The best sustainable investment opportunities for right now

Will Mcintosh-Whyte, who runs the sustainable multi-asset fund range at Rathbones, says the issue is that “many people invested in assets that are sustainable, but traded at very frothy valuations.

"Many people invested in those because of what the companies did, or promised to do. Companies that were untested business models. People were investing in hope and hype. And that has reversed this year. Some people bought based on the story rather than the financials. And those stories have been hard to explain to clients more recently.””

He adds: “When we launched our sustainable fund range in 2021, we told prospective clients that we wanted to buy good companies that were also sustainable, rather than sustainable companies alone. And when we launched, some people said we didn’t look like a typical sustainable investment fund.

The hard task is to identify which of the companies within a particular theme will be the winners.

Sandra Crowl, head of stewardship at Carmignac, says investors should not abandon the long-term themes and strategies in which they are invested, but adds that companies with lower levels of debt are likely to do relatively better in the current market conditions, as they are shielded from higher interest rates. 

Although his own funds do not invest in large energy companies that have operations in both renewable energy and fossil fuels, many sustainable investment mandates do invest in this area, and Mcintosh-Whyte says those companies will benefit as a result of the market re-considering the issues around global energy supply. 

Crowl agrees that the opportunities may be “in the supply chains” of the companies that are popular right now in the ESG universe. 

She adds that she continues to believe renewable energy represents an investment opportunity, as "the current energy crisis reinforces the need to change the energy mix". 

We have seen examples of people identifying the trend early on, but not ultimately being the most commercially successful.Will Mcintosh-Whyte, Rathbones

Duncan Goodwin, who runs the Global Sustainable fund at Premier Miton, says: “We see an accelerating pace of innovation among many of the themes we are investing in, whether that be renewable textiles, online education, renewable fuels or micro lending, to name but a few.

"In addition to investing in a broad range of themes, across many different regions, we believe taking a disciplined approach to valuation also helps to diversify a portfolio. Within this context, new opportunities this year have presented themselves in a broad range of sectors. 

"Cyber security is a good example of a theme we have been tracking for some time and we’ve seen opportunities emerge with the general sell-off in the tech sector.”

Mcintosh-Whyte says that while themes can be identified as promising – he cites hydrogen as an energy source for an example – "the harder task is to identify which of the companies within a particular theme will be the winners.

"Throughout history we have seen examples of people identifying the trend early on, but that company not ultimately being the most commercially successful.” 

David Harrison, who runs the Rathbone Greenbank Global Sustainability fund, remains a fan of electric vehicles as a theme, but is trying to focus away from the actual car manufacturers and instead focus on the companies that supply those businesses, as a way in which he can avoid the 'picking winners' problem. 

The most challenging environment for sustainable investors is when the sectors they choose to avoid, such as fossil fuels, are the best performers.Megan Brennan, Sarasin

Harrison adds another area that has become interesting is healthcare, as both the levels of public concern and the level of innovation in this area picks up, driving capital towards the sector. 

For Jake Moeller, senior investment consultant at Square Mile, the present fall in share prices of some of the more established sustainable investment names represents an opportunity for investors to have a portfolio that is diversified across styles, something which has been difficult to achieve in recent years.

He said a previous problem for sustainable investors was that most of the investable companies were growth stocks and so took a battering this year as that style fell from favour.

But Moeller says many have fallen sufficiently far that they may now be considered value stocks, and so represent an opportunity.

Those themes are also of interest to Megan Brennan, co-portfolio manager of the Sarasin Tomorrow’s World Multi-Asset fund.

The most challenging environment for sustainable investors is when the sectors that they choose to avoid are the best performers.

She says: “Sustainability itself is multi-faceted, with many different opportunities across a range of industries that an investor would want to own at different points in the economic cycle. Take two areas of investment we see as attractive: low-carbon building materials and healthcare companies.

"The macro-economic drivers for these two sectors are quite different; building materials tend to be highly correlated to the housing market and industrial production, whereas the demand for critical medical products are much less sensitive to the economic cycle, so a balanced, style agnostic, sustainable portfolio would blend investments across such sectors."

That's what we want to look for – a theme that is well established, but an area where opportunities still exist.David Harrison, Rathbones

Brennan adds: "In sustainable multi-asset portfolios there are even more opportunities to capture diversified risk premia. Clearly the most challenging environment for sustainable investors is when the sectors that they choose to avoid, such as fossil fuel production and refining, are the best performers.

"While direct exposure to heavy polluting industries may not be desirable for good reasons, there are correlated assets, such as battery storage infrastructure assets that benefit from rising power prices and power price volatility, which may offer diversification benefits."

Harrison also takes the view that health food remains an attractive investment area today, despite some price falls this year to date.

Harrison says: “I think the consumer area was very focused on milks and meat substitutes, but we are now starting to see a wider range of investment opportunities, and that's what we want to look for – it follows a theme that is well established, but an area where opportunities still exist.”

david.thorpe@ft.com