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Trending topics for ESG: 6 basic principles for sustainable investing

27 Apr 2023

Key takeaways

  • We believe that sustainability is an important trend that investors can no longer ignore.

  • Analysts and rating agencies will increasingly penalise companies that are insufficiently sustainable.

  • We have developed 6 basic principles to help you start sustainable investing.

We believe that sustainability is an important trend that investors can no longer ignore. Companies may lose customers if their products and services are considered insufficiently sustainable. In addition, they may gain market share for producing greener or more sustainable products. We think that analysts and rating agencies will increasingly penalise companies that are insufficiently sustainable, resulting in a higher cost of funding for such companies.

So what is the right strategy when it comes to sustainable investing? We have developed 6 basic principles. They are not exhaustive, but are a good place to start.

1. Know what you want to achieve

‘Why’ you want to invest sustainably will guide the ‘how’. Are you ‘values’ driven (which may lead you to exclude certain sectors and activities) or do you want to change corporate behaviour through engagement? Are you mainly looking at sustainability to discover new opportunities (thematic approach) or manage risks and generate better risk-adjusted returns (enhanced approach), or make a direct impact (impact investing)? 

2. Adopt a medium to long-term approach

The net zero transition needs long-term capital, corporate engagement takes time to yield results, and some new technologies will take time to become profitable. In our view, the very short-term performance of investments is often linked to financial factors, not sustainability factors.

3. Consider sustainability across all asset classes

All asset classes need to contribute to the funding of the climate transition and are affected by the changing investment environment. Diversification can help broaden the opportunity set and mitigate risk as no one asset class will outperform all the time.

Selection in each asset class can be skewed towards companies and governments with superior ESG practices, and explicit allocations made to relevant themes like green bonds or renewables. Companies that manage their ESG risks and create value for stakeholders are also more likely to survive through cycles and thrive in the long term.

4. Incorporate sustainability in both core and thematic investments

Thematic investments are more often positioned as “satellites” in a well-diversified portfolio. They typically consist of companies that offer specific product solutions or services to help transition to a more sustainable world, e.g. climate change mitigation or adaptation solutions.

In fact, every company in your core portfolio is also affected by sustainability issues such as climate change impacting supply chains, regulatory changes, etc. Therefore, all companies need to build future-proof businesses.  While many of the thematic investments related to sustainability will have a sector bias (utilities, technology) and/or style bias (growth stocks),  investors should consider the sustainability risks and opportunities of both their core and  thematic holdings.

5. Make sure your investments do what it says on the tin (avoid greenwashing)

As definitions and practices are still evolving, the role of a strong fund manager or distributor is key to ensure the investment matches the strategy and objectives you have set. Some banks may even deploy ESG ratings to let investors understand how sustainable their portfolios are. 

6. Evolve with the market

A growing, more transparent and competitive market will provide more opportunity and liquidity to investors. With time, we see no reason why investors would not incorporate a sustainability approach across the entirety of their portfolio.

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