“If you want to know if something is sustainable, just ask yourself – can we do this over and over again forever?” David Attenborough’s words have important implications for investors, says Head of Sustainability Kate Rogers, in a live conversation with over 400 viewers.

As we face the challenge of climate change, while rebuilding economies in the wake of a devastating pandemic, it is increasingly apparent that governments and companies around the world will have to change how they operate.

These changes mean that thinking about sustainability is a financial necessity – and not just an ethical choice.

“We are entering a new phase for investing,” explains Kate. “Companies don’t operate in a vacuum; they all have an impact on people and the planet. This impact is increasingly being reflected in a company’s profits, whether it be through taxation, such as a sugar tax or carbon tax, regulation or simply through consumer preference.”

Evidence continues to build that companies which take impact into account can offer investors less risk and improved performance. “During the Covid-19 crisis, we saw that earnings estimates for companies with higher sustainability scores fell significantly less,” notes Kate.

Of course, this doesn’t mean that a more sustainable portfolio will always outperform. “Over the long term, you could expect the risk-adjusted return of more sustainable portfolios to be at least the same or better… but in the short-term, the journey could look very different,” adds Chief Investment Officer Caspar Rock. “It’s all about timing.”

“It’s not black and white” – complexity and controversy

There is a huge amount of research and rating data now available, especially when it comes to more traditional Environmental, Social and Governance analysis.

“However, there is little consistency in how different providers rank companies,” notes Kate. She offers the example of electric car maker Tesla. “It is ranked in the bottom 10% by one rating agency while receiving an A rating from another. The disparity reflects different weighting of workers’ rights and environmental impact.”

There is also often a need to make difficult choices. Mining is a good example. “Mining can be very damaging to the environment – but metals are essential to creating a greener future.“

The ABC framework

We now incorporate impact assessment into all of our investment decision-making processes, irrespective of whether or not you have a sustainable mandate. We are also reporting on impact in our quarterly and annual reporting.

Our approach is based on:

Avoiding harm: we aim to exclude areas of significant social or environmental harm (e.g. tobacco) as well as exposure to unsustainable practices

Benefiting society by investing in sustainable business: we measure and manage the impact of our investments on people and the planet, focusing on generating a positive impact overall

Contributing to solutions to global challenges: we do this through impact investments targeting specific areas of unmet need and use of our influence

Being able to measure impact is central to our approach and, as part of a global asset manager, we have access to market-leading measurement tools.

These include Sustainex, which allows us to quantify the costs that companies would face if their negative impacts were priced, as well the boost they would receive if the good that they do was recognised financially. You can read more about SustainEx here. We also work with ThemeX, which allows us to measures how investments contribute to the UN’s 17 Sustainable Development Goals. These are “the closest thing the world has to a strategy” for dealing with its many challenges

And of course, with over £500 billion of assets under management, we are also able to use our significant influence to drive change at companies we invest in.

Sustainable investment – a brief history

Almost a century ago, Quaker and Methodist groups were investing in the stock market while avoiding companies involved with alcohol, gambling and weapons.

This ethical approach to investment accelerated in the 1980s, when many investors divested from South Africa, in protest at apartheid.

More recently, we have seen investors move on from avoiding harmful areas to actively seeking out those companies that conduct their business in a responsible or sustainable way.

In the past twenty years, we have also seen the rise of thematic investing, which seek to actively contribute to solutions to global challenges – such as climate change, water scarcity and healthcare.

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