Rule 4 – Quality of capital allocation
As an example, the Chinese renewables sector is much maligned due to historically poor allocation of capital and high curtailment rates – not being connected to the grid. Knowing the fundamentals of businesses in this area requires a local knowledge of wind turbine location in terms of wind intensity, as well as grid connection and state by state subsidies, not to mention management quality and motivations.
Rule 5 – Ownership structure
China is known for state-owned enterprises, but not all are created equal. Clearly an independent entity is preferable, but if you are going to invest in an SOE, understand the dynamics first.
Craig Bonthron is co-manager of the Kames Global Sustainable Equity fund and Ryan Smith is head of corporate governance and ethical research at Kames
