Is Amazon really a sustainable investment?

Ted Franks

Pengana Capital Group

The WHEB investment strategy has evolved considerably over the past 15 years. But the core has always been quite simple. We invest in companies that provide solutions to sustainability challenges. The companies’ products and services are good for society or the environment, and because of that, they have the potential to grow profits and generate strong investment returns.

That’s the idea. And there is beauty in simplicity. It shouldn’t take too much effort to see whether a company is genuinely having a positive impact.

The investment community has moved further in our direction in the last five years than we ever thought was possible. But we are still often amazed that some investors make this so complicated.

During the quarter, we read some great research from Morningstar and Morgan Stanley. They looked at the top holdings in EU registered funds classified as “Sustainable” under the Sustainable Finance Disclosure Regulations (SFDR).

Under SFDR, sustainable funds should mostly be classified under either Article 8 or Article 9. Technically, Article 8 funds promote environmental and social characteristics. Article 9 funds on the other hand have a sustainable investment objective. You can think of them as lighter vs. darker green, or ESG vs. impact, although neither distinction is perfect.

Alongside the names of many holdings highlighted in the analysis that makes logical sense, there were plenty that hit the eye as odd. News this month also made one name, in particular, stand out. Amazon is apparently held by 30% of the Article 8 funds the researchers looked at. More incredibly, 13% of the Article 9 funds somehow justified including it too.

To include Amazon in an Article 8 fund, investors need to look past quite a roster of troubling supply chain issues. These are environmental, social and governance (ESG) concerns, which we separate from how it actually generates revenue – its impact. Aggressive tax and labour practices, and ubiquitous plastics and packaging use, all look like pretty meaningful ESG red flags to us.

But we classify WHEB’s strategy under Article 9 of SFDR. To include Amazon in an Article 9 fund is an even bigger stretch.

Also in June, some intrepid undercover reporting by ITN uncovered the horrors of Amazon’s destruction policy. At a single site in Scotland, they found that Amazon was targeting the obliteration of 130,000 perfectly good items every week. Surplus to requirements, these products were mostly unused and largely still in their wrapping. It is not clear how many were even having parts recycled.

This is the problem of Amazon in plain sight: it is at the centre of rampant, turbo-charged consumerism. Its whole retail business is geared up to make it as easy as possible for everyone to consume more. The smallest number of clicks, the cheapest products, the easiest returns policy. Whatever the company can do to encourage you to buy things that you only half-want. And even some that you don’t.

And to feed this beast, Amazon constantly pushes competition on price alone. This means, running the kind of stock policy that results in throwing away perfectly good stuff.

And it also means turning to manufacturing sources where the true environmental and social cost of the production isn’t reflected in the price.

Analysis from Marketplace last year estimated that somewhere between 28% and 58% of Amazon’s sales volumes came from Chinese sellers. This number excludes resellers of Chinese products. How many of those suppliers operate to standards that their western consumers would approve of is an open question. And that is before you even factor in the emissions to ship those products to us.

So this is what Amazon does. In the rather plaintive words of the Greenpeace activist interviewed in the ITN film: “Each of these items requires natural resources and carbon emissions and human labour to make. That is why, as long as Amazon’s business model relies on this kind of disposal culture… things are only going to get worse.”

To us, this feels a very long way from a sustainable investment objective. We look for a lockstep relationship between unit sales growth and positive outcomes for society and the environment. For us, growing consumption is nearer the opposite of that description.

Learn more

Read more about Pengana’s WHEB Sustainable Impact Fund, or access our impact tools (the dynamic impact calculator, the impact map, and our annual impact report) and our latest webinar "Building Back Better" on our Impact Page here.

Pengana Capital Limited (ABN 30 103 800 568, AFSL 226566) is the issuer of units in the Pengana WHEB Sustainable Impact Fund (ARSN 121 915 526). A product disclosure statement for this fund is available and can be obtained from our distribution team. A person should consider the product disclosure statement carefully and consult with their financial adviser before deciding whether to acquire, or to continue to hold, or making any other decision in respect of, the units in the Fund. This report was prepared by Pengana and does not contain any investment recommendation or investment advice. This report has been prepared without taking account of any person’s objectives, financial situation or needs. Therefore, before acting on any information contained within this report a person should consider the appropriateness of the information, having regard to their objectives, financial situation and needs. Neither Pengana nor its related entities, directors or officers guarantees the performance of, or the repayment of capital or income invested in, the Fund.

Ted Franks
Pengana WHEB Sustainable Impact Fund, Fund Manager
Pengana Capital Group

Ted is the Fund Manager for the Pengana WHEB Sustainable Impact Fund and helped to found WHEB Asset Management in 2009.

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