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Fund manager David Osfield answers questions on why he puts ‘sustainability’ at the heart of his investment approach

Putting ‘sustainability’ at the heart of the investment approach

David Osfield David Osfield Fund Manager
Opinion

Putting ‘sustainability’ at the heart of the investment approach

David Osfield

David Osfield
Fund Manager

WHAT DOES SUSTAINABILITY MEAN TO YOU IN TERMS OF DEFINING IT? 

I think we are very quick to label or pigeonhole terms in our industry. The widely accepted definition of sustainability in an investment context is quite clinically interpreted as incorporating environmental, social and governance factors into company analysis with an over-arching responsible philosophy. For me, it requires broader and deeper analysis of what the company is making or providing and how this output will effect society in the long-term. Personally, I would say we are experiencing a generational shift towards holding companies to account for their impact on society. Increased transparency and reporting has been augmented by digital search, while social media vehicles can quickly mobilise opinion and change market behaviours. As investors, we need to be fully aware of these powerful forces.

WHAT DO YOU LOOK FOR IN A STOCK WHICH OFFERS SUSTAINABLE SOLUTIONS OR IS A TRANSITION CHAMPION?

Fundamentally, we are assessing whether the product or service the company is offering is solving a significant challenge or problem in society. Our Amity Insights represent our differentiated thought-leadership around identifying many of these key issues, but they should not be seen as exhaustive. Whether it is reducing global carbon emissions, or tackling obesity, or reducing our enormous waste footprint, there are often multi-faceted opportunities to address the issue. It is critical to assess both the materiality and intentionality of the company’s approach, as well as the effectiveness of the company’s broader strategy and execution. Conversely, we also need to guard against greenwash and creative marketing and hold companies to account for over-stating the sustainable nature of their offering.

IN A GLOBAL EQUITIES PORTFOLIO, WHAT IN YOUR VIEW IS THE BALANCE BETWEEN SELECTING 'OLD ECONOMY' STOCKS AND SUSTAINABLE SOLUTIONS IN TERMS OF STOCK DIVERSITY?

We remain acutely aware of the need to build resilient, diversified portfolios that can withstand periods of market volatility. The perception that old economy firms that harness physical assets and industrial processes are unable to innovate is misplaced. We see significant sustainable opportunities in manufacturing and agriculture alone to address resource efficiency, and have identified a number of incumbent stocks that are transitioning as exciting investment opportunities. Traditional companies can often make small, technology-enhancing acquisitions that can be transformative in terms of sustainability. Conversely, new economy stocks should not automatically be seen as solutions providers, and experience would suggest value creation is not a given for disruptive companies. Overall, in constructing companies, we look for sustainable solutions across a broad range of industries, encompassing a variety of factor risks, geographies and business models to ensure we achieve appropriate diversification and risk management.

"Traditional companies can often make small, technology-enhancing acquisitions that can be transformative in terms of sustainability."

IS THERE EVER A TENSION IN YOUR VIEW BETWEEN DELIVERING LONG-TERM FINANCIAL PERFORMANCE FOR INVESTORS AND CHOOSING SUSTAINABLE OPTIONS?

On the contrary, I feel that this is especially aligned to long-term investing. The sustainable products and solutions that our target companies are providing are often aimed at addressing problems and challenges that are likely to persist over periods lasting more than a few months or years. In terms of financial performance, my experience of back-testing data over the long-term is particularly supportive, but increasingly independent academic studies support this thesis. Stepping back from the granularity, it is a coherent argument – companies that are successfully providing solutions or products to some of the biggest global challenges are more likely to see demand in excess of the broad economy, through the cycle. All other things being equal, if that product or service is seeing above trend demand, there is a greater chance of having a degree of pricing power and healthy profitability. Moreover, we have regularly found that companies that have robust environmental policies, enabling accurate measurement and effective management of key cost items, have superior and less volatile margin structure. But, before we get too carried away, there is no one-size fits all sustainable formula – just because a company is creating a sustainable product or solution doesn’t necessarily make it a suitable investment. We undertake the same rigorous fundamental analysis as a non-sustainable investment process, and critically we are particularly sensitive to valuation which can often be excessive in high-profile sustainable leaders.

SO, DOES SUSTAINABLE INVESTING THEREFORE LEAD TO BUYING HIGHER GROWTH COMPANIES?

While we would expect companies that are providing sustainable solutions to grow in excess of the economy over the long-term, how well the market anticipates this and values that company accordingly is a critical determinant in delivering superior investment returns. Using our contrarian approach, we aim to identify those companies that are not well recognised as sustainable leaders, and this often takes us into areas where those characteristics are under-researched, outside of largecap companies, and into regions such as Asia where there is a nascent focus on sustainable investing. It is critical that we avoid paying a very full valuation for a sustainable solution provider, only to find the company is subject to industry disruption.

OVERALL, DO YOU SEE SUSTAINABILITY AS A FAD, FASHION OR THE FUTURE OF INVESTMENT?

Clearly the demand for sustainable investment has increased significantly of late, but the suggestion that this is merely a passing phase or fad is misplaced. Personally, I believe we are just beginning a journey to much wider adoption. Obviously, my answer is inherently biased, given I have chosen to focus my career on investing sustainably. What was originally seen as niche is now seeing significant demand from end clients, and we expect this dynamic to increase further as wealth transfers to a generation that has grown up with a values framework that is aligned with sustainable investing. It’s not just a question of how much my portfolio will return, but increasingly the question of how their portfolio is invested is being asked. It’s incumbent on us as both responsible and sustainable investors to deliver both outcomes to the end client.