Dit artikel is alleen in het Engels beschikbaar.

A theme that is increasingly in the spotlight in this respect is ESG, which concerns whether and how investors take Environmental, Social and Governance factors into account in their investment process. We suppose most investors do not strive to violate human rights by contributing to poverty, hunger, slavery, and the like; they will rather aim to promote human prosperity and welfare. Nor will many investors strive to contribute to the destruction of our planet, including its biodiversity and climate, if only because such destruction would undermine their own prosperity and that of their children. However, there seems to be a wide spectrum of approaches to dealing with these various thorny issues.

And that does not only hold for investors. One end of this spectrum can be described as ‘passive hiding’. People on this side of the spectrum prefer not to be associated with any of these issues. They do not want to be questioned or pointed at, and they do not want to get the feeling that they have to excuse themselves. In essence, they prefer not to be seen with dirty hands. With investing, this approach is most efficiently implemented by excluding all markets and instruments that are somehow linked to these thorny issues, preferably on the basis of ‘objective’ criteria formulated and quantified by an independent third party. We understand and respect this choice. The other end of the spectrum is made up by the larger number of people who do not mind to get their hands dirty: the housekeepers and the garbage collectors, the farmers who grow and harvest our food, the earth movers who dig up the minerals, metals and fossil fuels that our society cannot (yet) do without, the soldiers who risk their lives defending our freedom. In fulfilling the responsibilities they have assumed, these people are helped by well-organized, well-functioning markets. And so are their working conditions. We do not want to turn our back on these people, also not if doing so would somehow reflect favorably on us.

From this, it may be clear that we at Transtrend are avid supporters of active participation. And within our investment program, we try to practice what we preach. We do not avoid thorny issues but rather discuss them, make our own decisions, and are willing to explain our choices. We sometimes do this proactively, for instance through a publication or by participating in a panel or other event. And yes, let there be no misunderstanding: we also prefer active participation because we believe this to be in our best interest. That is, in the best interest of our investments and therefore in the best interest of our clients. We are convinced that passivity in general does not deserve a reward and generally is not rewarded. When investors consider being seen with dirty hands a risk they want to avoid, they will pay a risk premium for that, which in turn can be harvested by investors that care less about their polished nails. We believe that the most rewarding way to deal with issues is to be part of the solution, not by shying away from them and most certainly not by closing your eyes to them. Successful investing in our view is about being on the road forward, not about hiding behind the hedges.

At the same time, no matter our convictions, we have to be extremely modest. Taking our role seriously starts by acknowledging the limitations of our power. The fact that we predominantly trade futures contracts seriously limits the number of ways we can have impact. Carrying price risk, contributing to price discovery and offering liquidity — as important as these roles are for the well-functioning of markets — that’s about it. And we can only fulfill these roles if we in fact actively trade these contracts, not if we exclude them. So our (potential) impact starts with inclusion.

An example of this is our stance towards trading futures on crops such as wheat and rice. Whenever the price of such futures contracts rises to high levels again, ‘speculators’ are pointed at and publicly criticized for ‘making money on hunger’. Some investors do not want to trade such commodity futures because of this criticism. However, we consider this to be cheap populism. While the following may sound harsh, everybody who is active somewhere in the food chain — from plant breeders to farmers, from food processors and carriers to greengrocers and cooks — in essence makes money off people that would otherwise be hungry. We believe there is absolutely nothing wrong with fulfilling real needs. We would not know why it would be more responsible to for instance create and simultaneously fulfill a demand for something rather useless like a fidget spinner! There are important roles in feeding the world that need to be fulfilled by investors. We try to play a meaningful role in this process.

Our modesty with respect to our potential impact also explicitly lies at the basis of our investment philosophy. Our world is constantly evolving. And the inexhaustible source of energy behind this evolvement comes from all the people pursuing new ideas. The idea to make wagons ride on a rail track; the idea to connect computers into an internet; the idea to use wind as a clean source of energy; and so on. We are happy to see that these ideas include many ideas about social and environmental issues — ideas that we embrace ourselves as well. But from time to time people also pursue ideas that we like less. However, we cannot really afford to take that into account in our investment decisions. We simply have to respect the force of people pursuing ideas. Trading against that force, as a matter of principle, does not stop and reverse that force; we would just be overrun. For instance, we can make fun of the fidget spinner, but there was absolutely nothing we could do in our investments to stop the demand for it, nor to stop the supply. As a matter of fact, most of us did not even succeed in preventing our own children from acquiring one. Who better than our own children to teach us to be humble? While this example may just concern a toy, the principle is not really different for other trends.

Respecting the force of people pursuing new ideas also lies at the basis of our view on price discovery. The stock price of a company like Apple should rise if the goods or services that it produces are in demand. And if they are not, it should not rise. In other words, demand is leading. It does not work in the opposite direction. The demand for goods and services of a company will not rise just because its stock price is rising. It could well be that we truly believe that it would be good if the demand for a specific good would rise, for instance because of environmental reasons, but we consider that an extremely poor argument for buying stocks of the company that produces that particular good. Only the expectation that the demand will in fact rise, for instance because of the same environmental reasons, would be a valid argument for buying the stock.

But then we still would not buy the stock. Because we do not invest in stocks in our trading program. We only trade futures on stock indices — of which that particular stock could be one of the components — and total return swaps on individual stocks. Just like with commodity futures, buying one of these instruments does not result in ownership of the underlying, in this case a stock. We solely take on the price risk of stocks.

And this brings us to what exactly an on-exchange futures transaction constitutes:

And, more importantly, this is what a futures transaction is not:

We realize that this ‘futures positions carry no responsibility’ argument can be perceived as an easy way out. It is not our responsibility! But that is absolutely not what we are advocating. We just want to state that the only responsibility that results from having a position in a futures contract — as long as we do not hold it until delivery — is the responsibility to deposit sufficient margin when the position goes against us. In essence, this is what bearing price risk ultimately boils down to. Besides that, we have many other responsibilities. But for the most part, these do not directly result from the positions we have, but rather from the actions we take, including our trading activity. Contributing to price discovery and offering liquidity are two examples of such responsibilities. But we also have other means to contribute to well-functioning markets. This includes engagement, albeit not as a shareholder aimed at the management of listed companies, but as an experienced and passionate investment manager primarily aimed at decision makers and other relevant practitioners in the financial industry.

Above, we clarified our stance on trading various agricultural futures. Another current thorny issue is investing in fossil fuels and associated companies. There is a growing number of above all private investors — including those whose pensions are managed by pension fund managers — that prefer to invest fossil-free. While we understand this desire, we do not believe that making large scale fossil-free investments is currently possible. Our society is still highly dependent on fossils. Petroleum, for instance, is an important raw material for producing popular products like plastic and other synthetics, as well as petrol and kerosene. The use of fossil energy may have partly been replaced by the use of energy from sustainable sources such as wind and solar energy, but a lot of fossil fuels had to be burned for the manufacturing and installation of all the required wind turbines and solar panels. Not even Greta Thunberg can perform all her activities without the use of fossil fuels! Firms and investment managers might compensate for their use of fossil fuels, but that does not fundamentally change their dependency.

However, underlying this demand for fossil-free investments lies a strong force of people that endeavor to reduce our society’s dependence on fossil fuels and — driving this goal — want to reduce the emission of carbon and other greenhouse gasses. We embrace this trend, and we most definitely want to participate in it. The question here is: What would be effective ways to do so? We do not believe that reducing the ‘carbon footprint’ of an investment portfolio by selling (existing) stocks of high-pollution firms and buying those of low-pollution firms really contributes. In essence, this only changes the (potential) composition of the shareholder meetings of these firms. The voting rights of the stocks of the more polluting firms will move towards owners that care less about pollution. We do not expect that this will drive these firms to reduce their pollution. And, if instead of the actual stocks, only futures and other derivatives on these stocks change hands, no one in the board room will notice any change. We do not shake up companies by trading derivatives.

But that does not prevent us from participating in such an important and far-reaching project as the energy transition — a transition that has a huge impact on many markets, not only those in the energy sector. For instance, large shifts in the sources of energy used, induce large changes in the demand for various metals. Such changes constitute a major source of risk for many parties involved. For the parties that have to adapt their consumption patterns as well as for the parties that have to adapt their production process. For the producers of goods that will likely meet strongly growing demand as well as for the producers of the goods that likely will meet diminishing demand but that our society cannot yet do without. To keep the momentum of this transition going, someone has to carry these risks. This is foremost the role of investors. Futures contracts are extremely efficient instruments for transferring these risks. Therefore, if we want to participate in this transition in a meaningful way, if we want to fulfill our fundamental role as an investor, we have to trade the futures contracts that are directly or indirectly linked to this transition. That all starts with inclusion, not with exclusion.

By trading futures contracts we do not only carry price risk, but we also offer liquidity and contribute to price discovery. More generally, we contribute to the well-functioning of these markets. Which actually seems to be a reason for some investors to exclude some of these futures contracts. They do not want to contribute to the well-functioning of for instance the “dirty” coal market. The implicit assumption here is that a well-functioning market favors the polluting entities. But is this really the case? Just ask yourself which participants typically benefit the most from impaired markets. These are the participants that are best positioned to control the market. In the case of coal, these are the producers. If the coal market does not function well while our society cannot yet do without coal, the position of coal producers becomes somewhat comparable to that of drug dealers — their profit margins would be huge. We rather prefer that all legal, legitimate markets function well. Which among others is a necessary condition for environmental costs to be priced in properly. We certainly think there is room for improvement here. But we will not make an effective contribution if we exclude these markets.