The rise in popularity of sustainable investment products provides capital for companies that are developing new technologies and methods of conducting life, and this disrupts the business models of incumbent companies.
The area where this is most apparent right now is in cars, with electric auto-makers winning a greater share of consumers’ wallets and investors’ portfolios, at the expense of those more traditional companies producing cars powered by the internal combustion engine.
Mike Fox, who runs sustainable equity portfolios at Royal London Asset Management, says the impact on traditional companies is becoming more stark because “the nature of [environmental, social and governance investing], and what it is, has become more defined in recent years, and companies are getting asked about it more.”
Craig Bonthron, global sustainable equities fund manager at Kames Capital, says many of the more popular companies in the global sustainable equity space right now are companies “that are quite simply providing something which is better than the traditional competitor.
“We own Tesla in the portfolio. Elon Musk has said he will only build something if it is better than what is there already.
“From a long-term investing point of view, lots of the more innovative companies coming to the market are software companies, and the cost of increasing production for a software company is basically zero, whereas for a traditional industrial company that might have to invest more in a factory, which carries a huge extra cost.”
Supply and demand
Louis Florentin-Lee, portfolio manager of Lazard’s Global Sustainable Equity Select fund, says there will be a move to a more sustainable future, and this will affect demand across all sectors.
Some effects will be clear – such as the shift from fossil fuels – while others might be less obvious, such as the need to make manufacturing processes more efficient.
- Technological advancements are assisting sustainability
- However, they could cause a lot of disruption
- Companies need to adopt more ESG-focused policies
However, Mr Florentin-Lee says this shift will bring with it more eventual changes, which fund managers will need to consider carefully.
He explains: “For example, if new technologies enable the more efficient use of raw materials and energy to manufacture a car, will this result in lower prices for cars, which in turn boosts overall demand for cars and thus ultimately an increase in raw material and energy consumption?
"Or will car manufacturers retain that production efficiency for themselves in the form of higher profit margins, along with lower raw material and energy consumption?
“Simply adding a sustainability overlay on top of the standard analysis will not work.”
While such technological advances might create opportunities for some companies, this could prove disruptive to others.
As a result, he says the active fund manager can create value by navigating these trends.
David Winborne, global equity fund manager at Impax, is another investor who sees the pace and scale of technological change as a fundamental driver of the growth of sustainable investing in the years to come.