in Russia and Lithuania. It is an area of 100'000 ha with originally wet peat soils, which have been cultivated in the form of Dutch polders since the beginning of the 17th century. These soils are mostly still (or were) used in agriculture, in addition to peat extraction. The area in both deltas increasingly has to deal with flooding due to more upstream rivers discharged from urbanized areas, the poor state of water maintenance, and finally climate change. Only half of the agricultural land in the Russian part is in use, while the reuse of the land has increased elsewhere in the region. The project involves setting up an area of several hundred hectares of paludiculture (cultivation of reeds) that set up water management infrastructure for processing the harvest. In addition to preventing damage, the approach also contributes to a more sustainable socio-economic development of the region, by finding alternatives for agricultural use and the exploitation of peat bogs. Furthermore, these climate buffers and carbon storage possibilities were welcomed by Russian Officials and are part of a vision for the entire Neman river basin, the Kaliningrad Oblast as a whole, and similar low-lying delta areas in the Russian Federation and beyond.
• I see these solutions as interesting investments for philanthropists or impact investors that want to solve many impact challenges at once with a low contribution. I also see them as off-set carbon projects for the main traders in the market. Finally, they can be cheap capital expenditures for utilities that would not only solve their waste issues but help with their reputation capital as well. Get in touch if you want to find out more about these projects.

Pick of the Week

• Mowi is the biggest salmon farmer or the concept known as aquaculture (50% of the fish consumed nowadays is farmed). The company itself provides 20% of the world’s demand for salmon, especially in developed markets, and employes more than 14'000 people. The company is operating in an interesting place: it is at the forefront of ocean preservation, sustainment of local communities, and satisfying global food demand. But this comes with its challenges. On the one hand, it claims to solve fish conservation by reducing fishing of wild species, but fish farming induces diseases and has a negative impact on the local eco-system due to fishes concentration of excrements and considerate use of medicine. Moreover, these farmed fishes are also less genetically healthy and are reducing the health of the wild population and its size. Mowi has a new technology for this challenge as to put the farms off-shore with new donuts tanks to prevent escaping and more space to wash the excrements with large currents, whilst other technologies are staying along the coastline. Other solutions in the industry include land-based aquaculture with fish thanks that have no impact on the oceans and that can satisfy the food needs of a growing population. 
• The company itself has interesting financial characteristics with an annualized return of 26.1% over the last 5 years, 4.64% dividend yield (however partly financed by debt), PE Ratio 26.5, PB Ratio, 4.1, RoE 15.4%, RoA 8.7%, RoCE 14.5%, 32.3% undervalued by some analysts and finally a 24.9% annual growth of earning over the last 5 years. It is also financially healthy with a debt to equity ratio of 61.7%, with the debt being 35% covered by operating cash flow and the interest payments 63x covered by EBIT. It has recently issued a EUR 200 million senior unsecured green bond (4x time oversubscribed) at EURIBOR + 160 bps with the proceeds going to the following objectives: new freshwater hatchery with new technology that will save 99% of freshwater, reduce production time in the sea and projects that support 100% ASC certification as well as reducing absolute CO2 emissions by 35% in 2030 and 72% by 2050 throughout the value chain. Finally, Institutions own 62% of the companies, whilst 15% for upper management who recently bought more shares. 
• Mowi is also leading the food industry in terms of financial metrics, and has good traceability technology and is considered a sustainable leader by MSCI with a AA rating. It is suffering a couple of investigations at the moment by the European Commission for price salmon fixing (they use forward contracts for their sales), the US Department of Justice for Collusion and by the Scottish regulator for improper use of chemicals. The company has in other regards a clear sustainable strategy and seems to be an industrial leader in the matter.
• It is operating in a highly contentious space with many social and environmental challenges, but these challenges need solutions nonetheless. It remains to be seen how this space will evolve from a regulatory perspective, what will be the solutions that will solve the growing need of a healthy population of fish, what are such limitations, and finally whether the company will take a leading path. Seafood remains an interesting solution to provide food and support local economies but is currently under severe industrial pressure and ecological solutions are still being explored. The company is a player to contend with in the space and is somewhat an undervalued growth stock looking for expansion at the moment, with an interesting upside potential following the resolutions of the investigations and the technological evolution. I am keeping it under the radar.

The Wulp Castle

• The Wulp Castle is located in the town of Küsnacht, Zürich, Switzerland, in the surrounding woods that leads to Erlenbach. It apparently stood out from the Middle-Age and more particularly from the Bronze Age, but not much else is known about the castle. Why it was there and why it fell out remains a mystery.

Post Scriptum

Contact: [email protected]

Past Issues:

1. Into the Woods, 1st Issue
2. Into the Woods, 2nd Issue