Investing for our sustainable tomorrows, today

As sustainable investing has evolved, trends that once seemed like moon shots, have become central to the consciousness of investors. These include typically, electric cars and driverless cars, thanks to Tesla and other such businesses.

Renewable energy has also moved firmly into the mainstream. Mike Fox, global sustainable equity fund manager at Royal London Asset Management says there are very long-term emerging trends in the world that will probably become very significant in the decades ahead, but, right now, are not really investable.

He cites the example of quantum computing, which he says: “Could have a major impact on the world but is too far into the future to be investable in right now. “There is usually a lag between when something is discovered and when it becomes investable. We are keen right now on genetic medicine.

“Understanding of the human genome and its ability to help medical science has been around since 2000, but it is only really in the past year that we have really known what it can do on a practical level and in a way we can understand; that’s 19 years later. We aren’t really about the very early stage stuff.”

Look to the future

Peter Michaelis, head of sustainable equity funds at Liontrust, takes a slightly different approach, and is happy to “look years into the future” in search of sustainable investment ideas. He says: “Key to our sustainable investment approach at Liontrust is looking ahead, often years into the future, and making decisions based on how we believe things will develop. We focus on the biggest issues of our time, search for companies that can make money from solving them and invest in the opportunities of maximum impact for maximum returns – and this means getting ahead of the curve by identifying major transition points across sectors is vital.

The fund manager says: “We have seen this in an area like energy, for example, where the climate change crisis continues to drive a changing agenda. We believe this is a key trend for any fund to get right to generate attractive returns, with wind turbine manufacturers a clear beneficiary of this changing landscape. The dream of renewables, plus smarter grid and storage, continues to get closer and we think this will be virtually impossible to compete against economically, maybe as soon as 2025.”

Mr Michaelis adds that he removed the theme of “making cars more fuel efficient” as one of the guiding principles of his portfolios in 2018, as he felt the theme had been superseded by a broader aim to make “transport” more fuel efficient.

Stephane Monier, chief investment officer at Lombard Odier, says the present Covid-19 crisis is likely to speed up the pace of innovation in areas such as climate science. He says: “From a climate science point of view, the current crisis is going to offer researchers an unparalleled opportunity to study the impact of human behaviour on the environment.

“There is a chance to learn what happens to greenhouse gases in the atmosphere when the world returns to 1950s’ levels of international transportation. Will commitments to reduce greenhouse gases be weakened, faced with slowing economies? Or will the experience of lower levels of pollution, including in the emerging world, and an understanding of the positive economic growth impacts of investing in green infrastructure spur more action?

“As residents of many cities have been enjoying cleaner air under lockdowns, public tolerance for a return to business-as-usual is likely to be diminished, along with increased recognition of the impact of air pollution on public health. Research is now linking exposure to pollution with the spread and mortality rate of Covid-19, through the effect of air pollution on the body’s immune response and on underlying, aggravating health conditions. A review of the causes and contributing factors of the crisis may reinvigorate efforts to tighten emission controls, especially in transport. In addition, fiscal stimulus packages may provide a boost to green infrastructure.

EU Green Deal

“In the EU, at least, it appears likely that any long-term support programmes will be aligned to the EU’s Green Deal announced last year. Elsewhere, an increase in the availability of low-cost loans and capital will make investments in energy efficiency and renewable technologies more attractive, both of which require an upfront capital outlay but offer a positive economic return.”

David Harrison, sustainable equity fund manager at Rathbones says: “The biggest trends we see in the medium term are innovation and infrastructure, a structural rise in digitisation across global industries. We invest in companies in next generation design technology, companies that will accelerate adoption of electric vehicles and businesses that we view as structural winners as society changes (software companies, payment companies); how we use and preserve water – we are invested in companies that make water systems more sustainable and efficient.”

Other areas of sustainable living are likely to see more popularity.

Louis Florentin-Lee, sustainable equity fund manager at Lazard says: “We believe that plant-based protein will see a significant increase in demand, as the technology to produce it improves and as consumers react to the environmental and health effects of animal-based protein consumption. However, we are concerned that the plant-based protein industry will ultimately be commoditised. Producers may make large amounts of revenue, but they are unlikely to make large amounts of profit. We do believe, however, that the flavours and fragrances industry will see a significant positive impact on profitability”.

“A key challenge to growing the plant-based protein market is making the taste and texture of the products comparable to animal-based protein. It is the solutions from the flavours and fragrances companies that will allow this to happen. These are proprietary technologies, providing the companies with significant barriers to competition, which in turn will allow them to generate high levels of profitability. This is just one example of how a detailed understanding of a wide range of businesses can translate into identifying investments for a global sustainability portfolio.”

David Thorpe FT Adviser Magazine

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