The next generation of sustainable investment opportunities

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What's next for sustainable investors?

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. 

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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






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.

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.