In Focus: Megatrends  

How sustainable investment approaches must adapt to keep up

How sustainable investment approaches must adapt to keep up

Getting rid of exlusionary investment policies, understanding companies’ true impact on the environment and diverting more investment towards emerging markets are all needed if climate change is to be stopped, Ninety One has said.

Juliana Hansveden, portfolio manager of Ninety One Emerging Market Sustainable Equity, said the future looks terrifying unless we get better at allocating capital to tackling climate change and other pressing sustainability concerns. 

“Annual climate finance needs to increase almost six-fold, according to the Climate Policy Initiative, to limit global warming to 1.5 degrees," she said. 

Crucially, this capital needs to go to the right places, she added, and highlighted how today, about 80 per cent of the world’s financial assets are located in developed markets, but that at least 70 per cent of the investment required to achieve the Paris Agreement climate targets and the UN’s sustainable development goals must be directed to emerging markets.

“The net zero transition, and sustainable development more broadly, remain woefully underfunded in the developing world”.

Deirdre Cooper, co-head of thematic equities and co-portfolio manager of global environment at Ninety One hit out at the division of companies into ‘bad egg’ and ‘good egg’ categories, driven by ESG ratings.

“Firstly, this gives no consideration to a company’s willingness or ability to drive sustainable development where it is desperately needed, including with respect to climate solutions, financial inclusion, physical and digital infrastructure, healthcare and education,” she said.

Secondly, it ignores emerging companies’ potential to deliver growth and profits for the benefit of shareholders, she added. 

Stephanie Niven, portfolio manager of Ninety One Global Sustainable Equity, said by itself, diversity will not make a company more innovative and responsive to customers’ needs. 

“These drivers of growth will only be unlocked if the company is run in a way that enables people from all walks of life to contribute and exert influence,” and analysts and  portfolio managers need to appraise not only a company’s diversity, but its inclusiveness. 

“Therefore, the final to-do is for portfolio managers and analysts (and the more diverse and inclusive investment teams that will hopefully succeed them) to fully incorporate these new methodologies for valuing externalities into their fundamental analysis, rather than relying on external ESG ratings and other outsourced sustainability insights.”

Cooper said: “If the companies of tomorrow succeed because they act and think differently to their predecessors, it seems a fair bet that the successful investment teams of the future will look and behave differently to those of today”.