Sustainable investing isn’t just about avoiding the risks of outdated businesses or environmental PR disasters, explains our Global Sustainability Fund manager, David Harrison. It’s also about spotting opportunities that can be captured if you keep your eyes on the future instead of the past.
There is a general feeling that investing in sustainable companies must come at some cost, that investing with principles must equal lower returns for investors. I think this is fundamentally wrong.
Myopic attention on short-term shareholder returns regardless of cost can be much more damaging to a portfolio than walking away from investments because you don’t agree with their methods.
By squeezing suppliers too much you could force them to erode the quality of the parts on which your gadget depends. By not thinking about how your actions affect your community, you may find attempts to expand operations are blocked by local voters. By not caring about the environment, you may not have a crop to sell in 10 years time. There goes your business.
This is what drew me to Environmental Social and Governance (ESG) investing: it just makes sense. A company that is well managed, aware of its operations from all angles and engaged with its community is better able to avoid catastrophic risks from public relations disasters, poor supply chains and dodgy boardroom antics. By thinking about businesses in a holistic way, I believe these directors, executives and investors are able to judge risk in a more holistic way too.
It’s not all about risks, either. Increasingly, people are starting to cotton on to the massive challenges that face our society and they are demanding change. Businesses have an enormous part to play in this: they are the conduit for everything from our food to our electronics, from keeping the lights on to how we get to work in the morning. The opportunities are huge for companies that can find sustainable solutions to our environmental conundrums, to those businesses that can offer sustainable products to customers that vote with their wallets.
When I took a trip to the US earlier this year to look over some investments I was about to buy, I found that many American companies are rapidly starting to take sustainability seriously. Companies that churn out billions of coffee cups each year are now worried about the PR damage caused by branded rubbish on that scale. Engineering instrument companies are finding new applications for their skills in the fields, helping farmers conserve water and pollute less. Even Silicon Valley, that Ivory Tower of technological excellence, is starting to concede that sometimes moving fast breaks things that shouldn’t be broken.
There are hucksters out there, though. There are always hucksters hanging round the next big thing. I’ve met more than a few companies trying to pass themselves off as sustainability crusaders when they are nothing of the sort – sustainable tobacco company, anybody? (Seriously, check out a few of their annual reports.) It’s amazing how often company executives simply wheel in an ESG expert and tune out of a meeting whenever you quiz them on sustainability.
I believe the companies that are farsighted enough to see these opportunities first, those that understand it makes sense both socially and commercially, tend to make great investments. In short, I would want to buy these companies even if I weren’t running a sustainable fund. Businesses are just a system of organising people who then organise resources. If you have good teams working together toward solid, long-term plans that don’t run contrary to the planet and its people, I feel like you’re already halfway toward a fantastic investment.