23 Nov 2021
Hear from Portfolio Manager Stephanie Niven on new approaches to investing sustainably.
I believe that externalities – the costs or benefits for others that are not taken into account by the person or company performing an action – are increasingly being valued and priced. In the last couple of years, the externalities associated with carbon-emissions have really begun to be noticed by the market, and we have seen the start of significant momentum there. But as the focus on building a sustainable future intensifies, we are at the dawn of a much broader shift, where externalities beyond carbon will start to matter from an investment perspective.
It requires new skillsets. As investors, we need to think more holistically about how we allocate capital, considering the broader impacts of investments from a longer-term perspective. Given the focus on climate this year, there’s clearly growing recognition of the ways that companies impact the world’s natural capital. But the understanding of externalities is widening to include impacts on human, social and financial capital – such as the extent to which a company’s products or services may extend financial inclusion, broaden access to healthcare or provide infrastructure that contributes positively to society. These externalities may be challenging to measure, at least at present. But they can still have a significant influence on how an investment performs, so investors need to be able to assess them.
Investors need different analytical approaches, and different ways of thinking about how businesses are creating value. For example, we have been doing a lot of work over the past year on evaluating corporate cultures. Business leaders often talk about the importance of culture, but to date the investment community has largely ignored it – mostly, I think, because it’s difficult to measure. There is no single statistic that I can plug into a spreadsheet to tell me whether a business has a good or bad culture. So we have built a qualitative framework, underpinned by empirical evidence and with input from academia, for evaluating corporate cultures that can be applied across all sectors and regions. The aim is to identify companies with strong cultures that are appropriate for their specific businesses, and that we believe have the potential to contribute to value creation for investors.
Interestingly, the companies we have identified as having a corporate culture advantage differ to those that might be identified via a screen based on typical ESG [environmental, social & governance] metrics. This suggests that a corporate-culture focus gives us the potential to build a portfolio of sustainability leaders that is differentiated from other sustainability-oriented investment approaches. And the opportunity set we have identified is itself diverse. We have found companies with strong and appropriate cultures across developed and emerging markets, and a broad range of sectors.
Equity investment: The value of equities (e.g. shares) and equity-related investments may vary according to company profits and future prospects as well as more general market factors. In the event of a company default (e.g. insolvency), the owners of their equity rank last in terms of any financial payment from that company. Sustainable Strategies: Sustainable, impact or other sustainability-focused portfolios consider specific factors related to their strategies in assessing and selecting investments. As a result, they will exclude certain industries and companies that do not meet their criteria. This may result in their portfolios being substantially different from broader benchmarks or investment universes, which could in turn result in relative investment performance deviating significantly from the performance of the broader market.
All investments carry the risk of capital loss. The value of investments, and any income generated from them, can fall as well as rise and will be affected by changes in interest rates, currency fluctuations, general market conditions and other political, social and economic developments, as well as by specific matters relating to the assets in which the investment strategy invests.
Environmental, social or governance related risk events or factors, if they occur, could cause a negative impact on the value of investments.
With Western central-bank policy normalising, economic growth rates diverging and global trade still readjusting to life after lockdown, investors have a complex environment to navigate in 2022.
Ninety One’s portfolio managers assess the outlook across their asset classes and regions.
Our team also takes a deep dive into the outlook for emerging markets, as well as into how sustainability will drive investment outcomes next year and beyond.