Strict definitions have been put in place by the financial watchdog, the Financial Conduct Authority (FCA), which means that funds that claim to be ‘sustainable’ must now prove it.
The first stage of these rules took effect at the end of May to combat greenwashing – where a fund claims or overstates its strategy in relation to sustainability. This regulation requires that any fund’s reference to sustainability is clear, fair and not misleading.
At the end of July, the Sustainability Disclosure Requirements (SDR) came into force. This regulation allows funds to label themselves as sustainable once they have successfully met the required criteria. So far, only around a dozen funds sold in the UK are currently able to use any of the labels – including the globally focused equity impact fund that WHEB runs.
Greater clarity
A key feature of the labels is that they require funds to provide more information into what a fund does.
Funds can secure one of four labels:
Wellness and wellbeing holidays: Travel insurance is essential for your peace of mind
Out of the pandemic lockdowns, there’s a greater emphasis on wellbeing and wellness, with
Sponsored by Post Office
- Sustainable Focus
- Sustainable Improvers
- Sustainable Impact
- Sustainable Mixed Goals
A fund that invests in ‘improvers’ means it targets companies that are lagging in their sustainability credentials, but are making clear and active efforts to improve this part of their business.
‘Focus’ funds back companies that already demonstrate some kind of sustainability characteristic, while those fund managers that secure the ‘impact’ label invest in companies that are making a clear and measurable positive difference to the world.
Patient approach
Many of these trends are long term, and investors may need patience to see them come to fruition.
Exuberance around artificial intelligence (AI) has been a distraction for investors.
In recent years, index returns have been driven by technology stocks, whose valuations have rocketed since the Covid-19 pandemic, meaning the performance of social and environmental impact stocks looks less appealing by comparison.
Clean energy and environmental technology stocks have performed less well in this environment, and the election of US President-elect Donald Trump, who considers climate change to be a ‘hoax’, could add to investor pessimism.
However, many environmental stocks are at their lowest valuations relative to the market – using a metric that measures the price of a company’s shares relative to the net value of its assets – for over 10 years, WHEB research shows.
Like every type of investment, share prices can fall as well as rise, but if an investor expects there to be more renewable energy use in the coming years rather than less, then they may decide to build some exposure to clean energy within a diversified portfolio.
Active decision
What investors need to decide for themselves is what their vision of the future is: do they think the world will opt not to progress, and rely only on existing technology and energy sources, such as fossil fuels; or will it, as we believe, continue on a long journey to a more sustainable, zero-carbon economy?
That might feel like a difficult decision to make, especially with Trump in the White House.
Yet, WHEB’s experience over 20 years running our Impact strategy shows that Republican presidencies tend to provide an environment that is supportive of the mid-sized industrial and technology companies that provide solutions to sustainability challenges.
There is also considerable appetite for renewables outside the US. This is true both in the European Union, China and around the globe. Advanced economies around the world currently plan to expand renewables by nearly 100% by 2030 (from 2022). Emerging and developing economies are planning an even bigger expansion of 140%. Both, however, are still below the rates of deployment that scientists say is needed to protect the climate.
Plentiful opportunities
Of course, there are many opportunities – including those that we target – in terms of Western companies that can thrive in their own markets or internationally, meaning that investors can gain globally diversified exposure to the sustainability theme.
It might feel like there are a lot of decisions to make. And not everyone will want to invest 100% in sustainable funds. But sustainability remains a growing theme around the world and investors may want to have at least some exposure to these trends. For those who do want to invest in sustainability, the SDR labels represent a high standard of sustainability.
This is great news for retail investors, as it will make it easier to identify funds that are genuinely seeking to catalyse positive global change and achieve the aspirations they have for their investments.
Seb Beloe is partner and head of research at WHEB Asset Management
