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Sustainable investing starts to curry favour
With the necessity to limit resource use and greenhouse gas emissions, sustainability and disruption will increasingly move in tandem as the global economy shifts gear
Bayani S Cruz 12 Dec 2018

It's still early days but investors are beginning to realize that sustainability and disruption are interlinked themes that are penetrating every sector of the global economy.

"As investors, we see compelling evidence that companies committed to building a sustainable economy are favored within today's rapidly evolving environment. Both sustainability and disruption are necessary, with sustainability helping to drive innovation while innovation is required for companies to be sustainable and maintain long-term relevance," says Hamish Chamberlayne, head of socially responsible investing at Janus Henderson Investors, who manages the GBP730 million Global Sustainable Equity Fund.

Launched in 1991, this fund has been investing through the lens of environmental and social factors for 27 years and actually predates the recent rapid growth in the popularity of sustainability or environmental, social, and governance (ESG) linked investment strategies.

"In the broader market, it is apparent that the fastest growth subsectors are increasingly aligned with sustainability. We are finding exciting investment opportunities in areas such as cloud computing and artificial intelligence, electrification of transport, energy efficiency, smart cities, Industry 4.0 or the rise of new digital industrial technology, sustainable infrastructure, financial services, education & research and healthcare," Chamberlayne says.

Some of the key themes that are featured in sustainable investment portfolios include technology disruption, transport, and energy, as well as oil and plastics.

In technology disruption, Chamberlayne believes there is a multi-year trend where the power of computing is now being applied to a much broader range of industries, machines, and consumer goods, with many technology investments addressing more than one sustainability theme.

"Semiconductors, for example, the backbone of a smart and connected world, have evolved from serving computing and smartphone markets to adoption by numerous industrial and 'internet of things' companies. This will lead to the creation of new economic models, and we view this digitalization as a powerful agent towards creating a more sustainable world," Chamberlayne says.

In transport and energy, the huge growth in electric and autonomous vehicles is resulting in far more semiconductor content in cars. At the same time, the number of cities committed to combatting air pollution and climate change is swelling.

"This year has also seen more progress on renewable energy development. China plans to invest US$368 billion into renewable energy projects by 2020, and SoftBank's Vision Fund plans to support a US$200 billion, 200-gigawatt solar power development in Saudi Arabia.

Aside from its environmental benefits, the world's largest oil economy visibly diversifying its energy sources sounds a warning to those who have yet to adopt a low-carbon approach," Chamberlayne says.

In oil and plastics, Chamberlayne believes society is now waking up to its obsession with plastic and the consequent pollution of the oceans.

"Regulation will doubtless increase and, as oil is a primary raw material in plastic, a global shift away from its use is another negative for the long-term oil price. We have very little exposure to companies contributing to these problems: we do not invest in oil and petroleum stocks and where plastic is used, we engage with company management to better understand what they are doing to lessen its use," Chamberlayne says.

While most of today's ESG and sustainability linked strategies are based on the United Nations Sustainable Development Goals (SDG) that was published in 2015, this fund is based on the Brundtland report, widely-considered the original report on sustainable development issued by the UN's Brundtland Commission in 1987. Formerly known as the World Commission on Environment and Development (WCED), the mission of the Brundtland Commission is to unite countries to pursue sustainable development together.

The investment strategy of the fund is published in a document known as the "Global Sustainable Equity Investment Principles" which contains a high-level explanation of the investment approach that takes into account the environmental and social factors included in the strategy as well as the framework based on positive and negative criteria.

The difference between "Global Sustainable Equity Investment Principles" and the UN's Sustainable Development Goals is that the latter does not define what is not sustainable.

"We believe this is very important because the SDG does not mention what is not sustainable. We are living in a period of unprecedented disruption. Some companies will continue to grow, creating value and jobs, but many others will struggle to adapt," Chamberlayne says.

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