Turning Values into Value: A Thematic Approach to Sustainable Investing

Spotting the opportunities in sustainable investing

Alastair Bishop: “Like investing itself, analysis of environmental, social and governance [ESG] factors is often about recognizing and managing risk. You need only look at BP’s Macondo oil spill or Volkswagen’s emissions scandal to understand the impact ESG risks can have on a company’s share price.

“But ESG is not just about managing downside risk; it can also be a source of positive returns. Companies improving their sustainability characteristics can outperform over the long term, especially if we as investors are supporting their transformation through engagement.

“With targeted sustainable thematic investing, the opportunity comes from recognizing—ahead of the market—the powerful, transformative and disruptive nature of the world’s transition to a more sustainable economy. Markets, like people, think change happens at a moderate pace. This is not how disruption works; once a tipping point is reached, change tends to happen exponentially. This disconnect between expectation and reality is where thematic investing in sustainable opportunities has the potential for substantial long-term outperformance.”

Evy Hambro: “We’re always trying to tap into the best of what we refer to as long-term megatrends, and sustainability is certainly one of those. We define megatrends as high-growth areas of the market that trigger disruption and value creation. Our job is to discover the companies most likely to benefit from this disruption.

“The key for us is identifying when a company makes the decision to move toward a more sustainable approach. This is when we can extract the most value from such companies.”

The themes driving sustainable investment

Evy Hambro: “The pandemic has accelerated the adoption of sustainable practices by companies around the world. In fact, it touches many of the other trends we’ve seen over the past couple of years—digitization and the demise of the high street for example. We are expecting to see substantial shifts in demand growth for such megatrends over the coming years, and the pandemic has simply brought their peak levels of growth forward.”

Mohammed Masood: “In addition to the growing profile of sustainable investing, I think choice is a big part of the equation. Investors can now find the ESG issues they want to focus on in different active and—increasingly—passive funds. And I think the transparency of the data is an important issue, too; clients can see the rationale behind every investment decision.

“In terms of specific themes, we are seeing a lot more interest in climate change, which has even prompted the creation of specific benchmarks. But, again, different investors mean different things when they talk about climate change. Some want strict screens on fossil fuels, while others want to consider more forward-looking metrics, such as physical risk and transition risk.”

Alastair Bishop: “Climate change is certainly the focus right now. The world is undergoing a seismic shift in the way that we both produce and consume energy. If you look back through human history, economic prosperity has gone hand in hand with carbon emissions. It will take a lot of effort to reverse this trend; according to the United Nations, even with all the increases we have seen in low-carbon investment, the world is still tracking a temperature rise of more than 3C. But, because of the pandemic, governments and businesses are raising their game in the fight against climate change. The link between supporting sustainable investments and creating jobs and economic growth is stronger than ever. This will create a range of long-term investment opportunities for investors in a sustainable future—the most important megatrend of them all.”

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