This article is an extract from the latest Good Investment Review, from 3D Investing and Good With Money, free to download here
While sustainable investing might come in many guises – and many initialisms – its move from the fringes to the mainstream of the financial world in recent years in undeniable.
But this is not something we are just coming to realise. We can point to a two-decade track record of sustainable investing, during which time we have continued to research and develop the 20 sustainable themes that shape our investment, focusing on companies making the world a cleaner, safer and healthier place to live.
The impact of Covid-19 on our health, livelihoods and economy does not change our view that companies exposed to these areas will continue to see strong growth in the coming years. Indeed, longer term, we can expect investment in areas such as healthcare to be prioritised.
Compelling stocks for the long-term
Our team has been working through scenarios to model the impact of coronavirus on each of our holdings, 2020 revenues, the ability of companies’ balance sheets to withstand it and tentatively what the likely earnings will be in two to three years. There are many unknowns but it does highlight stocks that are beginning to look compelling over the longer term.
It is ultimately impossible to know what impact the current crisis will have on sustainable issues. On the one hand, we would hope the current ‘uniting against a common enemy’ trend could be directed against climate change in the future; on the other, we may find governments have used much of their firepower fighting economic slowdown and will not be spending money on sustainable projects for some time to come.
Our base case, however, remains that sustainable companies have better growth prospects and are more resilient than businesses not prioritising ESG (environmental, social and governance) – and these advantages remain under appreciated by the wider market.
Watch out for greenwash
With popularity comes proliferation, and as we continue to see more and more asset management companies launching into this market, it is important to identify ‘greenwashing’ in practice. Greenwashing is when asset managers say they take a sustainable or ESG approach to investing when they do not.
While the spread of coronavirus continues to dominate everyone’s thoughts, here are five attributes that will show you whether funds, and the teams behind them, are capable of meeting investors’ sustainable expectations.
Genuinely sustainable fund managers should be transparent about how they invest, as well as being open to be challenged. This should include clear and simple information explaining how the team manages funds: what companies they look for under the sustainable approach and what they avoid. It should not be generic greenwash, with little more than meaningless ‘brochure’ comments like “sustainability is in our DNA”.
A sustainable manager should be able to provide a full list of all the companies in which a particular fund invests rather than just the standard top 10 that appears on factsheets. If they are unable or unwilling to do this, it is a red flag.
Investors should expect to see frequent communication giving an update on what is going on in the fund, relating back to the investment decisions and companies held. Anyone can write a generic report on climate change but how is the portfolio positioned in light of the huge challenges that combating this will entail?
The manager should respond to queries about companies they are invested in and explain why they like them.
2. Experience and resource
We believe the experience and depth of a team is important when it comes to sustainable investing. There is nothing to say a new fund will not be a goodinvestment and there are interesting products coming to market. But to use a simple analogy, if you need a plumber, you are likely to choose one with experienceover a novice.
3. Knowledge and ongoing training
Sustainable investing is a specialist area and subjects like climate change are fast moving so investors need to be confident that their chosen managers have the required knowledge to run money in this way. This can be anything from members of the team having specialist qualifications to a general focus on training to ensure people understand the latest sustainability trends. Again, if managers cannot display this, that represents a red flag.
We believe managers should be able to highlight a track record of holding companies to account and encouraging them to improve. Fund managers should be able to talk in detail about their engagement priorities – whether diversity, tax transparency or plastic pollution – rather than just making sweeping statements. It is also worth looking at managers’
AGM voting records: do they just vote with company management or actually challenge the businesses in which they invest to improve?
Ultimately, you are looking for all this knowledge and experience in sustainability being applied to investment decisions – giving meaningfully different exposure compared to more conventional funds. Are managers able to show how their sustainability views are reflected in their decisions: is it simply ESG data and reporting for the sake of it or is it actually making a difference
to investments? Can fund managers provide concrete examples of where, if you removed the sustainability aspects from a business, they would not have invested in it?
Read the latest Good Investment Review of Ethical and Sustainable Funds by 3D Investing here.