The future of sustainable investment has been questioned by several different parties recently. Yet, in contrast, we are more excited about the prospects for the sustainable themes and stocks we invest in than we have been for many years.
By Peter Michaelis, head of Sustainable Investment, Liontrust
The criticism of sustainable investment follows a period of challenging performance for sustainable investment. Both equities and bonds in general delivered negative returns in 2022, the rise in inflation and interest rates have impacted growth stocks, and the dominance of the magnificent seven stocks in the US has negatively affected funds with underweight positions in these companies on a relative basis.
Before we discuss why we are so confident looking forward, we will reiterate why sustainability is a good characteristic to look at. The classic definition of sustainable development is «development that meets the needs of the present without compromising the ability of future generations to meet their own needs».
Far From a Sustainable Level
Unfortunately, a look at where we are today shows that we are operating very far from a sustainable level. Over the nearly 50 years since that definition of sustainable investment was first set out, each generation has left a more depleted environment for the next.
Focusing in on climate change only emphasizes the scale of the problem. Worldwide, carbon dioxide emissions have risen by close to 40 percent since our sustainable strategies were set up in 2001. Given the global warming potential of these emissions, this is clearly far from sustainable.
The Direction of Travel Has Firmly Changed
But there are grounds for optimism on climate change and our other sustainable themes. Previously, the ozone hole was a huge problem but the control and reduction of ozone-depleting chemicals under the Montreal Protocol is now on track to allow the ozone hole to recover in the coming decades.
Equally, a closer look at emissions data shows that in Europe there has been a 20 percent decline in absolute emissions since 2001. When it comes to capital expenditure on electricity generation the direction of travel has firmly changed, with around six times more being spent on renewables than on coal or gas.
Breakthroughs in Our Ability to Diagnose
The International Energy Agency has also highlighted that solar photovoltaic energy is the cheapest electricity in human history. In healthcare, the advances in gene sequencing continue to deliver breakthroughs in our ability to diagnose, prevent and treat diseases.
And in cyber security, there is no let-up in demand for protection from increasingly sophisticated bad actors; for instance, ransomware attacks were up 37 percent last year. Behind these positive changes are several factors, not least the interplay between science and understanding, government and society and business.
Strong Themes Around Resource Efficiency
In the US, the Inflation Reduction Act (IRA) is allocating more than $370 billion for clean technology, energy efficiency, renewables and grid infrastructure upgrades. This will accelerate what were already strong themes around resource efficiency.
In Europe, the Fit for 55 targets 55 percent renewable energy by 2030, and China has bold ambitions on electric vehicles and clean energy (50 percent electric vehicles by 2030 from 21 percent today and 33 percent renewable electricity by 2025). Business has an essential role to play in innovating and refining solutions and extending the limits of what is possible.
Where Sustainable Investing Comes in
This emboldens governments to drive for further change. Over the years, this has led to safer roads, cleaner city air, clean drinking water, reduced childhood mortality and the acceleration that we have seen in renewable energy and in arresting the decline of the ozone hole.
Investing in and supporting these businesses is where sustainable investing comes in. Looking to the future, it is not hard to see that those businesses that are providing the solutions will potentially access vast growth opportunities. In many cases, the speed and scale of this growth is likely to be underestimated in the valuation of their shares.
Confident About the Outlook
If we look at the valuations we are paying for equities to access this strong growth, it is at low levels we have not seen for many years. The prospects for fixed-income portfolios are also attractive. As the base rate hikes start to manifest themselves in the real economy, this will reduce aggregate demand further, limiting the need for further rate hikes and causing the growth outlook to remain challenged.
Given longer-term yields or longer-dated bonds are more correlated to the growth outlook, this should, in turn, cause yields to fall and returns to turn positive. For all these reasons, we are confident about the outlook for our sustainable investment strategies and that they will build on their long-term positive track record as they back those businesses that are growing profitability while delivering solutions to critical environmental and social problems.
For Investment Professionals Only. Capital at risk. This marketing communication does not form part of a direct offer or invitation to purchase securities. Before making an investment decision, you should familiarise yourself with the different types of specific risks associated with the Sustainable Investment funds. This information can be found in the final Prospectus and Key Investor Information Documents (KIIDs) available on our website: www.liontrust.eu. This advertisement is a financial promotion under the Financial Services and Markets Act 2000 which has been approved and issued by Liontrust International (Luxembourg) S.A., a Luxembourg public limited company (société anonyme) incorporated on 14 October 2019 and authorised by and regulated as an investment firm in Luxembourg by the Commission de Surveillance du Secteur Financier (“CSSF”) having its registered office at 18, Val Sainte Croix, L-1370 Luxembourg, Grand Duchy of Luxembourg and registered with the Luxembourg trade and companies register under number B.238295.
