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A positive case for sustainable investment
A few years ago, sustainable investment was much in favour. The tide turned decisively in 2022. Today, opinions about the future of sustainable investment are polarised.
A few years ago, sustainable investment was much in favour. The tide turned decisively in 2022. Inflation took hold in many economies. Monetary policy became restrictive. Europe was plunged into an energy crisis following Russia’s invasion of Ukraine. Capital rotated into traditional energy and resources companies, as well as banks, and from growth into value stocks. The performance of many sustainability funds turned south. Sentiment towards ESG (environmental, social and governance) and sustainable investment turned sour.
Today, opinions about the future of sustainable investment are polarised. Some people believe ESG has had its day in the sun: we should wind back the clock to a time when everything was simpler, and the social and environmental costs of economic progress were overlooked. Others (we included) believe this is wishful thinking: the need to advance human development without exhausting the planet’s resources will only become greater.
History teaches us that as countries have grown richer, their populations have also become wealthier, healthier, better educated, and (up to a point) happier. But these human development gains have come with a huge environmental cost. We are now using natural resources 70% faster than nature can regenerate1. We cannot run companies and economies as we have in the past, based on linear models of production fuelled by excessive debt and resource consumption.
A process of change
As societies experiment with different ways of doing things, a process of change is gradually taking root in countries, cities and communities across the world. It is a tenuous, haphazard and messy process, driven by a mix of regulation and voluntary effort, which yields patchy and irregular progress.
As this process of change unfolds, we believe that sustainability considerations are likely to gradually seep deeper into investment thinking. And if this happens, sustainable investment will gradually converge with mainstream investment until, perhaps, we cease thinking and speaking of sustainable investment as a distinct investment category.
At Stewart Investors we formally embarked on a sustainable investment journey in 2005. Our approach was built on an investment philosophy which focused on investing in companies for the long-term, based on company-focused analysis of quality and stewardship, and a definition of investment risk as the risk of losing clients’ money, rather than deviation from any benchmark.
We started investing exclusively in high-quality companies that both contribute to, and benefit from, sustainable development2. They include companies that are solving difficult problems, meeting vital needs, and helping society do more with less. Variously, these companies are helping make the world healthier, cleaner, and more productive. We invest in these sorts of companies because we believe sustainable development drives long-term returns and reduces investment risk.
Better outcomes for clients
Our experience of investing sustainably over the last couple of decades has enabled us to sharpen our thinking and investment process in ways we believe have made us better investors and led to better outcomes for our clients.
First, investing sustainably has heightened our appreciation of the value of patience and long holding periods. Companies need time to reposition product offerings to take advantage of sustainability opportunities. They need time to establish and embed circular business models. And we believe the best companies are prepared to sacrifice short-term profits to achieve better and more resilient long-term returns.
Second, investing sustainably has underlined the value of independent thinking when we generate investment ideas and construct portfolios. There are plenty of companies with wonderful sustainability stories to tell that make poor quality investments; we avoid them. Our favourite sustainability companies are often lesser-known companies, and rarely the iconic sustainability names that make the headlines.
We prefer sustainability ‘picks and shovels’ companies that provide valuable technologies, components and services to a broad base of customers, who in turn are working to improve the performance and sustainability outcomes of the products they make for their customers. We search far, deep and wide to find these ideas. They enhance our options when we construct portfolios, which we do without reference to benchmarks3, as experience has taught us that the best way to beat benchmarks is to ignore them.
Finally, investing sustainably has highlighted to us the importance of subjective judgement in investment decision-making. Many investors deplore the very idea of subjective judgement and focus only on what they can measure and quantify. Assessing the sustainability positioning of companies has taught us the most valuable information is seldom measurable. It is impossible to measure the sincerity and commitment of company leaders to creating a culture that prizes sustainability, yet that commitment is decisive in shaping the direction and success of companies.
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Important Information
This material is for general information purposes only. It does not constitute investment or financial advice and does not take into account any specific investment objectives, financial situation or needs. This is not an offer to provide asset management services, is not a recommendation or an offer or solicitation to buy, hold or sell any security or to execute any agreement for portfolio management or investment advisory services and this material has not been prepared in connection with any such offer. Before making any investment decision you should consider, with the assistance of a financial advisor, your individual investment needs, objectives and financial situation.
We have taken reasonable care to ensure that this material is accurate, current, and complete and fit for its intended purpose and audience as at the date of publication. To the extent this material contains any measurements or data related to environmental, social and governance (ESG) factors, these measurements or data are estimates based on information sourced by the relevant investment team from third parties including portfolio companies and such information may ultimately prove to be inaccurate. No assurance is given or liability accepted regarding the accuracy, validity or completeness of this material and we do not undertake to update it in future if circumstances change.
To the extent this material contains any expression of opinion or forward-looking statements, such opinions and statements are based on assumptions, matters and sources believed to be true and reliable at the time of publication only. This material reflects the views of the individual writers only. Those views may change, may not prove to be valid and may not reflect the views of everyone at First Sentier Investors.
To the extent this material contains any ESG related commitments or targets, such commitments or targets are current as at the date of publication and have been formulated by the relevant investment team in accordance with either internally developed proprietary frameworks or are otherwise based on the Institutional Investors Group on Climate Change (IIGCC) Paris Aligned Investment Initiative framework. The commitments and targets are based on information and representations made to the relevant investment teams by portfolio companies (which may ultimately prove not be accurate), together with assumptions made by the relevant investment team in relation to future matters such as government policy implementation in ESG and other climate-related areas, enhanced future technology and the actions of portfolio companies (all of which are subject to change over time). As such, achievement of these commitments and targets depend on the ongoing accuracy of such information and representations as well as the realisation of such future matters. Any commitments and targets set out in this material are continuously reviewed by the relevant investment teams and subject to change without notice.
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References to ‘we’, ‘us’ or ‘our’ are references to First Sentier Investors, a global asset management business which is ultimately owned by Mitsubishi UFJ Financial Group. Certain of our investment teams operate under the trading names FSSA Investment Managers, Stewart Investors, RQI Investors and Igneo Infrastructure Partners, all of which are part of the First Sentier Investors group.
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