Lessons from 20 years of sustainable investment

Written by Peter Michaelis on 23rd Mar 2021

Over the 20 years we have been managing the Liontrust Sustainable Future strategies, the key lesson proved, rather than learned, is that integrating sustainability into stock selection can enhance returns.

At launch in 2001, our goal was to deliver strong performance by investing in sustainable companies and also engaging with these businesses to encourage best practice on environmental and social issues. At the time, these were radical notions: most investors were certain that incorporating impact into investment was a distraction at best and, at worst, guaranteed to deliver worse returns.

The prevailing mindset remained in line with Milton Friedman’s dictum that the business of business is business, meaning shareholders should care only about profit maximisation and not worry about how it is achieved. Today, the picture is very different with almost all listed companies reporting on corporate social responsibility or ESG (environmental, social and governance issues).

A landmark came in 2019 when the usually conservative US Business Roundtable issued a statement on the purpose of corporations. The Roundtable periodically sends out Principles of Corporate Governance and each version since 1997 had endorsed shareholder primacy – that businesses exist principally to serve shareholders. In 2019, they moved away from this and included a commitment to all stakeholders, not just shareholders but customers, employees, suppliers and wider communities.

The key to performance

Over the years, the key to our performance has been investing in companies that have been successful because they help to make our world cleaner, healthier and safer. We have provided capital to companies that are decarbonising electricity generation, for example, developing innovative vaccines, building our communication infrastructure, and making roads safer. These highlight the importance of identifying structural growth and we continue to believe investors underestimate the speed, scale and persistency of such trends.

We look at the world through the prism of three mega trends;

  1. Better resource efficiency (cleaner)
  2. Improved health (healthier)
  3. Greater safety and resilience (safer)

Looking to the future

There are 21 themes within these trends, and our approach involves looking ahead, often years into the future, and making decisions based on how we believe things will develop. What this means in practice is that our thinking within themes changes over time and this is clear from the autos sector, for example. Few would argue the car defined the 20th century but we are approaching a tipping point for humanity’s relationship with the automobile.

We started the Sustainable Future portfolios with a refusal to invest in companies exposed to petrol or diesel engines, believing
the economics of a sector that emits poison into the air were no longer viable. We saw regulation shift in this direction in 2009, with the EU introducing a 130g/km C02 target for new passenger cars, dropping to 95g/km by 2021.

Beyond emissions, the industry has faced the problem that cars are fundamentally dangerous: while deaths caused by road accidents in the UK have been falling since the 1960s, thousands still die every year. Better tyres are one measure to improve safety but the initial focus remained on people within the car – and data shows half of those dying are pedestrians or cyclists. Again, we saw this as a problem that needed solving and identified stocks innovating in smart sensors and automated driving.

The making of sustainable investment

Looking to the future, we are again seeking ways to get ahead of regulatory and societal curves, with driverless cars no longer the stuff of science fiction. Emissions have been an issue for decades but something more fundamental is now at work: the problem is not should we buy diesel, petrol, hybrid or full electric but rather whether to own a car at all.

We see the transport sector shifting focus from traditional internal combustion engine and powertrain cars to auto safety, multi-modal transport and trains. Our view remains that as we look past Covid-19, the tools and techniques companies have developed to outperform in the face of a climate emergency, an obesity epidemic or failing boards will be the making of sustainable investment.

Do remember that the value of an investment and the income generated from it can fall as well as rise and is not guaranteed. Therefore, you may not get back the amount originally invested and potentially risk total loss of capital. Past performance is not a guide to future performance.

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