ESG is the latest investing megatrend, but Mackenzie’s Gregory Payne succeeded with a more targeted approach

Gregory Payne | Senior Vice President, Portfolio Manager, Co-Head of Mackenzie Green Chip Team Mackenzie Investments

Bailey McLean/The Globe and Mail

Environmental, social and governance (ESG) investing has grown in popularity in recent years. But Gregory Payne, a value manager who has focused on environmentally-themed investing since 2008, sees better opportunities within a narrower circle of companies that make things for a low-carbon economy or are part of the energy transition to renewable energy. He and John Cook jointly manage the nearly $2.2 billion Mackenzie Greenchip Global Environmental All Cap Fund, which has outperformed the MSCI All Country World Index since late 2018. We asked Payne, 52, how his fund has outperformed and why he favors China-focused solar companies like JinkoSolar and Canadian Solar.

Why did you choose an environmental versus an ESG strategy?

ESG is based on how companies behave, and it doesn’t matter what they do. They just need to be judged as good actors. You might buy an oil sands company because it uses the least water per barrel. Environmental investments own companies that address challenges such as environmental degradation, population growth, and resource scarcity. ESG strategies own healthcare, technology and consumer discretionary companies, which are often household names and can be subject to hype and high valuations. The utilities, industrials and materials sectors where we usually find stocks are often overlooked and not subject to the same euphoria.

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We invested in solar stocks at a low point in 2018 after Donald Trump imposed tariffs on solar imports and China cut subsidies to the sector. We’ve had acquisitions, including AVX and KEMET in electronic components, and deals with Hanwha Q Cells, Kaz Minerals and Suez. Our value investing style came back into vogue last year, but stock selection has been helpful in previous years. Our fund has done well at 20% to 25% in US companies versus more than 50% in our index and its peers.

Why do you favor China-focused solar panel manufacturers when US-based First Solar is often the first name?

Solar is a global market with the US accounting for 15%. China is a big part of the success story in building an ecosystem and supply chain around solar energy. JinkoSolar and Canadian Solar are trading at a fraction of their revenue, while First Solar is trading at more than five times. China-focused companies are heavily discounted by North American investors who favor US companies and may have anti-Chinese sentiment. There is a value opportunity in this alignment. And there’s 85% of the market for Chinese companies where they’re doing well.

What about allegations of the use of forced labor in China’s Xinjiang region, specifically to produce polysilicon for solar panels?

In Xinjiang, JinkoSolar has a silicon wafer factory and Canadian Solar has a solar farm, but both oppose the direct use of Uyghur forced labor. This claim is more relevant to Daqo New Energy, which we also own. Half of the world’s polysilicon comes from Xinjiang. It’s a concern and we’re doing our best to learn more about it. However, our companies do not lend themselves to manual work from the outset. They hire engineers, managers – jobs like that.

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Why do you like nuclear power despite the fear of possible disasters and attacks from environmentalists?

We own French energy utility Engie because it is a leader in renewable energy, but it operates Belgium-based nuclear power plants that plan to extend their lifetime to 10 years. We support extending the lifespan of old power plants because nuclear energy provides attractive, zero-emission base-load electricity. We also believe there has been an overreaction to security concerns. Small modular reactors are not yet a scalable, economical alternative.

Why don’t you own shares in electric vehicles?

Because of their high ratings. We put more emphasis on hybrid vehicles, smaller batteries and public transport. We own Hitachi, Alstom and Siemens which provide rolling stock and rail signaling systems. Local transport must be more of a focus than converting our car fleet to electric vehicles with massive, material-intensive batteries. When EVs take off, we still have a tailwind from electronic circuits and components. We own Onsemi, Infineon Technologies and STMicroelectronics.

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