Why we should be considering profits with principles investments
9 August 2017
Responsible investing is becoming mainstream as a source of long-term alpha, says David Osfield, fund manager at Eden Tree
The active management industry is under immense scrutiny. Cost pressures and the rise of smart beta are pushing closet trackers to the brink of extinction. In the forging of the new investment landscape, a narrow seam of active strategies is coming to the surface.
The industry is expected to coalesce around a number of elite managers delivering consistent long-term outperformance; a result of well-defined and repeatable processes. However, there is another evolutionary and complementary force at work that aims to provide a source of long-term alpha: the ascent of responsible investing.
Originally seen as niche, responsible investment is not just in the ascendancy, it is becoming mainstream. Achieving superior performance through responsible investment requires a mind-set shift beyond merely being United Nations-supported Principles for Responsible Investment (UNPRI) signatories. Institutions must move beyond box-ticking and focus on investing in companies fully embracing sustainability. This is the essence of delivering profits with principles.
Responsible investing embodies the very essence of long-term active management. We believe we can identify sustainable multi-year trends with greater certainty and predictability, as opposed to forecasting short-term global macro events. We see global thematic shifts around several sustainable outcomes, including health and wellness, sustainable consumption, energy efficiency and environmental solutions, training and educational shifts and sustainable infrastructure. Investing with this view is supported by a growing body of research. Studies indicate companies outperforming on environmental, social and governance (ESG) not only reduce risk through operational management, but also achieve superior revenue and profit growth.
Due to a varying adoption of ESG screening across the globe, we see differing trends in terms of rewarding companies for exhibiting positive sustainable characteristics. In Europe, where the majority of investors deploy a degree of ESG screening, the sustainable re-rating trend is well-entrenched. However, in Asia, where less than 5% of assets are managed with an element of ESG screening, stocks are less recognised for sustainable characteristics and this demand profile has not manifested in a higher valuation. In Asia, this provides a significant opportunity for long-term sustainable investors. The US lies somewhere between Europe and Asia in terms of ESG penetration.
In a changing world, markets have realised the importance of factoring in ESG risk into analysis. The active edge comes when you combine ESG and fundamental analysis, experienced insight into sustainable themes, a disciplined valuation framework and conviction stock picking. The resulting portfolio’s measurement of success is the creation of mutually beneficial arrangements for investors, in the form of superior index-bearing long-term returns, and for society overall. An era of profits with principles beckons.
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