Investment Opportunities - Sustainable Investing

With events such as the UK’s vote to leave the European Union taking centre stage and leading to market uncertainty and volatility, it is worth noting there are still long-term, structural themes which can benefit investors. Sustainability is one such theme. It is becoming ever more important not just because of its significance in environmental terms, but because companies which adopt a sustainable business model are also outperforming those which don’t.

The original term, ethical investing, used to be all about negatively screening out companies which were engaged in activities which are viewed as "bad" for various reasons, like those involved in arms manufacture or the tobacco industry. It was more about investing with your heart rather than your head, and the ability of many ethical funds to deliver good performance could be reduced by having a smaller number of companies in which to invest.

There is still a place for ethical investing and negative screening, but the concept has now evolved into sustainable investing, which is about seeking to make the world a better place while also benefiting financially from those investments. Good for your health, and good for your wealth. Sustainability will form a key part of all business and investment strategies going forward, and is something you should ignore at your peril.

Quentin Drewell, circular economy lead at Accenture Strategy believes moving to a circular economy focused on sustainability may be the biggest revolution and opportunity in how we organise production and consumption in our global economy in 250 years, in his view. It represents a new way of looking at the relationships between markets, customers and natural resources, and provides a huge opportunity for companies to create a competitive, or circular, advantage. This is also creating opportunities for investors to benefit from investing in these companies.

  1. Sustainable investing is now mainstream >
  2. Sustainable companies perform better >
  3. Sustainability central to investment process >
  4. Sustainability in action >

The views expressed in this section are those of the fund managers and not those of TD Direct Investing.

Sustainable investing is now mainstream

Following the Conference of the Parties, the Paris climate change convention of global leaders which took place in December, highlighted that sustainable investing has become even more mainstream.

There was a commitment on all sides to limit the rise in global temperatures to 'well below' two degrees celsius above pre-industrial levels, and, back when the decision was made, the International Energy Agency (IEA) estimated this will require $16.5 trillion (£11.2 trillion) of investment by 2030 in order to drive innovation in the climate change economy.

The above chart highlights the growth in sustainable investing on a global scale.

Mike Fox, head of sustainable funds at Royal London Asset Management and manager of London Sustainable Leaders, believes investors will need to consider how this agreement will change their investment portfolios. "As governments seek to implement the Paris agreement it is likely the penalties for poor environmental practices will only increase and companies will have to adjust to making climate change a core principle in how they set strategy."

Sustainable companies perform better

“Waste to wealth” – the business case for the circular economy is compelling

His view is that companies showing leadership in environmental management, and sustainability in general, are likely to be more profitable. Sustainability is becoming one of the most significant trends in financial markets; the sustainable funds on our Recommended Funds list have seen increasing inflows. Evidence also shows those companies which adopt sustainable business practices are likely to do better than those which don’t, as can be seen from some of the examples detailed below.

  • Strong environmental, social and corporate governance (ESG) practices typically result in better operational performance by companies.
  • More sustainable companies often outperform less sustainable companies on stock markets.

Companies which put time and money into this way of working are embracing new technologies, helping people to be healthier, seeking out alternative fuels and promoting better corporate governance.

Sustainability central to investment process

Schroders is one company which has made ESG central to its investment proposition. Jessica Ground, Global Head of Stewardship at Schroders, says as active managers the firm takes its responsibilities seriously and engages with the companies it owns to encourage better outcomes for both investors and society. "As society’s expectations are changing we are seeing growing awareness of sustainable investing considerations and our customers are increasingly seeking out investments which align with their own core beliefs and values. There is also a growing acknowledgement that sustainable investing creates better outcomes."

Sustainability in action

An example of the shift towards sustainable winners is occurring in Germany, where solar and wind powered electricity generation now account for a total of 43% of the overall market. Traditional coal dominated power generators such as RWE and E.oN have lost out in dramatic fashion as renewable energy, in the form of companies like solar power generator SunPower, has continued to take market share. SunPower is just one of the many exciting companies held in WHEB Sustainability. The fund invests specifically in companies which are providing solutions to the challenges of sustainability.

Similar developments have occurred in the area of wellbeing, where the growth in healthy foods is outpacing that of big food companies. Companies such as Kerry Group, an Irish flavours technology specialist, and Wessanen, a Dutch food producer, have benefited and outperformed traditional food companies.

On the subject of health and wellbeing we are seeing more people running marathons and keeping fit. This is another example of what is good for your health also being good for your wealth. Athletics apparel companies such as Asics have grown as a result of this expansion in leisure activities. Taking this further, Japanese company Shimano, which is also held by WHEB Sustainability, concentrates its efforts on a sustainable approach, developing products that will help people enjoy interactive communication with nature. It specialises in cycling, fishing and rowing. Shimano has benefited from a surge in global sales of racing bikes since 2012, and lifestyle pundits decreeing “cycling as the new golf”.

Kames Ethical Equity has a more traditional approach to sustainable investing, with fund manager Audrey Ryan negatively screening out companies which do not meet a strict set of ethical criteria. She believes clients like the clarity of negative screening.

Companies within the fund fall into a number of themes at present. Those with strong free cash flow and cash returns include Fidessa and Card Factory, while defensive growth plays are companies such as information and analytics provider RELX Group and funeral services provider Dignity. Within the theme of financials are stocks such as Prudential and Virgin Money, while specific European plays include business software company Sage and DS Smith, a packaging firm. Other themes are e-commerce growth (Rightmove and Autotrader) and “self help” plays.

Five year performance of sustainable funds on our Recommended Funds list

Sustainable investing is a long term, structural theme which could become more mainstream. Those companies which operate with a sustainable focus are giving themselves a better chance of being tomorrow’s winners, while those which fail to embrace sustainability could fall by the wayside. Funds which invest in these areas, and companies such as those mentioned above which are adopting a sustainable approach, are likely to be rewarding places to be going forward.

For more information on the sustainable funds in our Recommended Funds list click here.

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