The extended period of lockdown has provided a rich time for reflection for those of us involved in the capital markets. Is there a moral purpose to investing? Can capital be purposeful beyond maximising its return? How can the experience of a world shut down be reflected in investment choices? What is the responsible role of business at a time when normal is absent? In abnormal times, it is the values we strive to articulate as responsible investors that really come into their own. Responsible investment, if it is about anything, concerns long-term value delivered by sustainable businesses ‘doing the right thing’ in their culture, behaviours and stakeholder relationships.
The COVID-19 pandemic is being played out against a vital debate about the future of capitalism itself and the type of capitalism that is motivational and beneficial for society as a whole. Moreover, the need to provide vital services at a time of personal danger has forced into the spotlight an army of dedicated ‘essential workers’ that have kept the nation functioning. Many of these jobs are in the low paid service economy, and recognition of their dedication and value has perhaps finally brought the ‘S’ or social in ESG to the forefront of shareholder attention – in our view not before time!.
Within the current, somewhat clumsy nomenclature of ‘ESG’, (risks arising from environment, social and governance impacts) the ‘S’ has been something of an elusive, Cinderella concept; hard to measure, difficult to value, and has, with some exceptions, been largely overlooked by investors. The pandemic is reinvigorating thinking in terms of the future and value of work, and those who perform the economy’s most vital, but often poorly-rewarded functions.
So at EdenTree we place responsible business at the heart of what we do. That is why we are Responsible and Sustainable investors – responsible because business ethics, culture and values are, in our view, indivisible and essential to the concept of creating long-term value for clients. The pandemic has certainly shone a spotlight on the role good businesses play in society – the food retailers, private waste collectors, transport workers, men and women of the Royal Mail, those working in care. It has, too, highlighted those businesses where opportunism, poor values and naked self-interest have been readily exposed – the airline industry for one has notably failed to cover itself in glory!
In May, over 30% of the UK’s energy needs came from wind and solar – a technological as well as an economic achievement. In order to meet the country’s legally binding target of net-zero by 2050, more capital at an escalated speed needs to be allocated to these industries of the future.
Beyond a strong commitment to responsible business, we also see sustainability as a long-term driver for positive change. There is still something of an enigma around ‘sustainability’ and what it actually means. That is why we sought to define it for clients to show how we integrate it into our investment thinking. At its simplest, we view sustainability through the lens of companies harnessing ‘circular economy’ or ‘just transition’ models, or those providing ‘sustainable solutions’ to systemic environmental and social challenges. Our long established approach of gaining investment exposure from education, health & wellbeing (including sport, fitness and nutrition) and social infrastructure has been complemented by our adding ‘sustainable solutions’ into the mix. These might be companies benefiting from the environmental economy – renewable energy, smart metering, waste management and pollution control, or from other areas such as green construction, inclusive finance or regenerative agriculture.
The growing environmental technology sector is already valued at $4trn and so there is considerable opportunity in diverting capital away from potential stranded assets and allocating capital to the most climate progressive industries. In the UK alone, the decarbonising of the energy sector has been an extraordinary success, with May 2020 being the first full month since 1882 when coal made no contribution to the energy mix. In May, over 30% of the UK’s energy needs came from wind and solar – a technological as well as an economic achievement. In order to meet the country’s legally binding target of net-zero by 2050, more capital at an escalated speed needs to be allocated to these industries of the future. We therefore see ever more opportunity to make a positive impact for clients by allocating capital to well-run responsible businesses that are also well-positioned to prosper by providing solutions to achieving the net zero target.
Ultimately we seek to make good returns for clients over time, wanting our companies to perform well in accordance with the highest ethical standards – this is our Profits with Principles approach. As responsible investors we are excited too by business models that have the vision to grasp and embrace a ‘shared value’ model; by delivering sustainable profits for shareholders, continuous social progress and which can contribute to a cleaner, greener environment. Surely this is the type of capitalism we all can – and should – be embracing?