For investors with a proper approach, compelling opportunities can emerge where strong sustainability characteristics and attractive valuations intersect, say Edson Fonseca –Investment Product Analyst and Charlotte Smith – Analyst at Schroders.
As active investors, we believe periods of market concentration (such as we’re currently experiencing) create some of the most attractive opportunities for disciplined stockpickers.
When a growing share of market returns is driven by a handful of companies, vast areas of the market can become neglected.
Businesses with strong fundamentals, resilient cash flows and attractive valuations can be overlooked simply because they sit outside the dominant narrative of the day.
At the same time, the market conditions that influence long-term business success continue to evolve.
As active value investors, our job is not to own more of what has already worked but rather to identify where the market may be mispricing future outcomes.
Through rigorous research, detailed financial analysis and selective engagement with companies, active investors may uncover opportunities that broad market indices and increasingly concentrated passive strategies may miss.
At its heart, active management is about developing a deep understanding of businesses and their market context, challenging consensus assumptions and assessing risks that are not yet reflected in market prices.
Sustainability analysis naturally complements this process. Many of the questions that determine whether a company is a good long-term investment such as governance, capital allocation, corporate culture, stakeholder management and environmental stewardship are also fundamental sustainability questions.
The better we understand these factors, the better equipped we are to identify both investment opportunities and potential risks.
Rethinking the connection between value and sustainability
Few investment styles have faced more scrutiny from a sustainability perspective than Value. Investors might assume that cheap companies are cheap because they have weak governance, have been involved in controversy or exhibit poor sustainability characteristics.
Certain developments that can push a company into the value camp – such as a bank facing regulatory challenges, an industrial business grappling with environmental issues or a consumer company navigating labour concerns – have fostered a perception that Value investors spend their time fishing in the market’s least attractive waters.
The reality is usually more nuanced. While we do encounter businesses with genuine sustainability concerns, companies may become undervalued for a variety of reasons.
More often, share prices disconnect from intrinsic value because of cyclical pressures, temporary disappointments, changes in sentiment or broader market dynamics. In fact, we would argue that the same research discipline that helps investors avoid value traps is often the same discipline that helps identify sustainability risks.
One way to test the perception that cheaper stocks exhibit heightened sustainability risks is to look at the opportunity set itself.
When we examine the distribution of sustainable companies across MSCI ACWI, we find that sustainability leaders are not confined to the market’s most highly valued businesses.
In fact, the distribution of companies’ sustainability scores within the cheapest segment of the market is broadly comparable to that found in more expensive segments of the universe.
Figure 1: The cheapest stocks have been just as likely to be sustainability leaders as their more expensive peers*
MSCI ACWI by CAPE: Q1 = expensive, Q5 = cheap
***Shown for illustrative purposes only and should not be interpreted as investment guidance.***
For active value investors, this creates a significant opportunity. Rather than choosing between sustainability or valuation criteria, we can focus our research on identifying those companies where attractive valuations and strong sustainability characteristics coexist.
The challenge stems not from a lack of opportunity, but from the need for a robust research framework and disciplined investment process to uncover it.
*Source: Schroders, MSCI All Country World Index (ACWI) as at 2 September 2026, using CAPE (Cyclically Adjusted Price-to-Earnings Ratio) as a valuation measure.
Index constituents are grouped into quintiles from the most expensive to the cheapest. Sustainability ratings are based on MSCI ESG Ratings, which rank companies from AAA (leader) to CCC (laggard).
Main image: invest, growth, micheile-henderson-SoT4-mZhyhE-unsplash
