This is the first in a three-part series exploring what sustainable investing means today, the opportunities it can create for investors and the role it could play in long-term financial planning.
Flooding in Nepal and another destructive wildfire season across Europe are reminders that environmental risks are becoming harder to ignore.
But for investors, sustainability now goes far beyond climate change.
It’s increasingly about understanding how major shifts, from extreme weather and pressure on resources to ageing populations, healthcare innovation and cybercrime, could affect the companies we invest in.
Sustainable investing is often associated with avoiding fossil fuels and backing renewable energy. In reality, it can cover everything from energy-efficient buildings and medical technology to cybersecurity, resilient infrastructure and cleaner supply chains.
At its heart are two questions – which businesses are helping to solve the challenges likely to shape the economy over the coming decades, and which could be left behind by them?
For Liontrust’s Sustainable Investment team, that long-term view is central to its approach.
Following where the economy is going
The basic principle behind sustainable development is meeting our needs today without leaving future generations worse off.
For investors, that means looking at changes already taking place across the economy and identifying businesses that could benefit from them.
Climate is an obvious example, but this goes well beyond simply buying shares in renewable energy companies.
Liontrust looks for businesses improving the energy efficiency of buildings, turning waste into durable materials and developing technology to detect pollutants such as PFAS, often known as “forever chemicals”, and microplastics.
Adapting to a warmer climate also creates potential demand for companies making infrastructure more resilient, developing technology to monitor environmental conditions and providing insurance against changing risks.
The investment argument is simple: these are problems societies will have to spend money solving.
It’s about more than the environment
Health is another major theme. Liontrust sees potential opportunities in earlier diagnosis and screening, medical innovation and technologies that make new treatments possible, alongside businesses helping people to live healthier lives.
Supply chains matter too. Globalisation has made products cheaper and trade easier, but it has also left companies exposed to poor labour practices, environmental damage, geopolitical disruption and natural disasters. How well a business manages those risks can have financial consequences.
Cybersecurity is increasingly relevant for similar reasons. Digital attacks can cause huge financial and reputational damage, creating demand for companies providing protection while making cybersecurity governance an important issue for businesses themselves.
Good corporate governance may sound less exciting, but how a company is run, how executives are rewarded and whether its board properly understands its risks can have a direct bearing on long-term performance.
Seen this way, sustainable investing becomes a wider assessment of how well a company is positioned for a changing world.
Avoiding harm still matters
Investing in solutions is only one side of the picture.
Many sustainable funds also restrict or completely avoid businesses involved in activities their managers believe cause significant environmental or social harm.
Depending on the fund, that might include fossil fuels, tobacco, weapons, gambling, intensive farming, alcohol or companies associated with serious human and labour rights concerns.
And the caveat of ‘depending on the fund’ is important.
There is no universal rulebook for sustainable investing. One fund may exclude an industry entirely, while another may invest selectively because its manager believes particular companies are changing.
So a “sustainable” label alone does not tell you enough. Investors need to understand what a particular fund actually does with their money.
Using investors’ influence
Sustainable investing can also involve what fund managers do after they buy shares.
Managers can engage directly with businesses on issues including climate risks, pollution, working practices, diversity and executive pay. They can also use their votes at company AGMs to support or challenge management.
Liontrust regards this engagement as an important part of sustainable investing, both to gain greater insight into the companies it owns and to encourage better business practices.
For investors choosing a sustainable fund, this is worth checking. Can the manager explain which issues it has raised with companies, what changes it wants to see and how it votes when businesses fall short?
What about returns?
Sustainable investing is still investing. The aim is to generate returns, rather than simply direct money towards companies doing useful things.
Liontrust’s investment case is that businesses providing products and services needed for a cleaner, healthier, safer and more resilient economy could benefit from long-term structural demand.
The reverse can also be true. A company may be profitable today but face difficulties if its products become less desirable, regulation tightens or it fails to manage significant environmental, social or governance risks.
That does not mean every sustainable company will be a successful investment or that a sustainable fund will automatically outperform a conventional one. The price paid, the quality of management, competition and wider economic conditions still matter. As with any investment, your capital is at risk.
Sustainability is another way of assessing where future risks and opportunities may lie.
So what does sustainable investing mean today?
For Liontrust, it means looking for businesses benefiting from long-term shifts towards a cleaner, healthier and more resilient economy, limiting exposure to activities it considers damaging and using its influence as a shareholder to encourage companies to improve.
For individual investors, the more useful question may be not whether a fund calls itself sustainable, but how it is sustainable.
What does it invest in? What does it avoid? How does its manager decide whether a company qualifies? And can it show that sustainability genuinely influences investment decisions?
Those answers tell you far more than the label on the fund.
