Our views

The overdue rise of sustainable investing

Mike Fox, Head of Sustainable Investments

18 December 2017

For those long-term participants in the sustainable investment market, where values are as important as valuations, the recent rise in its profile has been long overdue. For too long there has been cynicism in this area, reflecting the fact that most market participants do not think environmental, social and governance (ESG) factors can enhance investment returns. Times are changing though, driven by increasing evidence that not considering ESG issues can result in missed opportunities and risks, to the detriment of investors.

What does it involve?

To us at Royal London Asset Management (RLAM), the goals of sustainable investing are no different than the goals of any other investment strategy - to generate sustainable, risk-adjusted returns that reflect a wider understanding of what will drive economic performance in the future. Fundamentally, we want to invest in companies that provide products and services that have a long-term and tangible benefit to society, as well as companies that manage their ESG issues better than their peers. We use the lens of sustainability to help us find these companies. This requires full integration of ESG risks and opportunities within the investment process, something we’ve been doing for the past 14 years.

An undervalued investment

We regard that investors in general do not give adequate consideration and weight to ESG issues when making investment decisions. Despite strong evidence to the contrary, this reflects continued cynicism about how important ESG issues are in an investment context. It also reflects the broad expertise required to implement this approach not being readily available to investors.

We believe, and our performance demonstrates, that companies providing a net benefit to society, through their products, services and strong ESG management, often exhibit structural growth with lower inherent risk. This shouldn’t be a surprise. Socially useful products and services are more valuable to their end consumers. Also, only investing in companies with good corporate governance (with appropriate remuneration policies and board structures) and due consideration for their social and environmental impact should be common sense. Sadly it is more apt to call this uncommon sense. Such companies are still frequently undervalued, as markets are ineffective in discounting these factors. Opportunities may therefore exist to identify and capitalise on this before the market has valued them appropriately.

What does the future hold?

There appear to be more opportunities than ever to invest in companies that will have a positive impact on society. Areas such as cloud computing, artificial intelligence, electric vehicles, immuno-oncology (using the immune system to fight cancer), and agriculture offer companies whose products and services are improving society as we write. We concentrate our investments on these areas and avoid industries, such as oil & gas and mining, where we believe the long-term prospects for growth are weak as new technologies disintermediate them.

Interest in sustainable investing is growing rapidly. Younger generations, such as millennials, are making more socially aware choices across a whole range of purchases. It is natural that investment products should be part of this. Increasingly, ESG integration in investment products is seen by millennials as a requirement rather than an optional extra. It is our belief that sustainable investing has the potential to become a much larger investment category. If, as is our experience, sustainable investors get a better a return than those who do not consider the opportunities and risks presented by ESG issues, the proposition should appeal to all investors, not just a niche part of the market.

It is for these reasons we believe the opportunity for a sustainable future, both in terms of the delivery of investment returns and broader society, is stronger than ever.

The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice.