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Sustainable Portfolio Management – Annual Report 2022

Pushing science to its limits: The value of precision

22 April 2022

Unless otherwise stated, companies referenced in this report were companies held by the Sustainable Total Return Strategy as of 31 December 2021 and may no longer form part of our portfolios. Reference to specific companies in this report is not an opinion as to their present or future value and should not be considered investment advice or a personal recommendation.

Mettler Toledo, a portfolio holding and global leader in precision instruments, manufactures laboratory balances that are precise to a tenth of a millionth of a gram – or roughly a 1000th of an eyelash1. For the active ingredients in pharmaceutical products we widely consume, a difference in the weight of an eyelash can be the difference between life and death. The pharmaceutical industry is just one that has benefited from society’s ability to measure and manufacture with greater precision.

Over the past few hundred years, improving levels of precision have been critical in producing things with scale, at a lower cost, with less waste and more interchangeability. It has started revolutions, and will be crucial in tackling the many sustainability challenges we face – be it through better measurement of carbon emissions, or understanding the genome, or by underpinning the many advanced and innovative technologies on which we will depend.

From industrial to technological revolution

One of the first great advantages from improved precision came with the creation of the James Watt engine in 1776. Watt had spent several years looking at ways to improve the efficiency of steam engines, which suffered from significant leakage from the steam cylinder as the piston moved in and out. So he turned to the famous Cumberland ironmaster, John “Iron-Mad” Wilkinson, who used a boring machine to create cast-iron piston cylinders, precise to the thickness of a British shilling. This new technique of using a machine tool to reliably increase precision greatly improved the efficiency of Watt’s engine, ushering in the era of steam power and the start of the Industrial Revolution – a period that greatly improved the quality of life for millions, but which also accelerated the climate challenges we face today2.

Two hundred years later, the level of precision to which we produce and measure things is barely conceivable. The world’s most advanced manufacturing processes now operate at the ångström level – a unit of length used to describe the sizes of individual atoms. This has had a profound impact on our ability to create increasingly powerful and innovative technologies for improving outcomes across a number of sustainability areas (as covered throughout our annual reports). These include artificial intelligence, the internet of things, dematerialisation of the physical world, the transition to renewable energy, precision agriculture, and how we treat disease, to name just a few.

Pushing science to its limits

In 1925, Julius Lilienfeld patented the world’s first design for a transistor – an electrical device that used low-voltage current to control the flow of higher-voltage current by amplifying it, or switching it on or off. The first working transistor, built by Bell Labs around 20 years later, could fit into the palm of a hand, and started the modern computer age3.

Three-quarters of a century later, our ability to make transistors smaller and with greater precision has been pushed to its very limits, as we have moved from a world governed by Newtonian mechanics into the world of Einsteinian electronics. Modern microchips, the ones in our smartphones, contain up to six billion transistors, spaced five nanometres apart – approximately 10 atoms of silicon across. This distance is shorter than the wavelength of visible light, meaning these transistors are now literally invisible to the naked eye2.

Astonishingly, there are now more transistors in the world than there are leaves. While our ability to cram more transistors into a space has consistently improved – roughly doubling every two years in an industry-motivating observation known as Moore’s Law – the manufacturing process has remained similar throughout. The critical step in the production of semiconductors is called photolithography. Essentially the reverse of an old darkroom photography projector, the process involves shining light through a mask showing the chip design, then using optics to shrink it down. The parts exposed to light are then etched using gases and turned into transistors.

The most advanced manufacturing capability on Earth

To meet the challenge of manufacturing ever-smaller components, Dutch company ASML (one of our European equity holdings, as at April 2022) has developed one of the most advanced machine tools in human history2. They use very short wavelengths of light from the extreme end of the UV spectrum, which are then focused using mirrors to produce the atomic-scale transistors on which the modern world depends. To do this, they start by squirting 50,000 discrete droplets of molten-liquid tin into the machine. Each drop is then hit by an initial laser to flatten it, then smashed by an incredibly powerful second laser to create UV radiation. Finally, this is steered down a series of exceptionally flat mirrors to focus the light onto the chip with atomic precision.

These highly engineered mirrors themselves test the limits of what is believable. Each mirror varies in flatness by less than the diameter of a single hydrogen atom, and is made by pushing each individual atom into place. Put another way, if each mirror were the diameter of the Earth, they would vary in flatness by less than the width of a single human hair. Each machine usually costs upwards of EUR 150 million, and a typical factory will require up to 50. Machines like these are essential to the continuation of Moore’s Law, as well as in delivering the sustainable benefits that digitalisation and advanced technologies promise to bring.

Reading the genome with molecular precision

Oxford Nanopore Technologies (one of our UK equity holdings, as at April 2022) also uses ångström-level precision, in this case to sequence genomes in real time. The company has developed a portable genomic sequencing device that can provide rapid answers to biological questions in the field, such as identifying the strain of e-coli causing a patient’s stomach upset at a GP surgery, or the microbes present in a glacier.

The technology starts by splitting a double-helix DNA strand in two, and attaching a motor enzyme at one end. This then helps to feed the DNA strand through a tiny nanopore embedded in a silicon chip. Each nanopore is made using a programmed bacterium, and has an internal diameter of one nanometre – roughly the size of a molecule, or 100,000 times smaller than a human hair4. As the DNA strand is pulled through, each DNA base disrupts the electrical current in a unique way, much like placing different objects under a running tap can disrupt the water in different ways. This flow is interpreted by a machine-learning algorithm, which can provide an answer in as little as 10 minutes.

The company’s ultimate aim is to decentralise genomic sequencing and provide equitable access to answers to a wide range of important biological questions, to help solve real-world challenges in areas such as healthcare, environmental science, food and agriculture, or epidemiology. Genomic sequencing has been a key technology in the fight against COVID-19, and represents a paradigm shift in how to diagnose and treat disease.

Towards a more sustainable future

Our ability to measure with ever-greater precision, and to manufacture from the atom up, is likely to be invaluable in building a more sustainable future. It could revolutionise the way we address climate change, manage pandemics, feed the world, and protect our natural resources. Increasing computing power should open up new possibilities for innovative new technologies that can answer questions we as humans cannot – with the potential to transform our lives in ways we’ve not even begun to imagine.

Key investment risks

ESG data risk: Some positions within the strategy may not have an ESG rating due to the nature of their asset class (e.g. government bonds, gold, hedging derivatives). Should a position not be covered by MSCI (or an equivalent provider) due to lack of coverage, the Portfolio Manager will determine the position’s equivalent rating.

Market risk: The possibility for an investor to experience losses due to factors that affect the overall performance of the financial markets. Market risk, also called “systematic risk”, cannot be eliminated through diversification, though it can be hedged against. Sources of market risk include major natural disasters, recessions, political turmoil and geopolitical tension.

Liquidity risk: The risk stemming from the lack of marketability of an investment that cannot be bought or sold quickly enough to prevent or minimise a loss.

Derivatives exposure: The use of these instruments can, under certain circumstances, increase the volatility and risk profile of the strategy beyond that expected of a strategy that only invests in equities. The strategy may also be exposed to the risk that the company issuing the derivative may not honour their obligations which could lead to losses arising.

Currency risk: An investor will be exposed to currency fluctuations between their domestic currency, a fund’s holding currency, and the local currency of an investment.

Interest rate risk: An investor will be exposed to interest rate risk. Changes in interest rates will impact the performance and/or value of instruments. Interest rates tend to change suddenly and unpredictably.

Inflation: Inflation will reduce the real value of your investments in the future.

Taxation and tax relief: Levels of taxation and tax relief are subject to change.

Returns are not guaranteed: Past performance is not an indication of future performance. The value of investments, and any income, can fall as well as rise, so you could get back less than you invested. Neither capital nor income is guaranteed.

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Sustainable Portfolio Management

In this year’s report, we focus on some of the exciting new technologies that could meaningfully improve sustainability outcomes, from precision manufacturing and measurement, to genomic sequencing, to digital infrastructure. And we’re delighted to feature an article from Sir David King on the strategies urgently needed to ensure climate repair.

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