In focus

Why investing sustainably can get you better income and better outcomes


Eleanor Lambert

Eleanor Lambert

Schroders

See all articles

Not only is it possible to combine income investing and sustainable investing, we believe you can actually make your income more resilient, smooth and reliable by investing sustainably.

Many things have changed for investors in a post Covid-19 world, but the needs of income investors haven’t. They still want their income to be high, stable and not at risk of being impaired by dividend cuts or persistently low yields.

We think income should be sustainable in both senses of the word: in terms of time horizon (because, by definition, it doesn’t just happen once), and from an environment, social and governance (ESG) standpoint.

Clearly, the environment in which income investors are operating in has changed. So have the tools they are using. We need to look at more than just financial metrics to gauge the likely stability of future income streams. And with the heightened risk of income being impaired across asset classes, there is evidence that a sustainable approach can help mitigate this risk.

Diversifying an income stream by taking a multi-asset approach can reduce the volatility of the income. However, this can only take you so far.

Many income investors are concerned about impairment risk, as the chart belows shows. Bond yields are at all-time lows, not to mention the fact that income from equities is discretionary at the best of times, let alone when governments are forcing companies to cut dividends.

Obstacles_to_stable_income.png

We therefore need to do other things to reduce the risks to a smooth income stream. Taking ESG factors into account can help and, in fact, the recent crisis has shown this.

By the end of May we had seen 12.5% of companies cut or suspend dividends globally and we expect this trend to continue.

However, companies leading on the sustainability front have been less likely to cut dividends compared to the companies with poor sustainability scores. This is shown in the chart below where we compare the sustainability score of companies that have cancelled dividends with the sustainability score of companies that have maintained their dividends.

Cancelling_dividend_sustainability_scores.png

This divergence highlights the importance of sustainable business practises. Sustainable companies tend to have a more conservative dividend payment policy, they tend to operate with less leverage and target stronger long-term growth that benefits all stakeholders such as the environment, governments, customers, employees, and communities.

Sustainable_leverage_levels.png

We do not know how long the effects of Covid-19 might linger, but we know that the issue of sustainability is not going away.

We believe that, by definition, companies that are unsustainable are unlikely to provide consistent and reliable income, or good outcomes for society as a whole.

Even for those investors who might be ambivalent about the theme of ESG, we think the case for investing income portfolios sustainably is compelling if you want a smooth income stream.

The opinions contained herein are those of the author and do not necessarily represent the house view. This document is intended to be for information purposes only. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Cazenove Capital does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. This does not exclude or restrict any duty or liability that Cazenove Capital has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Cazenove Capital is part of the Schroder Group and a trading name of Schroder & Co. Registered Office at 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. For your security, communications may be taped and monitored. 

Contact Cazenove Charities

Achieving your charity's investment objectives takes time and thought. To find out how we can help you please contact:

James Brennan

James Brennan

Portfolio Director james.brennan@cazenovecapital.com