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What happens when pragmatism meets idealism?

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Matthew Toms

Investment Manager
6 min read

The next steps for sustainable investment

Since we launched our Sustainable range of investment strategies just over three years ago, their track records (three years to 31 March 2019) indicate that taking a responsible approach does not harm investment performance. Indeed, they have demonstrated performance slightly ahead of our core multi asset strategies.

Over this period, a dramatic evolution has been underway in this fast-growing investment space. The sustainable movement’s expansion across the investment industry has created many more options for investors. The development of sustainably-focused ‘passive’ products (generally cheaper solutions designed to track investment sectors or indices) has been especially important in this drive, providing us with a broader selection of investments for our sustainable strategies.

We know that the sustainable investment space will continue to evolve. But what
should investors hope to see next?

1. Tighter definitions for sustainable products

It can be difficult for investors to understand the investment philosophies behind the diverse range of sustainable products on the market, with labels ranging from ‘ethical’ and ‘responsible’ to ‘ESG’ (environmental, social and governance). What’s more, the existing definitions of these labels, including those authorised by the EU, may not be fit for purpose. Against this backdrop, the Investment Association (the trade body representing UK investment managers) has set up a Sustainable and Responsible Investment Committee which has launched a consultation on the classification of sustainably focused funds. We support such efforts; investors need to know what they have invested in, and managers need the option to actively promote the credentials of their funds.

2. More evidence of the impact we are having

Unfortunately, if understandably, finding the best way to measure sustainable credentials is highly subjective. Is a car manufacturer’s carbon footprint equal to the carbon cost of its car production line, or should it also include the output of those vehicles on the road? Is an investment fund using screening to avoid investment in ‘unsustainable’ assets more impactful than one seeking change through activist shareholder positions? Many investment bodies and agencies have tried to address such questions, introducing their own measures and ratings systems in the process.

While such methodologies remain imperfect, they are a welcome step in the journey towards transparency. In the meantime, logic tells us that a sustainable investment approach is better for society and the environment, and there are numerous impact measurement techniques that back up this assumption.

However, we expect (and want) these techniques to improve. In particular, we would like to see better ways of evidencing the positive impact of sustainable multi asset strategies (which include a range of asset types like bonds, shares and alternative assets, such as property or infrastructure), as many current measurements focus exclusively on their shares-only or bond-only counterparts.

3. A greater range of sustainable assets

A few short years ago, one of the challenges faced by multi asset investors taking a sustainable approach was the limited number of assets available to them. Publicly-listed companies have quickly realised that shareholders now want information about corporate sustainability (most of the largest businesses in the US are already reporting to their shareholders on these issues), and sustainable bonds providing funding for areas like social housing and clean energy, have rocketed in number. However, other areas of the market remain under-penetrated by the sustainable wave.

This includes ‘alternative’ asset types like property, hedge funds, private debt, and commodities, which do not fall into conventional investment categories. While sustainable awareness in this diverse group of assets has been growing, it has much further to go. In the commodities sector, which includes precious metals like gold, investors need more evidence of sustainable sourcing. In the hedge funds space (historically focused on returns and asset gathering), investors need to see products which actively exclude exposure to ‘unsustainable’ assets or which place their bets in favour of assets with improving sustainability.

What does this mean for sustainable investment today?

Ambiguous product categorisations, subjective reporting measures, and some limitations in specific asset types are all signs of an investment area which is still evolving. However, recent years have seen sustainable investment develop rapidly, becoming a fully-fledged and credible investment space.

 

We expect to see further rapid evolution from here. It is becoming apparent that investors want to make a difference to the world by putting their capital to work sustainably, and are increasingly realising that they can do so without compromising on their investment returns. The track records of our Sustainable strategies support this. We firmly believe that now is the time to join the drive for sustainable investing, as sustainable idealism blends with pragmatic investment goals. In combination, these factors are creating strategies which are already producing results for clients, society and the environment.

"We firmly believe that now is the time to join the drive for sustainable investing, as sustainable idealism blends with pragmatic investment goals."

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About the author

Matthew Toms

Investment Manager

Matthew co-manages our Sustainable Investment Strategies, in addition to supporting the management of the Heartwood Cautious Investment Strategy. Matthew also researches the full spectrum of fixed income investments. Prior to joining Heartwood in 2014, Matthew gained experience at RBC Capital Markets as a member of the Global Investment Banking team.

Matthew graduated from the London School of Economics in 2012 with a first-class BSc (Hons) degree in Economics. In 2014, Matthew completed his MSc from Warwick Business School. He has subsequently passed the Investment Management Certificate, the Private Client Investment Advice & Management Certificate and the Certificate in Investment Performance Measurement, as well as being a CFA charterholder.

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