InvestmentsAug 10 2016

Sustain in order to gain

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Sustain in order to gain

Fortunately, there are also some long-term, structural themes which look attractive as an investment. Sustainability is one such theme. It is becoming ever more important because companies which adopt a sustainable business model are demonstrably performing better than those which do not, and this is reflected in the funds which invest in them.

Ethical investing used to be about negatively screening out companies which were engaged in activities which are viewed as ‘bad’ for various reasons – for example, those involved in arms manufacture or the tobacco industry. It was more about investing with your heart rather than your head, and the reduced investment universe was often detrimental to the performance of ethical funds.

Sustainable investing is more about seeking to make the world a better place while also benefiting from those investments. We are already seeing sustainability, and environmental, social and corporate governance (ESG), at the core of many business strategies.

Sustainability encompasses many different areas, from renewable energy to technology, and from healthcare to changing lifestyles and general wellbeing.

We are already seeing sustainability, and environmental, social and corporate governance, at the core of many business strategies

Investors are increasingly finding sustainable investing interesting as they see direct links to themes and companies they know about and lifestyle choices they are making, and see this as a way to contribute to the world being a better environment for the next generation. Interest is growing, particularly among women and younger people – two groups which are rapidly becoming more influential investment decision-makers. Research conducted in February 2015 by the Morgan Stanley Institute for Sustainable Investing showed 84 per cent of millennial investors were interested in sustainable investing and were twice as likely as investors overall to make sustainable investment decisions.

Companies showing leadership in environmental management, and sustainability in general, are likely to be more profitable. Evidence also shows those companies which adopt sustainable business practices are likely to do better than those which do not, something which was hastened by the financial crisis of 2008 and the associated corporate governance issues.

• Strong environmental, social and corporate governance practices typically result in better operational performance by companies. Bad governance leads to bad outcomes.

• More sustainable companies often outperform less sustainable companies on stock markets.

Ted Franks, fund manager on the WHEB Sustainability fund, said that while every company claims it is integrating ESG into its process, they are doing it to greater and lesser degrees. He added: “The good thing for us is that those which are doing it are creating a lot of alpha while also mitigating risk. Good companies tend to avoid pitfalls and generate shareholder returns.”

We have also seen the introduction of the MSCI World Socially Responsible Investing index, with exchange traded funds such as UBS MSCI World SRI UCITS ETF tracking it.

An example of the shift towards sustainable companies being winners is in the area of cleaner energy. Solar and wind-powered electricity generation now account for a total of 43 per cent of the overall market in Germany. 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 such as 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 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 have seen a notable rise in the number of 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, 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, with lifestyle pundits decreeing “cycling as the new golf”.

Alongside cleaner energy, digitisation is a core theme for the WHEB fund. Mr Franks said: “Across all our themes the power of the computer is very striking. Monitoring and analysis is now embedded in things as common as smartphones.”

Digitisation is playing a key role in the automotive industry, where sustainable developments also include electric cars, autonomous vehicles and the concept of a shared economy where owning possessions such as cars will become less common.

Healthcare, technology and infrastructure are three of the major themes which Mike Fox, manager of Royal London Sustainable leaders, is pursuing. He highlights two current sub themes which he views as very important. In his view, artificial intelligence could be the biggest technological development of our lifetime. Within healthcare there have been initiatives such as the Cancer MoonShot 2020 programme, whose ultimate goal is winning the war on cancer.

Quentin Drewell, circular economy lead at Accenture Strategy, said 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.

We believe sustainable investing is a long-term, structural theme that will only become more mainstream.

Michelle McGrade is chief investment officer of TD Direct Investing

Key Points

Sustainability is a long-term attractive structural theme.

An example of the shift towards sustainable companies is in the area of cleaner energy.

Sustainable developments in the automative industry include electric cars, autonomous vehicles and the concept of a shared economy.