Asset managers Lenka Martinek and François Bourdon: alpha with impact

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As investors are souring on the simplistic and greenwash-susceptible notion of ESG, a Montreal asset manager and associated investment research firm are clear on their focus on alpha with sustainability and impact investing at the core.

Moreover, they say, sustainable investment options can be important tools for investment brokers in retaining next-generation clients and next gens in family offices may be among those driving demand.

François Bourdon and Lenka Martinek are managing partners at Sustainable Market Strategies (SMS), a boutique investment research firm founded in 2018, that focuses uniquely on sustainability themes. They are also managing partners at its sister company, Nordis Capital, co-founded by Bourdon in 2021, which oversees about $100 million in assets.

Bourdon studied actuarial mathematics, and as a former CIO of a global asset manager, has many years of experience managing investment strategies in a wide variety of public and private asset classes.

Martinek has a background in research and investment strategy, including at one of Canada’s largest pension funds. She left the corporate world to earn a master’s degree in management and sustainable development from HEC Montreal before joining Nordis and SMS. Martinek appears as a frequent market commentator on BNN Bloomberg.

Here, Bourdon and Martinek discuss investment strategies, market outlook and why sustainability should be a greater focus for investors, not only from a more complex lens than simply screening out certain sectors, but also because it is a key concern for the next generation of wealth creators and inheritors.

Lenka, how did you come to be involved with Nordis and SMS?

Lenka Martinek: “I spent the first fifteen years of my career at BCA Research as a macro strategist (the intellectual challenge of publishing weekly investment-grade research is well suited to my personality) and then on the buy side at a Canadian pension fund, still focusing on global macro.

In my early forties, I started seriously thinking about what I wanted to achieve over the next phase of my career and I was preoccupied with the idea of working on things that ‘mattered.’

Ultimately, I ended up returning to university to study sustainability. Near the end of my degree, a friend put me in touch with François and the team at Sustainable Market Strategies. Coming from a family of entrepreneurs, I was excited by the prospects of building Nordis and helping SMS reach its potential. My skill set from both the buy side and sell side have so far been put to good use.”

What do you do at SMS and how is it being received by investors?

Lenka Martinek: “At SMS, we produce weekly sustainability-focused research notes that are geared primarily to equity investors. We strive to provide our clients with frequent, actionable investment ideas, as well as educate on sustainability topics that may not always be properly understood.

In my first six months, SMS landed a London-based manager looking to launch sustainability-focused ETFs, while Nordis launched a long-short equity fund with the help of the Quebec Emerging Manager Program, and we added three more members to the team.

It was an exciting first year and fortunately, despite 2022 being a tough year in financial markets, Nordis’s performance was relatively good and SMS’s reputation for thoughtful and timely research was being recognized.”

François, how did you come to co-found Nordis?

François Bourdon: “After a fruitful investment career, mainly at Fiera Capital, I nonetheless felt far from having a significant real-world impact on society by doing conventional investing.

Toward the latter part of my tenure at Fiera, one of my proudest accomplishments was creating an impact investment fund. I was excited when I got a call from SMS, who wanted to launch a sustainability-focused asset manager.

I did my due diligence and was impressed by the depth of research and their global client base.

Nine months later, Nordis was up and running.”

People seem to be shying away from ESG these days. But Nordis has staked its business on sustainability. Why is that?

François Bourdon: “In 2023 the artificial intelligence frenzy carried financial markets higher with a few of the large companies driving most of the performance.

This coincided with accelerated culture wars in the United States leading to doubts about ‘ESG.’

Finally, high oil prices and interest rates meant that sustainability investors that were primarily focused on renewable energy vastly underperformed their benchmarks. This confluence of factors has led many to believe that ‘ESG’ doesn’t equate with attractive investment performance.

At Nordis, our investment thesis since the start has been that climate change and social inequality will be the major challenges of our time and they will be borne out in financial markets.

Terms like ESG or responsible investment may evolve, but the underlying economic, physical and social problems will need to be addressed.

We believe that capital markets will play an important part and at Nordis, we can build portfolios that contribute positively to addressing these issues and also deliver attractive returns.”

With ESG investing experiencing a backlash in investor sentiment in some circles, how is the investing industry approaching the issue?

Lenka Martinek: “The industry is transforming from ESG risk management toward impact and thematic investing by aiming to address issues rather than just measuring risks.

To be sure, for the reasons previously mentioned, some strategies that have been dubbed sustainable are being severely tested and the “tourists” are packing up.

However, we expect that investors that stay the course will be rewarded because the overarching themes still need to be addressed and capital will inevitably flow to where it’s needed.”

What kinds of returns can investors expect in the sustainability space? Do investors with a commitment to sustainability need to consider sacrificing returns for doing good?

Lenka Martinek: “Past performance is not indicative of future performance. We believe investors should expect equivalent or better returns in the sustainability space because they will be aligned with the evolving needs of society. In other words, investing in sustainability themes is not about sacrificing returns, it’s about finding opportunities relevant to how the world is changing. For example, take climate change: it will not relent. Those that choose to ignore it, do so at their peril.

Our global equity strategy has delivered 6.6 per cent year to date, and our global impact strategy has so far delivered 7.4 per cent this year.”

What is Nordis’s investing style?

François Bourdon: “One thing that we decided very early on is that it would be crucial to our long-term success to show that generating alpha through sustainability could be done in any market environment, e.g. that sustainability is not limited to shorting the energy sector.

We are heavily leveraging the work at Sustainable Market Strategies, whereby we publish research across all industries and geographies. We’ve built a universe of 600 companies (long and short).

Companies make it into our universe if they have products or services that are aligned or leveraged to one of our five investable themes and have a positive operational performance (ESG score). This is often referred to as “double materiality.”

Specifically, in our investment process, we divide companies in four categories: impact companies that deliver products and services that are beneficial to society and have good operations, like Carrier Global that produces HVAC.

Then companies with products that are needed, but are not necessarily beneficial, with very good operations, like Bridgestone, which produces tires.

Then, the neutral companies are those that simply don’t feature in our universe. These are companies like Tesla, which has beneficial products (electric vehicles) but poor operations (governance and labour issues).

The final category is companies that are a potential short because they produce harmful products, like Philip Morris, the cigarette producer, or have poor operations, like Doordash.

At Nordis, we then perform traditional financial analysis and construct portfolios based on our macro outlook.

Nordis was launched at the end of 2021. How has it been going?

François Bourdon: “Nordis currently manages five strategies (both long only and long/short) using a singular investment process previously described.

After a decent 2022 performance, 2023 was a challenging year for us and we learned a lot: Alternative infrastructure assets (wind and solar) were under pressure, we were underexposed to the Magnificent Seven and we were reminded that not all themes play out as quickly as anticipated.

As a result, we’ve adjusted our risk management process.

The 2023 underperformance led to some worries about client retention. Fortunately, we work very closely with our clients and strive to develop relationships based on common goals.

As part of this relationship, we also provide overall asset allocation and portfolio construction services. We were able to maintain our clientele throughout this period. Our performance has improved in 2024 and we are very optimistic about what the future holds.”

What macro trends are key to consider in this space?

Lenka Martinek: “In our view, the biggest macro trend for all investors, including those focused on sustainability, is the structural increase in inflation, as well as interest rates.

From 1982 to 2021 interest rates in developed economies continuously fell due to falling inflation and interventionist central banks. Since the pandemic, governments opened the fiscal spigot and inflation is considerably stickier.

Fiscal policy (such as the U.S. Inflation Reduction Act) is now often driving financial behaviour as much as, or more than, monetary policy. True, a cycle of rate cuts is now occurring with the EU and Canada recently cutting and the Fed most likely to follow later this year.

But the “lower for longer” mantra of the past two decades is no longer appropriate, given fiscal positioning and inflation. In other words, periods of monetary policy accommodation will be shorter than what investors have become accustomed to.

And, of course, deglobalization, changing demographics, the energy transition and artificial intelligence are all issues at the intersection of sustainability and financial markets.”

Given some of those macro trends, where are you seeing investing opportunities currently?

Lenka Martinek: We try to look at where there are important supply-demand mismatches for investment opportunities.

There are three that we are currently focusing on.

The first is related to the transition to electrification. Low levels of investment in the electric grid in many jurisdictions means that the ability to move electricity to where it is needed is becoming constrained. Companies related to the grid buildout, i.e. the transmission of electricity, should do particularly well as the need for increased grid capacity surges due to the electrification theme.

A second area of supply-demand mismatch is also related to the energy transition theme.

Some (but not all) transition materials and metals are in short supply. In particular, demand for copper is rising quickly due to its use in electric vehicles, charging stations, buildings, etc. But there has been little new investment in copper mining in the past decade. This has led to an important copper deficit that will be difficult to fill in a timely manner. Of course, mining is a delicate subject for many sustainability investors because the industry is fraught with environmental and social risks. We tackle these challenges in our research and propose investment strategies that address these concerns.

The third mismatch is related to the food sector and is also an important reason why we think inflation will be more problematic for the next decade.

The global population is still getting larger and yet the amount of arable land is limited, especially now that more and more countries are finally restricting forest devastation. So, already the need for improved agricultural productivity is evident. But add on climate change, which is beginning to wreak havoc on food production, and the problem potentially gets much worse. Just look at crops like coffee, tea, orange juice and cocoa over the past year. All of these crops have been dealt blows related to climate change (drought, pests, etc.) and the result is a spike in prices.

It is fair to expect that more frequent and severe weather events will negatively affect crop production and introducing further volatility into prices.

The investment opportunities in this space are sometimes a bit less obvious for equity investors, but have nonetheless been successful with long/short pairs that support more companies involved in more resilient agriculture versus those with very unsustainable practices.

What do you see as short sell opportunities and why?

Lenka Martinek: “Client-facing companies that are just serving themselves with little consideration to society are areas of interest for us on the short side. Companies like Doordash, with weak labour contracts, or Draftkings, that promote the ease of gambling, should have a difficult time should consumer budgets become more constrained.

Another area of shorts for us are undesirable calorie companies like Shake Shack and Domino’s Pizza. These companies offer food choices that are way out of line compared with national dietary guidelines. A further uptake of weight loss drugs or a squeeze on consumer spending would spell difficulty for these companies.”

We often hear that the next generation is more focused on sustainability. How does that play out in the investing world?

François Bourdon: “One of the major upcoming issues in asset management is the transfer of wealth from baby boomers to younger generations. When we talk to some of our not-so-young broker contacts, we hear that the transfer of wealth from long-standing clients to their children presents retention issues; the next generation does not respond well to their traditional service offering.

Younger people may be more focused on sustainability and want their investments to reflect those values. These are currently scarce. As wealth is transferred, thematic sustainability strategies should see much greater demand.”

What do family offices need to think about in terms of sustainability?

Lenka Martinek: “To continue on from François’s comments, family offices are extremely well placed to capture the changing product demand related to the demographic shift.

Too often, sustainability strategies are thought of as concessionary or believed to be about non-financial returns. If our investment thesis is right – that challenges like climate change are, in fact, macroeconomic in nature and will play out in financial markets – then building well-diversified portfolios with sustainability as the objective should end up helping family offices grow their wealth and enhancing any philanthropic activities.”

Responses have been lightly edited for clarity and length.

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