Staying ahead of society’s changes holds key to successful sustainable investing
WHEN we began running the Liontrust Sustainable Future strategies some 20 years ago, our belief that strong performance could be delivered by investing in sustainable companies and engaging with them to encourage best practice on environmental and social issues was viewed as radical.
Most investors were certain that incorporating impact into investment was a distraction at best and, at worst, guaranteed to deliver worse returns. Milton Friedman’s dictum that the business of business is business was still held to be sacrosanct. Profit maximisation, not how that profit was achieved, was the primary concern for shareholders.
The world has come a long way since then, with 2019 marking a significant turning point in corporate attitudes.
That year, the usually conservative US Business Roundtable issued a statement on the purpose of corporations which included a commitment to all stakeholders in a business, from customers and employers to suppliers and the community at large. This was a significant shift from its previous stance that held that businesses exist principally to serve shareholders.
Today, the belief that investing in companies whose success is linked to their potential for helping to make our world cleaner, healthier and safer can drive performance is no longer seen as radical. Indeed, it is widely accepted across a broad range of investors.
This might manifest itself in a number of different ways: providing capital to companies that are decarbonising electricity generation; developing innovative vaccines; building our communication infrastructure; and making roads safer. It is vital for an investor to be able to identify where the structural growth in the world of the future lies and not to underestimate the speed and scale with which these trends can develop.
Take the autos sector as an example. Few would argue the car defined the 20th-century but it is clear we are approaching a tipping point in our relationship with the automobile.
The Liontrust Sustainable Investment team has always excluded companies exposed to petrol or diesel engines as we could not see how the economics of a sector that poisons the air could continue to be viable. This view was reflected in a regulatory shift when, in 2009, the EU introduced a 130g/km C02 target for new passenger cars, dropping to 95g/km by 2021. However, concerns surrounding cars go beyond emissions. Cars are fundamentally dangerous and while in the UK deaths caused by road accidents have been falling since the 1960s, thousands still die every year.
And while measures have been taken to improve the safety of drivers and passengers, data show that half of those dying are pedestrians or cyclists. Again, we saw this as a problem that needed solving and identified companies innovating in smart sensors and automated driving as a means of mitigating this threat to life.
The auto sector shows importance of looking out several years hence
Looking to the future, investor success can best be achieved by trying to get ahead of regulatory and societal curves, with driverless cars no longer the stuff of science fiction.
While emissions have come under scrutiny for many years, there is an even greater question hanging over the sector. The problem is not one of whether we should buy diesel, petrol, hybrid or full electric but rather whether we should own a car at all.
We see the transport sector shifting focus from traditional internal combustion engines and powertrain cars to auto safety, multi-modal transport and trains. The auto sector is just one illustration of the importance of looking out several years hence, to identify the tools and techniques companies have developed to tackle crises such as the climate emergency and obesity epidemic.
Those companies that have focused on being on the right side of these societal and environmental challenges will be the making of sustainable investment in the years to come.