Affordable housing *|* Clean water & sanitation *|* Health *|* Sustainable agriculture & nutrition
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LIVING CONDITIONS: An estimated 1.6 billion people will lack adequate housing by 2025.1
POVERTY REDUCTION: Access to affordable housing is one of the most cost-effective strategies for reducing childhood poverty.2
The demand for affordable housing remained high in 2021 as economies grappled with the continuing impacts of COVID-19 and ensuing economic slowdowns. Government support for the newly unemployed has been patchy in many countries, exacerbating the near-term challenges. As a secular theme, we see affordable housing as an ongoing essential need that can accrue health and wellness benefits to families and communities and create and sustain economic value.
We believe access to safe, affordable housing allows people to focus more on overall well-being and upward mobility and less on basic survival. With less day-to-day stress, families can concentrate on education and career building, potentially leading to better educational outcomes, higher earning potential, and lower health care costs.
We see affordable housing as an ongoing essential need that can accrue wellness benefits to families and communities, creating and sustaining economic value.
In 2021, our equity and fixed income strategies invested in companies and organizations combating homelessness and addressing the need for safe, affordable shelter.
In the equity portfolio, we owned shares of a manufactured-home community operator with sites across the US and Canada. The company provides single-family homes for sale or rent at approximately one-half to one-third the cost of local two-bedroom apartment rents, while looking to increase the energy efficiency of its units. In Japan, we invested in a company that rehabilitates dilapidated or abandoned homes (which would otherwise be torn down) and resells them to first-time and low-income home buyers at affordable prices. The portfolio continued to own a French company that provides high-quality affordable housing to low- to middle-income renters and home buyers. The company operates primarily in the Paris region, where it builds multifamily properties.
Within the fixed income portfolio, we invested in debt issued by US government agencies that provide financing for low-income multifamily housing. We invested in loans underwritten by a California organization that serves as an intermediary between builders and financial institutions, providing access to capital for Low Income Housing Tax Credit developments throughout California that target low-income families, seniors, and residents with special needs. We believe these issuers are positively impacting society by supplying financing or directly providing underserved populations with a basic necessity: secure, affordable housing.
1 King, R. et al., “Confronting the Urban Housing Crisis in the Global South: Adequate, Secure, and Affordable Housing,” World Resources Institute, 2017. 2 Multiple studies cited in “A Place to Call Home: The Case for Increased Federal Investments in Affordable Housing,” Campaign for Housing and Community Development Funding (CHCDF).
PORTFOLIO INVESTMENT SPOTLIGHT EQUITY
IMPACT THEORY OF CHANGE (How will investment in company’s issuer/products and services help solve this specific impact challenge? Why does our investment lead to progress?)
Investments in Vonovia provide affordable housing at a lower price point relative to standard local comparative rents in Germany, Austria, and Sweden. Vonovia reduces costs per residential unit through economies of scale. Affordable housing facilitates greater social and financial stability for its tenant base.
FIVE DIMENSIONS OF IMPACT (Based on the framework formulated by the Impact Management Project)
WHAT
Lives and communities improved by access to affordable housing
Aspirational
WHO
Number of tenants housed
> 1 million
HOW MUCH
Affordable housing units under management
636,507
CONTRIBUTION
Reduction in monthly rent per square meter compared to market average (Germany)
12%
RISK
Execution: Potential deterioration in housing quality over time
Moderate significance/ low probability
UN SDG ALIGNMENT Sustainable Cities and Communities
TARGET 11.1 By 2030, ensure access for all to adequate, safe and affordable housing and basic services and upgrade slums
NEGATIVE IMPACTS Environmental impact of operations and supply chain
SCALE Narrow
MITIGATION EFFORTS Sufficient WILLINGNESS TO ENGAGE High
QUALITATIVE ASSESSMENT (How has company delivered relative to our expectations?)
Vonovia continues to provide high-quality affordable housing units, evidenced by high levels of customer satisfaction that increased over the pandemic. We are encouraged by its tenant outreach and consultation process as well as the discounted rates offered to social organizations.
Meets expectations
ENGAGEMENT PRIORITIES
(Issues on which we are looking to engage/have engaged in the prior 12 months)
As Vonovia’s balance-sheet leverage has increased, we have engaged on the company’s strategic direction and potential modifications under new company leadership.
Portfolio spotlight examples are based on non-performance-based criteria. For information on how we selected the portfolio spotlight examples, please see the Important disclosures section. Portfolio spotlight examples are for illustrative purposes only, are not representative of all investments made by the portfolio, and should not be interpreted as specific security recommendations or advice. It should not be assumed that an investment in the examples has been or will be profitable. Actual holdings vary for each client, and there is no guarantee that a particular client's account will hold the examples presented. Key Performance Indicator data is based on issuer or company reporting, press releases and websites, proxy data, and Wellington analysis. While data is believed to be reliable, no assurance is being provided as to its accuracy or completeness. Wellington determines the UN SDG goals and targets that, in our view, each portfolio company or issuer is aligned with. Language for the goals and targets has been abbreviated, but not otherwise altered, from UN.org.
PORTFOLIO INVESTMENT SPOTLIGHT FIXED INCOME
IMPACT THEORY OF CHANGE
The Philadelphia Redevelopment Authority is a public body. These social bonds form part of the financing of the Neighborhood Preservation Initiative, intended to preserve access to critical affordable housing as well as promote economic activity and the welfare of the residents of Philadelphia. It includes rental assistance, loans, and grants to facilitate housing repairs and grants/loans for first-time home buyers.
FIVE DIMENSIONS OF IMPACT
Enable the provision and maintenance of quality affordable housing to residents of Philadelphia in need
Share of renters paying at least 35% of their income toward housing Share of homeowners paying at least 35% of their income toward housing
49% 28%
Size of grants or forgivable loans to first-time and eligible home buyers
Up to US$10,000
2021 funding allocated to preserve and develop affordable housing
US$44.4 million
Execution: Program may fall short in providing sufficient affordable housing
Moderate significance/ moderate probability
NEGATIVE IMPACTS Potential difficulties in getting access to loans, grants, and information about eligibility
SCALE Moderate
MITIGATION EFFORTS Sufficient
QUALITATIVE ASSESSMENT
Over the life of the program, the Neighborhood Preservation Initiative will provide up to US$400 million for citywide investments in affordable housing and other social initiatives. We are encouraged by the planned levels of disclosure and reporting, which include details on the socioeconomic characteristics of the beneficiaries. Meets expectations
ENGAGEMENT PRIORITIES As the bond has only recently been issued, we have not yet seen a social bond impact report. We look forward to discussing with the issuer future disclosure on the ultimate social benefit of the bonds and the Neighborhood Preservation Initiative.
Portfolio spotlight examples are based on non-performance-based criteria. For information on how we selected the portfolio spotlight examples, please see the important disclosures section. Portfolio spotlight examples are for illustrative purposes only, are not representative of all investments made by the portfolio, and should not be interpreted as specific security recommendations or advice. It should not be assumed that an investment in the examples have been or will be profitable. Actual holdings vary for each client, and there is no guarantee that a particular client's account will hold the examples presented. Key Performance Indicator data is based on issuer or company reporting, press releases and websites, proxy data, and Wellington analysis. While data is believed to be reliable, no assurance is being provided as to its accuracy or completeness. Wellington determines the UN SDG goals and targets that, in our view, each portfolio company or issuer is aligned with. Language for the goals and targets has been abbreviated, but not otherwise altered, from UN.org.
Next theme: Clean water & sanitation >
FRESH WATER: Demand for fresh water is expected to increase 70% by 2050.1
WATER STRESS: Up to 3.5 billion people could face water scarcity as soon as 2025.2
For hundreds of millions of people, in developed and emerging economies alike, securing clean water is a constant struggle that can hamper economic development and perpetuate community-level inequities, with up to two billion people lacking access to safe water.3 Water infrastructure is also key to building climate-change resiliency and ensuring safe, uninterrupted service for industries ranging from energy to agriculture to health care. Products and technologies that help alleviate water stress and secure better health outcomes help us meet our impact goals for this theme.
Our research with Woodwell has reaffirmed the opportunity in this theme. Projections for capital spending for improving water infrastructure, including delivery, safety, and treatment, are rising.
Many water-scarce regions are experiencing rapid urban population growth, putting even greater stress on water supplies.
In 2021, you helped invest in companies and organizations developing infrastructure across the water cycle, using technology to help increase usage efficiency and reduce waste.
Products and technologies that help alleviate water stress and secure better health outcomes help us meet our impact goals for this theme.
The equity portfolio included shares of a company that helps to prevent water contamination, reduces energy consumption, and ensures water quality by disabling up to 99.9999% of harmful organisms.
We also held a US consulting company providing science-driven engineering solutions. The company is a leader in water and environment management, solid waste, wastewater treatment, watershed management, flood control, and desalination. We maintained our position in another US company facilitating water recycling and biogas collection.
Within the fixed income portfolio, we invested in a selection of US municipal water departments, which expand access to drinking water as well as to wastewater and stormwater services for millions of residents. We also invested in an issuer providing water, hygiene, and infection-prevention solutions and services to communities across the globe, reducing the risk of waterborne disease and mitigating other water-related hazards.
We believe our investments in these companies and issuers help ensure safe and consistent access to clean water and sanitation services, thereby improving the health and quality of life for individuals and communities.
1 “Nature-Based Solutions for Water: World Water Development Report,” United Nations, 2018. 2 World Resources Institute. 3 United Nations Department of Economic and Social Affairs, March 2022.
Evoqua offers a range of water and wastewater treatment solutions that help address water scarcity challenges. By providing technology that improves water quality at high volumes, water scarcity challenges can be addressed, and industry and individuals can be empowered to contribute more effectively to the economy.
Lives and communities improved by effective water and waste management
Total customers
38,000
Installations
200,000
Total water processed
141.6 billion m3
Execution risk: The company fails to keep pace with innovation Endurance risk: Installations do not last as long as intended/are not maintained adequately
Moderate significance/low probability
UN SDG ALIGNMENT Clean Water and Sanitation
TARGET 6.4 By 2030, substantially increase water-use efficiency across all sectors and ensure sustainable withdrawals and supply of freshwater to address water scarcity and substantially reduce the number of people suffering from water scarcity
WILLINGNESS TO ENGAGE High
Evoqua is executing effectively and continues to grow its scale and service breadth across its wide range of end markets. The company is well positioned to benefit from increased funding for clean water initiatives under the US Infrastructure and Jobs Act. Meets expectations
ENGAGEMENT PRIORITIES In a recent engagement, we discussed governance and compensation, with a focus on a special award to the CEO. We feel comfortable that this was a one-time award and situationally justified. In 2022, we look forward to visiting the company’s newly opened Innovation Center to continue to deepen our knowledge of the company’s technical capabilities across its water platform.
Investments in Aegea, the largest private sanitation company in Brazil, provide clean water and sewage services throughout the country, with the goal of providing universal access to this essential service.
Providing universal access to water and sewage services
Individuals reached by water and sewage services
21 million
Number of cities in Brazil with Aegea operations Volume of water treated Number of active sewage connections
153 54,416 m3 1.2 million
Number of homes served by social tariff
95,000
Execution: Potential failure to ensure water quality and minimize water losses
Moderate risk/ low probability
TARGET 6.1 By 2030, achieve universal and equitable access to safe and affordable drinking water for all
NEGATIVE IMPACTS Energy intensity of operations and potential pollution as a byproduct of sewage treatment
Aegea continues to expand access to clean water and sanitation services across Brazil. Meets expectations
ENGAGEMENT PRIORITIES We have engaged recently with management on its planned issue of sustainability-linked bonds, targeting outcomes such as reduction of the company’s energy consumption as well as diversity-related indicators.
Next theme: Health >
ACCESS FOR ALL: Around 50% of the world's population lacks access to health care.1
POVERTY PREVENTION: Each year, 100 million people are pushed to poverty because of health-related expenses.2
We aim to identify companies and issuers with new business models and groundbreaking scientific or clinical approaches.
Reaching vulnerable populations or delivering multifaceted, long-term treatments for complex diseases is especially difficult. Pervasive inefficiencies and chronic underinvestment in many systems, particularly across emerging markets, have become increasingly apparent.
In parallel, we see increasing value in disease research, genomics, life-sciences innovation, and tech-enabled care such as remote monitoring and diagnostics. Impact companies are stepping up with solutions that take advantage of new scientific and technological development to help narrow these gaps.
Your investment helps improve care through exposure to innovative companies with direct positive impacts on health outcomes.
We aim to identify companies and issuers with new business models and groundbreaking scientific or clinical approaches to improving health care access, reducing costs, and solving other systemic problems.
Over the last year, our equity team has maintained our position in a US provider of home health and hospice care services, realizing that this type of care can lower the cost curve in health care delivery while providing effective treatment.
Recognizing the need for accessible, high-quality eye care at affordable prices, we initiated a position in a company providing low-cost eye exams and affordable prescription lenses. Importantly, the company is focused on serving a lower-income customer base and operates in more rural areas where optometrists are hard to come by. We have remained invested in a laboratory equipment business whose tools facilitate genomic research. We continue to own shares in a life sciences company whose bioanalysis and precision medical instruments aid diagnoses and help improve patients’ quality of life.
Within our fixed income portfolio’s municipal segment, we remain invested in the bonds of US not-for-profit hospitals that provide charity care or conduct what we consider innovative research. In the corporate space, we invested in a multinational health care enterprise that provides programs and services to underinsured individuals in the US, as well as a developer and manufacturer of insulin-delivery systems for people with Type 1 diabetes.
We believe investments in this theme can help improve health outcomes around the world and ensure that more people have access to affordable quality care.
1 “Half of the world’s population lack access to essential health services. Are we doing enough?,” World Economic Forum, September 2019. 2 The World Bank and World Health Organization, 2017.
Investments in Danaher support the development of innovative medical technologies that allow researchers and clinicians to create and administer lifesaving treatments, improving patient outcomes.
Improving patient care and outcomes through better understanding of chronic disease and infection
Number of patients served
Increase in cell and gene therapies in development since 2015* Proportion of treatment decisions informed by clinical diagnostics* Danaher market share in diagnostics and cell/gene therapy solutions
10-fold >70% Significant
Total value of patents and technology, gross carrying amount
US$14.4 billion
Potential for manufacturing or design defects that could impact safety of products or their usage
High significance/low probability
* Data as of January 2022.
UN SDG ALIGNMENT Good Health and Well-Being
TARGET 3.B Support the research and development of vaccines and medicines for the communicable and non-communicable diseases that primarily affect developing countries, provide access to affordable essential medicines and vaccines
in our view, Danaher has an impressive management team and a strong track record of execution and growth. We believe the innovation effort is illustrated by the number of patents (7,700) the company holds and the quantum of its R&D investments. Meets expectations
ENGAGEMENT PRIORITIES We have engaged on how to effectively measure impact in the form of patient outcomes from Danaher’s range of products and services. We believe the company is thoughtfully building out its capabilities. We have also discussed board structure and governance issues.
Wellcome Trust is a charitable foundation that seeks to solve urgent global health challenges. Investments help fund research in health care, clinical trials, advocacy, and development of new treatments.
Improvements in global health care outcomes
Number of participants in R&D trials
8 million
Number of products in clinical evaluation Number of countries where Wellcome Trust supports scientists and researchers
72 >70
Charitable expenditures
£1,233 million
Execution: Safeguarding the health and safety of employees
Low risk/low probability
TARGET 3.8 Achieve universal health coverage, including financial risk protection, access to quality essential health-care services and access to safe, effective, quality, and affordable essential medicines and vaccines for all
NEGATIVE IMPACTS Carbon footprint of investment portfolio
Wellcome Trust operates at the intersection of public policy and health. We are pleased with its activities this year, particularly its contributions to pandemic-related research and support of mental health. Meets expectations
ENGAGEMENT PRIORITIES These include, but are not limited to, Wellcome Trust's ongoing activities to address various global health challenges and its new approach to diversity and inclusion, launched in 2021.
PORTFOLIO INVESTMENT SPOTLIGHT EMERGING MARKETS
Investments in Apollo, the largest private hospital network in India, help provide access to affordable, quality health care services. Apollo provides 10,000 beds across 71 hospitals. The company offers comprehensive health care services, from preventative checkups to surgical procedures to innovative telemedicine.
Better health outcomes for lower- and middle-income patients in India
Patients
Number of doctors in network Number of hospitals in network Online consultations completed
>120,000 71 Approx. 290,000
Number of clinical outcomes where Apollo is better than the industry benchmark
7 out of 8 sampled
Exogenous factors: Inability to procure sufficient medical supplies due to supply-chain issues Execution: Safety lapses in administering health care
Apollo continues to provide essential health care services in a country with just five hospital beds per 10,000 people. We appreciate the company’s innovative use of telemedicine to cost-effectively deliver medical care. Apollo also offers a comprehensive preventative health care program that we believe can deliver long-term health outcomes more effectively than other providers.
ENGAGEMENT PRIORITIES The management team is undertaking various initiatives to mitigate negative externalities and is willing to engage on ESG. We will seek to further engage on pricing and demand trends for new clinics and hospitals.
Next theme: Sustainable agriculture & nutrition >
REDUCING WASTE: Wasted food costs US2.6 trillion annually. This amount could feed the world’s 815 million hungry people four times over.1
ENDING HUNGER: 1 in 9 people suffer from hunger, and 1 in 3 are malnourished.2
With the global population expected to reach 9.8 billion by 2050,3 the ability to produce more food with less resource-intensive methods may be critical.
In addition to looking at ways to enhance future food production, there is also a pressing need to bolster the resilience of existing food production and distribution mechanisms. The Intergovernmental Panel on Climate Change’s Sixth Assessment Report warns that climate change has started to hamper food production in some of the world’s more vulnerable regions, many of which are in emerging markets. And more recently, the tragic events in Ukraine (an important global breadbasket for corn and wheat) have highlighted the precariousness of agricultural supply chains.
In our view, investments in companies developing solutions for sustainable food production can play a meaningful role in addressing these growing challenges. Resilient livestock, seeds, and crops can reduce food insecurity and enhance nutrition. Technologies geared toward smallholder farms may help mitigate the negative effects of large-scale industrial agriculture, which has historically been a source of air, soil, and water pollution and a severe draw on natural resources.
In 2021, your investments in our equity portfolio helped finance businesses that support livestock productivity, address malnutrition and obesity, and widen access to healthy meats and vegetables.
We have maintained our position in a company advancing technology in porcine, bovine, and other animal breeding, which can increase the overall protein supply as well as animal productivity. Better animal welfare from lower disease incidence and higher efficiency of feed, water, and more productive resources can boost economic results for farmers and increase availability of high-quality protein sources.
We continued to invest in a multinational active in health, nutrition, and materials.
The company addresses malnutrition and obesity through the development of fortified food and micronutrients reducing salt and sugar content in processed food and improving agricultural sustainability. We also maintained a position in a producer of frozen meats and vegetables serving European markets. Frozen foods can deliver nutrition that is comparable and sometimes superior to fresh foods due to nutrient loss during transport. The company’s vegetable and protein products increase access to quality nutrition, particularly in areas where fresh produce is less available, and its eco-friendly packaging reduces solid waste.
In our fixed income portfolio, we continue to monitor the expanding universe of issuers for this theme. With the diversification of labeled bond-issuer types and formats, and the growing food shortage experienced most acutely in certain emerging markets, we anticipate that emerging market sovereign issuers and development banks may issue bonds earmarked to provide quality nutrition to the most vulnerable communities.
1 Food and Agriculture Organization of the United Nations. 2 "Zero Hunger,” World Food Programme, 2020. 3 United Nations World Population Prospects.
Nomad’s vegetable and protein products increase access to quality nutrition at affordable prices. The company's emphasis on recyclable packaging and frozen foods increases shelf life, reduces food and packaging waste, and supports environmental sustainability.
Improved health and well-being as a result of access to healthy food
Customers
Operations across 13 European countries
Market share in European frozen food
14%
Proportion of revenue from seafood, poultry, and vegetables Proportion of products without additives (2020)
75% 97%
Alignment: Health risks from unhealthy food produced
UN SDG ALIGNMENT Zero Hunger
TARGET 2.1 By 2030, end hunger and ensure access by all people, in particular the poor and people in vulnerable situations, including infants, to safe, nutritious, and sufficient food all year round
Nomad Foods is committed to offering high-quality food products at affordable prices and maintaining high standards in labeling that help consumers make sound nutrition choices. We believe it is an industry leader in sustainable sourcing. We continue to monitor merger and acquisition activity and alignment with the impact objectives underpinning our original purchase. Meets expectations
ENGAGEMENT PRIORITIES Nomad has emphasized better “portionability” in frozen versus fresh foods in the context of high food-price inflation. We have also engaged on supply-chain constraints. We believe the company should be resilient in the face of potential shortages given its global, scaled procurement footprint.
Picard is the leading retailer of frozen foods in France, enabling access to affordable and nutritious food. Its sustainability-linked bond is aimed at improving sustainability in its operations, including energy consumption and efficiency in stores and CO2 emissions from transportation.
Increased sustainability of logistics and retail practices in the food supply chain
Number of stores in operation
1,068
Proportion of Picard's energy consumption related to cold storage
>60%
Reduction in energy consumption per m3 of cold equipment vs 2012* Reduction in emissions from transportation
10.2% Aspirational
Low significance/low probability
*Data as of 31 December 2020.
UN SDG ALIGNMENT Industry, Innovation, and Infrastructure
TARGET 9.4 By 2030, upgrade infrastructure and retrofit industries to make them sustainable, with increased resource-use efficiency and greater adoption of clean and environmentally sound technologies and industrial processes, with all countries taking action in accordance with their respective capabilities
We are encouraged by Picard's sustainability targets to reduce CO2 emissions in its supply chain and operations by 10% and 15%, respectively, by 2025. Meets expectations
ENGAGEMENT PRIORITIES Long-term engagement priorities encompass progress on key focus areas to enhance sustainability in the supply chain, including increasing average loading rates, use of rail transport, and installation of biogas transport loops.
