The concept of sustainable investing has come a long way since the Brundtland Report was published in 1987, when financial decisions were more detached from long-term value creation and social impact. Today, the need for transformational technology to create sustainable economies presents a potentially vast opportunity for investors.
For someone to even suggest a growth outlook that ‘meets the needs of the present without compromising the ability of future generations to meet their own needs’ – as the Brundtland Commission so beautifully put it – must have taken a giant leap of faith.
The ideas proposed were based on important principles such as social equity, intergenerational justice, and ecological limits that we actively seek when selecting Ethical funds.
The concept of intergenerational justice adds a time dimension which prioritises long-term outcomes over short-term speculation. In fact, this ‘futurity’ principle underpins the very existence of finance: use the excess financial resources of today to fund the needs of a sustainable future.
Although some early adopters began to practise ethical investing, the range of investment options available was very limited, as only a handful of the world’s institutional investors included sustainability within their investment strategies. Fast forward 30 years, and we now see hundreds of new sustainable funds launches every quarter.
We also see market-leading companies pioneering sustainable practices to create and benefit from the transition to the ‘future’ economy. As a result, there has been an explosion of sustainability analysis across investment products as interest has grown. While this may not be directly linked to financial performance in the short run, sustainability performance can often indicate quality of management, which is a big driver of performance.
Unfortunately, a nascent and long run opportunity will always attract those that seek to benefit by gaming the system. ‘Greenwashing’ is a form of this, where investments are made to seem more environmentally friendly than they actually are (these are often investments that are new to the space). At Wealthify, we carry out active fund selection, and partner only with management teams that have long track records in sustainability.
We vet each investment carefully according to strict criteria, ensuring that our Plans have strong sustainability profiles and the best chance of participating in building the future economy.
To avoid greenwashing, sustainable investing will always entail some form of restriction in the investment universe as hard exclusions will remain in place. However, a number of megatrends continue to expand the range of investment options: energy transition, digitalisation, and an ageing population, to name a few.
As capital continues to flow into the ESG (Environmental, Social, and Governance) space, the number of projects and companies that align their core mission to the UN Sustainable Development Goals will inevitably increase. Whereas an ethical investor may have chosen to exclude the energy sector in the past, the growth in renewable energy funds over the last decade (including offshore and onshore wind farms, solar farms, energy storage facilities, bioenergy plants, etc.) provides a viable alternative in terms of exposure to energy prices.
Other popular options include thematic funds, which may focus on a particular sustainable goal, including: the development of goods and services to improve health; access to education; clean water; recycling solutions; sustainable cultivation of woodlands to meet the demands of building materials; gender equality; nutrition; and mental wellbeing.
There are sustainable investment options available across all asset classes – shares, bonds, and alternatives – and fund managers can also determine the level of risk by considering companies at different stages of the technology adoption lifecycle. For example, a high-risk fund may select companies that are pioneers in their sector, proposing innovative technologies to resolve environmental challenges; whereas funds with a more conservative mandate may invest in established market leaders that demonstrate high sustainability standards.
Another way to mitigate risk is what we call a ‘pick-and-shovel play’: this is essentially an indirect way to gain exposure to a hot sector, without having to endure the market risks for the final product. The name of this strategy comes from the 19th century Gold Rush, when an investor would have taken less risk investing in picks and shovel providers rather than mining for gold.
At present, there are emerging sectors such as electric vehicles, batteries, space, fuel cells, and genomics, which may have to wait years to become profitable. However, these sectors require the services and technologies of other companies (known as ‘enablers’) that can generate more consistent revenues (and may be considered by our fund managers as a safer alternative to participate in the growth of these emerging industries).
The growing sustainable investment universe provides the potential for strong long term investment growth. Due to its nascent and often complex nature, understanding where to invest is critical for success, both at a fund level and company level. This is the main reason why we use active funds for Ethical Plans, seeking out managers with long histories of selecting companies that outperform both in terms of sustainability and financial performance.
The still-emerging nature of this type of investing makes it a bit more susceptible to more drastic ups and downs, but we remain confident that, over the long-term, investors will be rewarded handsomely by the transition to a more sustainable economy.
Wealthify does not provide financial advice. Please seek financial advice if you are unsure about investing.
Capital at risk. Please remember the value of your investments can go down as well as up, and you could get back less than invested.