Chris Hiorns, manager of the EdenTree R&S European strategy, says the prospects for a value approach to sustainable investing in Europe have rarely been rosier.
The seemingly inexorable rise of sustainable investment funds over the last few years has seen it move from a niche area into the mainstream. This has offered active investors increased differentiation and their clients strong investment returns aligned with positive environmental and societal change.
There is no doubt that the increasing realisation of the need to address climate change has provided a strong backdrop for the growth in sustainable investment. Still, the attractiveness of sustainable funds was heightened by the decade-long bull market for growth stocks that preceded 2022, as many of sustainable funds tend to follow growth strategies and as a result attracted strong inflows.
2022 highlighted the concentration risk of investment in highly rated growth and thematic names with many sustainable funds experiencing sharp falls as the bubble in technology stocks burst and the strength of the energy sector on the back of higher oil and gas prices provided a significant headwind.
The sharp downward reversion of growth-focused sustainable investment styles in 2022, triggered by the significant rise in interest rates, has underscored the place for a value-based, contrarian approach in a diversified sustainable investment portfolio – an approach we apply when managing the Edentree Responsible & Sustainable European Fund.
Taking a value-orientated approach to sustainable investing has several benefits, most notably offering a potential margin of safety and returns at a time when central banks are pulling back from the highly stimulatory policies that have dominated for over a decade. This approach encourages a more constructive allocation of capital and we would also argue that embedding responsible and sustainable analysis within the stock selection process can lead to a well-managed portfolio of contrarian stocks which are well placed to benefit from structural shifts in the economy.
In 2022, the Edentree Responsible & Sustainable European Fund was clearly differentiated from the other sustainable funds in the sector and sits in the top decile in terms performance, supported by its clear focus on fundamentals and valuation, as well as the ethical screening. As we move into 2023, in our view the outlook for a value-based approach to sustainable investing in Europe has seldom seemed rosier.
The views contained herein are not to be taken as advice or recommendation to buy or sell any investment or interest. The value of an investment and the income from it can fall as well as rise, you may not get back the amount originally invested. Past performance should not be seen as a guide to future performance. EdenTree is authorised and regulated by the Financial Conduct Authority and is a member of the Investment Association.