InvestmentsOct 6 2022

The next generation of sustainable investment opportunities

Supported by
Rathbones
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Supported by
Rathbones
The next generation of sustainable investment opportunities
(Dominik Dvorak/David Clode/Bloomberg/FTA montage)

While there has been a steady increase in interest for sustainable investment strategies in recent years, as evidenced by Investment Association data, a frequent refrain from advisers is that the sector is not evolving quickly enough to meet the needs of different clients. 

The view of many is that firms, in the rush to enter the market, have created products that all look like each other and are all exposed to similar themes.

At least some of the buoyancy that occurred in the sector is the result of those themes, particularly in the renewable energy and electric car sectors, which, due to the relatively nebulous nature of their business models, tend to be classified as growth stocks, and growth stocks have been sharply out of favour this year. 

But the broader concern for many advisers is that it can be hard to understand how the range of products coming to market aligns with the risk profile of their client. 

Sandra Crowl, head of stewardship and engagement at Carmignac, says the next stage of the evolution may be that clients become more interested in funds that focus on a specific theme within the sustainable investing universe.

She says increased interest from retail clients will drive this change, as those investors are keen to understand fully the nature of their investments.

Jake Moeller is senior investment consultant at Square Mile

 

 

 

Reit managers have focused on investing in energy efficient buildings for years.

 

 

Jake Moeller, senior investment consultant at Square Mile, says there are certain types of funds that could be suitable for sustainable portfolios, but that are not thought of that way right now. He cited certain real estate investment trusts as example of this.

Moeller says: “A lot of these managers have been focused on investing in buildings that are more energy efficient. For example, instead of demolishing the building, they reduce it to a skeleton and re-build it, which saves on the carbon emissions of new concrete.

"Now the thing is, those Reit managers have been doing that for years, but only recently started to tell the story in a way that sustainable investors can understand. So it feels like a new theme."

He adds: "The other area that property managers are finding interesting to talk about is biodiversity, which is something many care about, and now that Reit funds are discussing it, it has become something that Reit managers talk about, though they have been doing it for years.” 

Crowl is another who believes that biodiversity will become a significant theme in future. She says regulators are increasingly looking at this area, and that will be the driver of demand into this area.

It is important to find companies that are willing and able to adapt and become leaders in these emerging themes.Nathalie Wallace, Natixis

Rahab Paracha, sustainable investment analyst at Rathbones, says: “Buildings are actually the source of 40 per cent of emissions, which is a greater proportion of the total than transport. And that means buildings will become higher on the agenda of regulators and policymakers.

"And while those themes are environmental, they are also social – they are about public health. If a house is not insulated properly, that is unhealthy for the people who live there.”

The other area Paracha says will be a significant future theme is agricultural technology. She says a combination of a desire for agriculture to be more carbon-efficient and a desire from politicians and the public to have greater food security will mean much innovation happens in this area in the future.

In the fixed income universe, Noelle Cazalis, who jointly runs the Rathbone Ethical Bond fund, says that while much of the product that has come to market in recent years has been focused on the environmental, or E in ESG, she anticipates that social housing, which is part of the social S theme within ESG, will be a growth area in future. 

She finds this to be an attractive investment theme as the revenues are often linked to social security or other predictable sources of cash flow. 

Transitioning companies

Nathalie Wallace, global head of sustainable investing at Natixis, says the evolution that has occurred to date has happened because retail clients are less interested in the old-style exclusion ESG strategies, which are premised solely on avoiding companies that are not ESG compliant.

She says retail clients, in her experience, increasingly want portfolios that are ESG compliant but that also have a positive impact on society.

Narina Mnatsakanian, executive director – sustainability centre at Van Lanschot Kempen, says: “The world is currently undergoing a lot of changes and transitions. It is important to find companies that are willing and able to adapt and become leaders in these emerging themes.

 

 

 

Buildings will become higher on the agenda of regulators and policymakers.

 

 

 

 

"Some of the most important transitions that we see are energy transition, food and agriculture transformation to include more sustainable, regenerative and biodiversity-friendly practices.

"Finally, materials transition will help us more towards a more circular economy. Companies that are able to navigate energy, food or materials transitions could be the next generation of winners.”  

Duncan Goodwin, who runs the global sustainable growth fund at Premier Miton, says: “The next generation of sustainability investments will be in companies that can provide new solutions to old challenges.

"Energy transition remains at the forefront of sustainable investing and newer technologies such as hydrogen and the next generation of energy storage batteries could see a step change in the ability to de-carbonise.

"In addition to fuel, the availability of affordable and healthy food is another great global challenge and one for which new farming techniques, both in and outside of the lab, look set to enter the investment mainstream.

"We look to diversify the portfolio via the breadth of themes in which we invest. Currently our sustainable funds have exposure to seven, largely uncorrelated, investment themes globally.” 

David Thorpe is special projects editor of FTAdviser