Troy presses Hershey on water, as investors quiz it on tobacco

Troy Asset Management flags its commitment to sustainable investing by tackling US confectionary giant Hershey over water scarcity, while investors in Securities Trust query its reintroduction of tobacco stocks.

Troy Asset Management has flagged its commitment to sustainable investing by tackling US confectionary giant Hershey over the issue of water scarcity and related environmental risks.

The company is held by Troy’s £438m Trojan Global Income fund and Securities Trust of Scotland (STS ), the £193m global equity investment trust it took over in November after winning the mandate from Martin Currie.   


Lead fund manager James Harries (pictured) explained he had become concerned by Hershey’s exposure to environmental risks, particularly water scarcity.

The team, which includes Tomasz Boniek as deputy on the fund, had conducted a review of not just their holdings list but the wider universe they look at.

The Hershey Company scored a ‘C’ grade for its response to the CDP’s 2020 Water Security questionnaire, which Troy described as a ‘sub-standard score for a business of this quality’. CDP is a charity which runs the global disclosure system for investors and companies to manage environmental impacts.  

Troy’s own analysis revealed that on this issue the Reese’s Peanut Butter Cups-maker – 1.9% of the fund’s portfolio and 2% of the trust at the end of January – also lagged rivals like Nestle, which they own.

‘Hershey, on this particular topic, water stewardship, dropped out as one that was both vulnerable and had poor disclosure. And we thought therefore was a very good opportunity to engage,’ said Harries.

Particular concerns were poor disclosures relating to manufacturing sites located in areas of water scarcity, little apparent consideration of water usage in the supply chain of the $31bn (£22bn) company and slow progress in reducing water consumption against its stated goals.

‘Our next topic’

Troy wrote to chief executive Michele Buck before meeting with the business’s senior director for global sustainability and social impact.

‘They were very candid about the fact that up until this point they’d been concentrating on climate risk specifically, with particular focus on deforestation, which is an issue for cocoa-dependent companies,’ said Harries.

The Hershey team said Troy had been the first institution to engage them specifically on water and it was now their ‘next topic’. Harries said Hershey pointed out that cocoa was mostly grown in areas of west Africa with naturally high rainfall, but acknowledged there were issues.

‘The supply chain is potentially quite demanding on water, even if you take their point about cocoa being a rain-fed crop, particularly because some of their factories, notably in Mexico, are in areas of water stress,’ said Harries.  

The fund manager said improving disclosures and underlying practices went ‘hand in hand’, with the company needing to consider the issue more deeply and communicate what they were doing about it with investors.

Troy’s rationale for is engagement is because they want to own a quality business like Hershey ‘forever’, explained Harries. Water stewardship is a risk to the company not just reputationally but operationally too, potentially leading to higher costs. Like technological innovation, environmental pressures are increasingly disrupting business models.   

Ultimately, the goal is an ‘A’ for Water Security on Hershey’s CDP report. Harries said Troy would monitor this and engage with the company again if that is not achieved.

Alarming tobacco

Meanwhile, a large position in tobacco companies, making up more than a tenth of the portfolios, has been queried by some investors on the Citywire Forums, particularly those in STS which dropped the high-yielding stocks on ethical and financial grounds under its previous fund manager Mark Whitehead.

Top holding British American Tobacco (BATS) was a 6.2% position in the Global Income fund at the end of January, while the US’ Philip Morris was 4.7%, according to the latest factsheet, with the investment trust also having similar positions in its top 10.

There is also a smaller position in Imperial Brands (IMB), about 1% of the fund at the end of 2020, according to Morningstar data.

‘We would draw a distinction between ethical funds and ESG,’ said Harries when Citywire put the question to him.

His own funds do not take an exclusionary approach to any sectors, although there are ethical options at Troy available for those who do not want to profit from areas like tobacco. Citywire A-rated colleague Hugo Ure runs the £276m Ethical Income fund, while there is also the multi-asset £262m Trojan Ethical fund.

‘It will be that one or two investors find tobacco to be unpalatable and we are sorry about that,’ Harries added.

The manager said they had engaged with British American Tobacco on the issue of child and forced labour previously – which the company aims to eliminate from its supply chain by 2025. He added that many companies operating in emerging markets are at risk of unacceptable labour practices over which they may have little control, but that the company could be moving faster.

From an investment perspective, he said the sector represented an ‘outstanding, idiosyncratic global income opportunity’, partly because the rise of ESG has likely led to uneconomic sellers. Given the companies still churn out cash and are visibly growing free cash flow, he believes there is an attractive in the context of richly-valued global markets, even without any rerating in tobacco shares.

Troy’s trust approach

STS will be run in exactly the same way as the fund. However, the managers will make cautious use of gearing, or borrowing, to boost long-term returns. At the end of January, this stood at the inherited level of around 8%.

One other difference is the trust currently holds Fever-Tree (FEVR) instead of the UK-listed Dominos Pizza Group (DOM), which the group cannot own any more of.

Changes to the portfolios this year include buying RELX (REL) and Diageo (DGE). Harries said both had lagged during the recent rotation towards ‘value’ stocks, but would also benefit from the reopening of the economy, in the case of RELX due to its exhibitions business. In the US, they bought Fastenal while selling Emerson Electric.

Since Harries joined Troy from Newton to launch Global Income in 2016, it has performed slightly better than competitors, according to the latest factsheet. From the beginning of November 2016 to the end of January, the fund returned 31.4% versus the 30.4% average return in the Investment Association’s Global Equity Income sector, lagging the 51.9% gain for the MSCI World index over the same timeframe. On a one-year basis, it lost 1.9% as peers rallied 4% and global markets rose 10.8%, falling behind the in the rotation since November.  

From 1 November when Troy took over, STS’s shareholders have seen a 1.3% total return versus 10.6% for the MSCI World index, according to Morningstar data.

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