What really matters in investments
Mark Lister says investment can be sustainable, profitable
Sustainable investing is one of the hottest topics in financial markets these days. When I’m out talking to groups of clients, businesspeople and investors, I always expect it to come up during question time. And it always does.
Sustainability is a growing investment theme that isn’t likely to slow down anytime soon. Evaluating investments against more than simply financial benchmarks is an approach likely to be embraced much more broadly.
We should all give more thought to whether the companies we’re investing our capital in reflect our values, and the way we want the world to look in the future.
Sustainable investing isn’t about climate change.
Evaluating a company for its sustainability also means thinking about social factors, as well as governance. That’s where the “ESG” acronym comes from. Social factors are things such as the negative impact a company’s products have, whether they operate supply chains responsibly, and if they treat their staff well.
Governance relates to the way a company is managed. It considers things like director independence, executive pay, transparency of reporting, and if smaller shareholders are treated as well as larger ones.
All these factors can eventually find their way into financial performance, so even the traditionalists that are solely focused on the numbers would be wise to take heed.
As governments around the world steadily move towards more stringent environmental standards, polluters are going to find themselves facing much tighter regulation and higher cost structures, at best.
Poor social practices can drive customers away and tarnish a brand, while weak governance leads to higher staff turnover, unwanted just scandals and distractions, or poor capital allocation and investment decisions.
Funds flow alone could ensure that a sustainable approach makes financial sense. As more people want to support businesses they feel good about owning, investment funds across the board are increasingly incorporating sustainability measures into their approach.
Companies doing the right things could find themselves with a much wider range of investors, both large and small, which could lead to greater overall demand for their shares and higher valuations placed on them as a result.
There are a few different ways investors can approach sustainable investing. Several funds across the local market, and many others across the world, have an ESG overlay of some sort. If the one-size-fits-all approach is for you, this is the easiest way to get involved.
However, the thing with sustainability is that it’s subjective.
You can never be sure that the fund manager in question has the same considerations as you do.
It also pays to check how much effort has gone in behind the scenes. Sometimes all they’ve done is run a basic screening process to exclude the most obvious offenders, or simply followed a sustainability index and used that as the starting point for their investment universe.
If you want to test your provider’s depth of knowledge and effort, pick a company in the fund and ask them to explain to you the specific E, S and G issues they encountered when studying that particular business.
Trust me, measuring sustainability is much harder than it sounds. We’ve spent the best part of a year trawling through company reports and interviewing management teams, and that’s just the tip of the iceberg.
We’ve done a lot more than most, mind you.
To build a comprehensive sustainability picture of all the companies you own, it takes a lot of time, energy, expertise, and more time. Some pragmatism is required, because if you push it too far you’ll be left with nothing to invest in.
To truly overlay your sustainability values across your investment portfolio you need to think carefully about what matters the most to you, then roll up your sleeves, take control and work closely with your adviser or fund manager to ensure your portfolio reflects that.