Four leading investment houses discuss the compelling case for sustainable investment and the barriers that are currently stopping it from becoming truly mainstream.
This article originally appeared in Blue & Green Tomorrow’s Guide to Sustainable Investment 2014.
Name: Peter Michaelis
Company: Alliance Trust Investments
Career history: Has been managing money in sustainable and responsible investment (SRI) for over 12 years. Prior to joining Alliance Trust Investments in August 2012, he was head of SRI at Aviva Investors. Also has a PhD in environmental economics.
Name: Claudia Quiroz
Company: Quilter Cheviot
Career history: Joined Cheviot from Henderson Global Investors in 2009, prior to its merger with Quilter in 2013. Lead fund manager of the Climate Assets fund. Has 15 years’ experience in sustainability and responsible investment.
Name: Alice Evans
Company: F&C Asset Management
Career history: Associate director and fund manager in F&C’s Global Thematic Equities team. Lead manager of the F&C Global Thematic Opportunities fund. Previously at Henderson Global Investors and JP Morgan Asset Management.
Name: Ketan Patel
Company: Ecclesiastical Investment Management
Career history: Joined Ecclesiastical in 2003 from Insight Investment Management. Now specialises in integrating financial and environmental, social and governance (ESG) analysis into investment. At Ecclesiastical, he leads on several ethical issues such as pharmaceuticals, energy and agriculture.
Why should people consider sustainable investment?
Peter Michaelis: To get strong investment returns. We believe that sustainable companies have better growth prospects and better quality management – two very strong investment attributes. Over the coming decade there will be growth in demand for companies involved in energy efficiency, innovative healthcare, education services, pollution control, healthy eating and clean energy. Sustainable investing targets these areas of future growth. Surely this is a strategy ideally suited for long-term savings and pensions.
Claudia Quiroz: Sustainable investment gives the opportunity to invest in long-term economic growth. Growth is the key reason for investors’ interest in sustainability and environmental themes. Most end markets in this space are expected to grow annually at double-digit rates over the next three to five years. This generates attractive investment opportunities when one understands the changes taking place with regard to consumer preferences, government spending, energy supply and security, the food supply/demand imbalance and the general need for a cleaner and more efficient economy – the new economy.
Companies meeting demand for energy efficiency, for example, are set to benefit the most going forward. Energy efficiency is one of our favourite investment themes at Quilter Cheviot. It is not only the cheapest but also the quickest way of cutting carbon emissions. We are talking about companies involved in transport infrastructure, building insulation and efficient lighting, industrial productivity gains, smart grid and energy storage, just to mention a few.
Alice Evans: As the future isn’t going to look like the past, we need to think differently about investment for the long-term. The global population tripled over the course of the last century and is forecast to increase another 50% by 2050, and huge nations are transitioning to industrial economies for the first time. The challenges of climate change and pressures on natural resources are steadily increasing. The digital age has accelerated globalisation, which creates great opportunity but also brings economic and cultural dislocations that we need to overcome.
Against this backdrop, companies that are thinking ahead, navigating these challenges, aligning their interests with society and bringing solutions will create more sustainable value. In other areas of our lives we make choices that are consistent with our values – how we save and invest for the future should be no exception.
Ketan Patel: More than 100 UK ethical and responsible investment products now provide a rich diversity of investment opportunities, covering all assets and geographies for the retail client. Investing for profits with principles is becoming a mainstream choice for many investors and the choice of products has never been broader. At Ecclesiastical Investment Management, we believe that ethical stock selection based upon financial and non-financial factors will drive better risk management and stronger performance over time.
There is also a growing recognition for companies to take a long-term approach to a wide range of issues from resource scarcity through to climate change and corporate governance, which puts ethical investing front of mind for many investors, particularly in light of recent financial scandals. Ultimately, there is no intrinsic reason why performance needs to be sacrificed in order to invest responsibly in the long-term.
What’s the biggest barrier to sustainable investment becoming mainstream?
Peter Michaelis: Education that there is a choice. We need to raise awareness that there is no compromise between investment returns and selecting sustainable companies. Sustainable investing has delivered strong investment returns without taking untoward risk.
Transparency will also help. The financial services industry is famously opaque and traditionally investors have found it hard to know what is in their funds beyond the top 10. As the industry is forced to become more transparent then people will start to question where their money is invested. It will be analogous to the food and clothing industry where provenance has become an essential attribute of any product. So too, the manner in which investment returns are generated will become an essential attribute of the investment product. Comic Relief and Church of England coming unstuck because of this opacity are early examples of the change to come.
Claudia Quiroz: I think the biggest barrier is that investors are concerned that there is a price to pay for sustainable investing. There is this belief that the performance of these funds will be worse than an unconstrained, or mainstream, fund. This is a matter of perception rather than reality, as proven by our sustainable investment strategy, Quilter Cheviot Climate Assets fund, which has returned 40.50% since launch in March 2010 to February 2014, compared to the VMA Stock Market Balanced Index rising 38.98%.
People would associate sustainable investing with the solar sector for example, which has had poor performance from 2008 through 2013 due to changes in government subsidy policy as well as an increased competitive threat to western solar companies from privately owned firms in China. However, the companies involved in solar power generation are a negligible part of our investable universe. Also, as we only invest in profitable established businesses with attractive valuations, we avoid the solar sector altogether during that period.
Alice Evans: Changing the perception that ethical and sustainable investment necessarily comes with a performance penalty. Long track records of sustainable investment funds can now show there is no systematic loss of performance compared to mainstream funds over time. If anything we would expect this to become even more obvious in the future as sustainable investment is an inherently forward looking thesis.
Ketan Patel: We believe that there is no barrier to sustainable investment becoming mainstream; it has grown steadily as an option, and the range and diversity of products available now numbers over 100 in the UK. Furthermore, 45% of UK adults with investments said that they now want at least some of their investments to take green and ethical considerations into account.
The appetite is clearly present from many investors. However, sustainable investment is essentially a long-term investment model and the City is still often driven by short-term returns. Remodelling the market to be more tuned to longer term horizons would enable the sustainable investment market to flourish.
Photo: Ben Ford via freeimages