The headlines so far this year have been full of market volatility and short-term shocks.
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.
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.