Myth-buster: four things you never knew about sustainable investing
It’s not a sacrifice
Returns will not automatically be lower than mainstream funds.
A factor driving interest in sustainable investment is the growing realisation that people do not need to sacrifice returns to meet their values when investing.
In a fast-changing world, we believe the companies that will thrive are those that focus a) on improving people’s quality of life, be it through medical, technological or educational advances, b) on driving efficiency in the use of increasingly scarce resources and c) on building resilient, prosperous and stable societies.
Well-run companies whose products and operations capitalise on such transformative changes can benefit financially. We believe that identifying these powerful trends and investing in exposed companies can make for attractive and sustainable investments.
It’ about pros, not cons
Investing sustainably is about much more than just avoiding tobacco and weapons companies – it’s about looking for positives as well as avoiding negatives.
Identifying emerging trends and long-term themes is the cornerstone of our process. This is often referred to as positive screening because funds focus on what they want to own rather than just what to avoid, and is one of the three main approaches to managing ethical and sustainable funds.
The second is engagement, also known as active ownership. In this case, fund managers engage with the companies they hold so they can influence management into changing their corporate strategy.
The third approach is avoiding certain industries because of the negative effects of their products, such as tobacco companies and producers of weapons. We combine all of these methods on our funds.
Banking on sustainability?
There can be a place for financials in a sustainable fund – even after the global crisis.
Our top stock picks within the financial sector have been a major factor behind performance over the past five years.
Financials’ inclusion may surprise some given our sustainable investment approach but it is a natural outcome of our process and a demonstration of how understanding these issues can deliver superior returns.
Being in the right banks has been key and we continue to see opportunities in a sector that remains vital to the broader economy. We prefer traditional retail names over investment banks as we see much clearer benefits to society from the former, provided they are well managed, and have concerns about the volatile nature of the latter’s earnings.
It’s changing the world
It is becoming increasingly mainstream, belying ‘tree-hugger’ clichés of old.
There are a number of factors driving growing interest in sustainable investment around the world. The first is the fact that sustainability is an increasingly important theme for consumers, who want what they wear, eat and drive to have a positive impact on the world around them.
Given this, we believe demand for sustainable investment will only continue to grow, as consumers expect the companies they use to be socially responsible. This is fundamentally changing businesses, from high street retailers to industrials and commodity producers.
Basic financial sense is also pushing companies down the sustainable path: regulations and legislation increase costs for polluting businesses, providing a significant impetus for efficiency improvements. Companies creating less pollution, and those involved in pollution reduction and efficiency technologies, should prosper.
Peter Michaelis is head of sustainable investment at Liontrust