By George Latham, Managing Partner at WHEB Asset Management LLP
Sustainable Investing’s Evolution
Not that long ago ethical funds were referred to as “Brazil funds” - the joke being you had to be nuts to invest in them. At that point, in the 1980s and 90s, Sustainable and Responsible Investing (SRI) was in its infancy. Ethical funds screened investments to avoid ‘taboo’ industries and business practises. Similarly, the environmental movement’s messaging at the time seemed focussed on what we needed to give up. It was an unattractive proposition and failed to capture public imagination. Though established, the industry remained small.
During the 2000s, focus on Environmental, Social and Governance (ESG) analysis grew. ESG tries to rationalise responsible investing within conventional investment frameworks. It’s largely used by investors to compare company performance on ESG indicators within industries. However, we believe, the best-in-class approach to ESG has two flaws:
Focusing on how companies are run and ignoring what they sell misses at least half the picture of how sustainable an investment might be; and,
ESG became increasingly technical and detached from real economic experiences.
It is often difficult for the average investor to understand, let alone feel excited by.
Sudden shift in momentum
Until recently, SRI remained niche. Now, every major investment house describes how important it is to them.
The 2015 Paris agreement, the ‘Attenborough effect’ or retaliation to the Trump administration are all potential catalysts. Though these may have played a role, for us at WHEB, the rising interest in “impact” is what has really connected with the investing public.
What do we mean by ‘impact’?
WHEB Asset Management’s strategic lens focuses on companies which sell products that have a positive impact on the environment or society. This helps us identify markets with structural growth in the longer term (Figure 1).
Figure 1: Impact and return aligned strategies
Our view is that we are in the early stages of a seismic change in the shape of the global economy - the transition to a zero-carbon and sustainable economy. This ‘transition’ will change every industry and large aspects of society. Some industries will disappear whilst others must re-engineer their operations. This threatens the future growth and profitability of big parts of today’s economy.
WHEB’s purpose is to be part of the solution. By aligning our investors’ capital with businesses that are enabling this transition, we create value. The companies we invest in are successful because they are helping to solve global challenges.
Impact Investing: an opportunity for investors
Impact investing has become popular for two reasons.
First, we see harmony between investing sustainably and generating strong investment returns. Investing in the impact economy is becoming a strategic asset allocation decision. Forecasting which sectors will likely thrive in a ’future-fit’ environment is not only about chasing growth and returns. We are also protecting investors’ capital from exposure to industries which will suffer and assets that risk becoming stranded.
Secondly, impact investing creates an opportunity for people to reconnect with their investments. Money and savings structures have become disconnected from real economic activity. The relationship between a saver and their savings has become shallower. Despite the small print, trust in many investments is still often narrowly based on recent historical performance.
Conversely, impact investing focuses on positive economic and societal outcomes. People can understand and take an interest in how their money is aligned with addressing climate change or providing an education to underserved communities. They can do well whilst doing good. Developments in impact reporting and tools, such as WHEB’s impact calculator, help to communicate this to savers, ultimately changing the relationship between savers and their investments (Figure 2).
Figure 2: The changing relationship between savers and their investments
1Based on a global average carbon price of £19 per ton (State and trends of carbon prices, World Bank Group, 2019).
2Based on landfill tax of £91.35 which is equivalent to the UK’s landfill tax in 2019.
3This assumes a US$500 annual health benefit from regular exercise (Tivity Health).
4This assumes annual earnings enhancement from having a Batchelors degree compared with a high school diploma of US$24,336.
The calculation method for the positive environmental and social impact associated with a given amount invested in the FP WHEB Sustainability Fund during 2019 is explained in the Methodology document.