World’s Most Profitable Hedge Fund Adopts Radical Climate Tactics

RIO DE JANEIRO, BRAZIL – Professionals with aggressive strategies are not lacking in the hedge fund industry, but few are as tough as Chris Hohn. The British billionaire takes the typical manual to new levels – closing deals, pushing to dismiss bosses, and confronting companies with lawsuits and threats.

An opponent was so angry after losing a meeting room battle with Hohn that he named a book on the experience: “Invasion of the Locusts”. This approach made Hohn’s TCI Fund Management become the world’s leading and best-performing hedge fund last year.

Now Hohn is using his aggressive tactics to fight against global warming. The asset manager, with US$30 billion in assets, is pressing his portfolio companies to reduce greenhouse gas emissions and disclose their carbon footprint.

Should they fail to do so, Hohn says he will dismiss boards or sell shares. In case anyone questions his commitment: Hohn and his charity have donated £200,000 (US$260,000) to Extinction Rebellion, the radical climate change movement whose members have blocked traffic in London and a private jet terminal.

“In the war against fossil fuels, you can’t be too picky with your allies,” says Jeremy Grantham, co-founder of Boston’s GMO resource manager, a legendary investor who has long been on the alert about climate catastrophe. Hohn “has shown that you can make a big impact on companies with a lot of arm-twisting”.

For Hohn, 53, a rational and very discreet financier, owner of a US$2 billion fortune, his campaign is only the first step to stir up the asset management industry, which he says has been ignoring a global crisis.

He asks investors to dismiss asset managers who do not pressure companies to reduce their carbon footprint and wants banks to stop lending to companies that ignore climate change.

Yet despite Hohn’s zeal, his crusade abounds in inconsistencies in green investment. The TCI once had a large stake in a coal producer in India; even now, the fund has stakes in three railroads that burn tons of diesel and carry fossil fuels, including tar sands, one of the worst sources of greenhouse gases. Another important position: in Ferrovial, the Madrid-based conglomerate that operates airports such as Heathrow in London.

“On the one hand, he’s trying to go green, and on the other, he makes money from polluters,” says Jacob Schmidt, president of Schmidt Research Partners, an investment company based in London. “The question is, how committed are you really to following your beliefs?”

Hohn says it’s much more productive to put pressure on carbon-intensive companies than to ignore them. On November 30th, the TCI sent letters to CEOs of the 17 companies in the portfolio with specific instructions on the deficiencies to be corrected.

The TCI said it will vote against directors of companies failing to meet targets, as well as auditors who do not report “material climate risks,” and may even sell all the shares in a company.

In a letter to Ferrovial, Hohn acknowledged that “decarbonizing” airports is a huge challenge and praised the company’s “A” grade for reporting its greenhouse gas emissions. However, the TCI said Ferrovial’s goal of reducing emissions by nearly 30 percent by 2030 could be increased and asked the company to support measures such as a carbon tax and an order for airlines to switch to greener aviation fuel.

He told Canadian Pacific Railway that its emissions disclosure method was awarded a “C” rating by the not-for-profit Carbon Disclosure Project and that the railroad’s plan to increase the rating to a “B” would still be “unsatisfactory”.

TCI, the railroad’s largest shareholder with an eight percent stake, said it requires the company to have a “credible and publicly announced plan” to reduce emissions and to meet seven goals, such as offsetting emissions from corporate travel and improving plant energy efficiency. Canadian Pacific says it maintains a dialogue with stakeholders on issues such as sustainability and has long been publicizing its emissions to improve its practices. Hohn did not want to grant an interview for this article.

Hohn launched TCI and an affiliated charity, the Children’s Investment Fund Foundation in 2004 after earning a reputation as an equity selection specialist in the Perry Capital’s London office, a New York-based hedge fund. His wife at the time, Jamie Cooper, whom Hohn met at Harvard in the early 1990s, managed the foundation, and they became a power couple in London when TCI invested money in the charity.

Thanks to Hohn, the foundation holds US$5.1 billion for programs such as improving youth nutrition in disadvantaged communities, protecting adolescents from slavery and human trafficking and expanding paediatric HIV treatment in Africa. Hohn and Cooper exchanged information regularly with Bill and Melinda Gates, and in 2012, David Cameron, then British Prime Minister, invited Hohn to speak at a summit on malnutrition at 10 Downing Street.

At TCI, the “vibe” was decidedly more hawkish. Hohn developed an investment strategy based on his own “personal, intellectual and emotional” structure, as he told Judge Jennifer Roberts, who handled his divorce in 2014, which resulted in a £337 million deal for Cooper.

Hohn’s approach meant conducting thorough analysis and looking for feeble management teams that other investors avoid. “Think of it as the damaged products department of a department store, where you can get 80 to 90 percent off because most people don’t buy,” Hohn said in a video interview with Institutional Investor magazine in 2013.

Fighting global warming will test Hohn’s approach like never before. First, he bets that companies will meet his demands and then that he will not reduce returns by destabilizing companies that reject them. By linking the TCI’s fate to a climate change agenda, Hohn bets that the economic risks of the growing crisis are so great that it would be foolish not to encourage companies to take a specific action on emissions.

“Green investment and hedge funds are not terms that many investors would use in the same sentence,” says Marc de Kloe, a partner at Theta Capital Management in Amsterdam and an investor in the TCI fund. “However, we have argued that hedge funds are somehow better suited to implement strong green policies because of their unrestricted nature and ability to deploy activist tactics”.