At the dawn of this new decade, it’s apparent to the world of investing that ESG (environmental, social, governance) is more than just a passing fad. In 2020, there are some clear ESG trends emerging; but what are they and how can we access them?
Theme 1: The growing immediacy of climate change.
Experiencing or reading about extreme weather events is spurring investor concern about climate risk in their portfolios. Increasingly investors want fossil-fuel-free portfolios and the demand to fund climate-change solutions through their investments is growing. And investor sophistication and knowledge about what their money is being channeled into is also increasing. So if you are a company that has less than sparkly climate change credentials, beware. One example of a fund that is friendly towards climate change is Investec Environmental Opportunities. This fund’s innovative approach identifies businesses whose products are contributing actively to the reduction of carbon emissions. One of the best performing global funds in 2019.
Theme 2: Stakeholder consideration over shareholder value at any cost.
The primary concern of business executives has historically been about shareholder return, often at the expense of everything else. But now companies are realising it is not the be-all and end-all. Doing the best for all stakeholders, whether they are customers, employees, communities or shareholders is becoming key. Funds with sustainable investment strategies vary in their particular approaches, but at some level, most of them are trying to identify companies that are pursuing stakeholder value, avoid those that are not and engage as shareholders with the ones they own to influence their direction. One example is Pacific Assets Investment Trust. The underlying companies in this fund are prioritising stakeholders in developing markets through the services and products they offer, such as socially useful consumer products, responsible finance and required infrastructure. It has a strict discipline of only investing in well-governed companies, making it a unique approach to investing in Asia. And performance continues to impress.
Theme 3: The increasing importance of the United Nations’ Sustainable Development Goals (SDGs).
2019 showed that there is a burgeoning demand for funds that are not only geared towards solving some of the world’s sustainability challenges, but ensuring their underlying portfolio companies are meeting specific criteria aligned to sustainability goals, namely the SDGs. One fund which has the SDGs at its heart is Montanaro Better World. This fund was one of the best performing funds in 2019 – its approach involves investing across six diverse themes, each with underlying holdings mapped to the SDGs.
Theme 4: Active ownership taking centre stage.
In 2019 we definitely saw a trend for greater support for ESG-related shareholder resolutions and we think the trend for shareholder activism for ESG issues will increase this year. Research shows that in 2019 ESG resolutions drew the support of nearly 30% of the shares voted at the annual general meetings of US companies, the highest level of support ever. There is also evidence that sustainable investors ramped up their direct engagement with companies in 2019, taking on ESG-related issues like guns, gender equality and climate change. Take the Hermes Emerging Markets fund. It has one of the best performance records in the emerging market peer group over the past decade and this year has proved no exception. This is a rare fund that has a proven track record of engaging with companies that are actively listening to their stakeholders on ESG issues and improving share price performance as a result.
Theme 5: Avoiding ‘greenwash’.
‘Bandwagonism’ is a common practice in all walks of life and investment is no different. Greenwashing refers to falsely marketing a product as sustainable, but when you dig down and look at the underlying portfolio companies, this is not necessarily the case. This is one trend you want to avoid, and single theme funds are interesting in terms of being sure you are invested in companies genuinely offering solutions to the problem. L&G has a range of ETFs buying baskets of companies involved in specific themes such as clean water, cyber security and clean battery technology.
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