This article is from the Good Guide to First-Time Investing, which you can download for free here.
Few could argue that the global economy is going great guns. When times are hard, it might feel like sustainability should take a back seat. But in fact, it matters now more than ever.
Sustainable investment is an opportunity to reduce social and environmental inequalities – exacerbated by the cost-of-living crisis – and grow the economy in a way that meets the needs of the present generation without compromising those of future ones.
Of course, sustainability credentials aren’t the only important factor in a ‘good’ investment. At Liontrust, we believe the companies that are driving positive change by finding solutions to the world’s problems are best placed to outperform the market and provide an attractive return for investors.
To seek these out, it can pay to consider both the big sustainability trends, as well as how company managers deal with more specific challenges to their businesses.
A cleaner, healthier, safer economy
Over the last 22 years, the Liontrust Sustainable Future investment process has focused on finding companies looking to enable and benefit from the progress towards a cleaner, healthier and safer economy.
Underpinning these three main investment areas, we use a further 20 sustainable investment themes to help us identify the strongest and most dependable growth trends in the economy.
We aim to think differently to the crowd and want to harness the exponential effect of companies that can grow at a strong rate both now and 10 years from now as they innovate and solve sustainability issues.
Looking at renewable energy, for example, the cost of generating electricity from solar and onshore or offshore wind has continued to fall over the past 10 years. The competitive position of renewable sources has also improved dramatically in comparison to fossil fuels, which has seen some volatile price spikes due largely to Russia cutting off its gas supply to Europe.
When it comes to meeting the ‘trilemma’ of our energy needing to be affordable, secure and clean, there is little that can compete with renewable energy. This is reflected in government schemes such as the EU ‘Fit for 55’ target of reducing net greenhouse gas emissions by at least 55 per cent by 2030. Even China has stated its target of being carbon neutral before 2060 and to begin to phase out coal after 2025. These are dramatic changes.
In healthcare, we have seen an acceleration in the ability to diagnose and treat diseases. For example, the cost of gene sequencing has fallen dramatically from $400 million (£327 million) for the first genome sequenced in 1977, to around just $400 today (£327).
The improved understanding of disease mechanisms and how to arrest them was shown in the speed at which the vaccines for Covid-19 were developed (in under 12 months). In comparison, the vaccine for typhoid fever took more than 100 years to develop.
To finance the crucial global transition to a low carbon energy system, large amounts of capital will be needed to fund the growth in renewable energy. In 2022, banks committed £3 trillion to finance clean energy projects. To put this into perspective, if 1MW of renewables costs roughly £1 million, then this amount would fund 3000GW – equivalent to the entire capacity of electricity generation in the US.
This gives an idea of just how many billions of pounds are being targeted towards renewables, and the critical importance of banks being prepared to finance these projects.
Still a long road ahead
All that said, particularly given the volatility of stock markets over the past few years, some may question whether sustainable investment themes have run their course.
This would only be the case if every problem had been solved and satisfied every need; we are a long way from that! There is still plenty of growth to do for sustainable companies, providing plenty of opportunity for sustainable investors.
Risk warning: Past performance does not predict future returns. You may get back less than you originally invested.