Long-term social, demographic, environmental and resource challenges are reshaping the global economic landscape, creating new investment opportunities for companies providing solutions to these challenges, and growing risks for those sectors that deplete human and natural capital.
Companies providing solutions to these challenges can be grouped into a number of social and environmental ‘sustainability’ themes. These are underpinned by long-term secular change and have structural growth characteristics in excess of the rest of the economy.
The same forces of change also present clear and present dangers to many traditional sectors of the economy. We see increasing evidence that sectors of the economy which create negative social and environmental impacts are at most risk of a permanent loss of value. Examples range from the Deepwater Horizon disaster, the Volkswagen emissions scandal, the collapse of coal investments, and the huge loss of value witnessed over the past eight years in German energy utilities.
We believe that this structural change in the shape of the global economy is already underway and is a powerful source of investment value. The risks and opportunities generated in different sectors of the equity market are underappreciated by investors who are either myopically focused on the short-term or overly fixated with benchmark indices.
By focusing on a universe of companies which are providing solutions to sustainability challenges, WHEB can build a diversified portfolio that is able to access multiple investment opportunities across both social and environmental themes. This portfolio exhibits better structural growth characteristics, and is also better insulated from the abrupt dislocation observed in many traditional industries facing structural change which may lead to significant loss in value.
Quality as an investment factor
Many investors look for ‘quality’ companies as part of their investment process, and in our view this is laudable. High quality companies are more likely to be able to create long term value and become category leaders. They are also more likely to be resilient, which should result in lower volatility and risk. However, most investors are heavily influenced by short-term catalysts and have a narrow focus on accounting analysis, which is backward looking and one-dimensional.
Long-term fundamental investors should take a more holistic view of companies when analysing investment value. Understanding how potential investee companies address critical environmental, social and governance challenges and opportunities therefore should be incorporated in the analytical process as they can present crucial signals of that elusive ‘quality’ which we strive to find.
This works both ways. It helps to find good companies which have strong management teams and are creating long-term value for shareholders. Such analysis also enables us to identify and avoid lower quality investments, where the short-term numbers look good, but the business is under-invested, or lacks management controls, leading to the risk of a future loss in value.
This approach makes particular sense in the context of a longer-term average holding period. ESG analysis generally doesn’t identify catalysts, but a deeper understanding of the quality and outlook for a business gives an investor a much stronger background against which to assess value.
Not bolted on but built in
WHEB’s investment strategy was developed in the mid 2000’s with the aim of providing a comprehensive answer to the challenge posed by investors who both want to invest their money wisely and to make a positive impact towards creating the kind of world in which they will retire and spend their savings.
Rather than ‘bolting on’ sustainability issues to an existing process to meet the needs of a specific set of clients, the WHEB investment process was built from the start with sustainability at its core. Avoiding controversial sectors, investing responsibly and undertaking ESG analysis and long-term engagement are all natural aspects of this philosophy, baked in to the process rather than bolted on as an appendix.
Finance for a positive purpose – creating impact
Finance and investment originally operated as a utility; a transmission mechanism to put idle savings to work in service of building a better economy. Yet over the past 30 years, the finance industry has become an end in itself, rather than the means to that original aim and objective.
Sustainable, Ethical and Responsible investment clients may all have been asking different questions, but the unifying force is that they want to use their investments towards a positive purpose, and in this way to turn the clock back towards a time when investment truly meant investing for the future.
WHEB’s mission is ‘to advance sustainability and create prosperity through positive impact investments’. It is our investment belief that this approach enables us to build a portfolio of resilient, growing companies that are building the economy we want to see, and benefiting from being a part of the solution.