The recent explosion of interest in Environmental, Social and Governance (ESG) and sustainable investing has been a surreal experience. I first got involved in sustainable investing in 1998, and we developed what is now WHEB’s investment strategy in 2005. For a long time, it felt like we were shouting in the wind. Now this has suddenly become one of the most popular parts of the investment industry. If we want to harness the potential of responsible investing to power the global green recovery, we must first understand its history.
The 1980s and 90s saw the development of the ethical funds. They screened investments to avoid unethical industries and business practises. Similarly, the environmental movement’s messaging at the time seemed focussed on what we needed to give up. Sometimes caricatured as turning down the heating and wearing another jumper. Whilst worthy, it proved to be an unattractive proposition and it failed to capture the public imagination. The ethical investment industry was established, but it remained the preserve of a determined few. The penetration of ethical funds always remained a very small part of the investing industry.
In the new millennium, focus on Environmental, Social and Governance (ESG) analysis grew. This tried to rationalise responsible investing within conventional investment approaches. Ethical investing had been dismissed by many as being a moral stance and therefore quasi-philanthropic. Conversely, ESG overtly aimed to bring responsible investing to a mainstream audience: it allowed investors to compare performance on responsible investment issues within industries; and didn’t stray too from a conventional benchmark so looked similar to regular investment funds.
Whilst ESG analysis has slowly flourished since the 1990s as a way to measure and control the environmental and social impact of investing the success of this technical and data-oriented approach has – in our view – left two key flaws in the financial landscape. Firstly, focusing just on how companies are run and ignoring what they sell misses at least half the picture when it comes to how sustainable an investment might be. Secondly, on its own, ESG suffers from a similar problem as the whole investment industry: it has become increasingly technical and detached from our real economic experiences. As a result, it is very hard for the average investor, sitting outside the industry, to understand, let alone feel excited by.
So, whilst the industry has continued to grow steadily over all that time, it remained in a niche until very recently. Over the past two or three years we’ve seen a very strong shift in momentum: it now feels like we have really hit a tipping point. In fact, we’ve come to talk internally about an ESG ‘stampede’. Hundreds of new products have been launched. Every major investment house now describes how important sustainable and responsible investing is to them. WHEB suddenly has imitators! Why? And why now?
We could point to many potential catalysts: the Paris Climate Change agreement in 2015; David Attenborough’s Blue Planet TV programme; even the election of Donald Trump shaking half the population out of apathy. Any or all of these will have played their role, but for us at WHEB, the rising interest in ‘Impact’ is what has really connected with the investing public.
What do we mean by impact? Our starting point is our view that we are now in the early stages of a massive change in the shape of the global economy. We refer to it as the transition to a zero carbon and sustainable economy. We believe that this ‘transition’ will change the shape of every aspect of our society and every industry. Some industries will disappear, others will have to re-engineer the way they operate. This is a threat to the future growth and profitability of large portions of today’s economy and investment markets.
Our purpose at WHEB is to be part of the solution: by aligning our investors’ capital with businesses that are enabling this transition, we will create value; the companies we invest in will be successful because they are helping to solve the great challenges that we face as a global society.
Our strategic lens is to focus on companies which sell products that have a positive impact on the environment or society. This helps us to identify markets which have structural growth in the longer term. The COVID-19 pandemic has only served to highlight this longer-term trend. The crisis we currently face is likely to increase the disparity in growth rates between industries which cause society harm and those which build social capital over the long term.
We see no conflict between investing sustainably and generating strong investment returns. Quite the opposite. Each drives the other. Investing in the impact economy is fast becoming a strategic asset allocation decision for some investors. Forecasting which sectors are likely to thrive in a ‘future-fit’ environment is not only about chasing growth and returns. We are also protecting investors’ capital from exposure to the industries which will suffer and the assets which are at risk of becoming stranded.
George Latham is a Managing Partner at WHEB Asset Management, a positive impact investor focused on the opportunities created by the transition to a low carbon and sustainable global economy. As Chief Risk Officer George provides oversight of WHEB’s investment process and chairs the Investment and Risk Committee. Prior to joining WHEB, George led the award-winning SRI team at Henderson Global Investors. During his fifteen years managing UK and pan-European equity and managed funds, George was awarded ‘A’ and ‘AA’ Citywire ratings, nominated for Investment Week’s Fund Manager of the year and named in Citywire’s top 100 managers in the UK. He was also responsible for designing and launching Threadneedle Asset Management’s sustainable and responsible investment strategy during the late 1990s. George has a degree in Geography from Oxford University, and served as a British Army Infantry Officer, and holds UKSIP qualifications.