Sustainability with substance: Sustainable investing needs to evolve before we hit boiling point

Ninety One’s portfolio managers Deirdre Cooper, Stephanie Niven and Juliana Hansveden discuss how sustainable investment approaches must adapt to keep up.

May 10, 2022

Ninety One’s portfolio managers Deirdre Cooper, Stephanie Niven and Juliana Hansveden discuss how sustainable investment approaches must adapt to keep up.

10 May, 2022

Sustainable investing has been the subject of fierce debate recently, but rather than arguing about how well it has worked in the past, it would be more useful to understand what kind of investment approaches we need now – and that starts with taking a view on what the future looks like.

Juliana Hansveden, Portfolio Manager: ”The future looks terrifying unless we get better at allocating capital to tackling climate change and other pressing sustainability concerns. Annual climate finance needs to increase almost six-fold, according to the Climate Policy Initiative, to limit global warming to 1.5C. Crucially, this capital needs to go to the right places. Today, around 80% of the world’s financial assets are located in developed markets, but we know that at least 70% of the investment required to achieve the Paris Agreement climate targets and the UN’s Sustainable Development Goals must be directed to emerging markets1. The net zero transition, and sustainable development more broadly, remain woefully underfunded in the developing world”.

Good eggs, bad eggs

This is unlikely to change with today’s sustainable investment approaches, many of which essentially involve giving companies an ESG (environmental, social and governance) score and dividing them into good eggs and bad eggs for portfolio inclusion or exclusion. Often, emerging market companies end up in the bad-egg pile because their scores tend to be lower than those of their developed market counterparts.

Deirdre Cooper, Co Head of Thematic Equity: “Firstly, this gives no consideration to a company’s willingness or ability to drive sustainable development where it is desperately needed, including with respect to climate solutions, financial inclusion, physical and digital infrastructure, healthcare and education. Secondly, it ignores emerging companies’ potential to deliver growth and profits for the benefit of shareholders. Many in the West fail to appreciate that being a leader in sustainability can be a growth tailwind for these businesses, too. Surveys show that developing-world consumers also care about biodiversity and nature loss2. The Chinese, in fact, are even more willing to buy electric vehicles than Germans3”.

Therefore, the first item on the to-do list is to evolve today’s simplistic and backwards-looking sustainability assessments into more intelligent, contextualised appraisals. This way, the babies will not be thrown out with the bathwater and emerging markets will be properly represented in sustainable portfolios.

Understanding externalities

Next, we must adapt the way we invest to reflect changes in the business world. Perhaps the most significant of these is that companies are increasingly being held to account for their externalities – i.e. their impacts on the environment, society and individuals.

The traditional way of thinking about shareholder returns is that they are generated at the expense of other stakeholders. Today, we see evidence that consumers, society and markets are starting to reward companies that consider the impact they have on all stakeholders, and in so doing create value for all. As a simple illustration, some 80% of consumers now think about the environment when making technology purchases, according to a Ninety One Planetary Pulse survey, suggesting a strengthening link between consumer-goods companies’ environmental impacts and sales. Meanwhile, a recent MIT study found that corporate culture was by far the biggest determinant of talent lost during the Great Resignation4. In other words, companies’ impacts on the day-to-day lives of employees matter more to their ability to hold onto the best and brightest than how much they pay.

‘Good egg/bad egg’ sustainable-investing approaches are not equipped to value these externalities – i.e., to calculate the returns generated on the environmental-, social- and human-capital companies deploy. Therefore, we need to add ‘develop externality-valuation tools’ to the to-do list.

Cooper continued: “This trend towards the internalisation of corporate externalities – an overblown way of saying that companies’ chickens will increasingly come home to roost – is happening to a far greater extent than many people seem to realise. To get ahead of this shift in how the world appraises companies, investment managers are likely to have to expand the skillsets and cognitive diversity of their teams. If the companies of tomorrow succeed because they act and think differently to their predecessors, it seems a fair bet that the successful investment teams of the future will look and behave differently to those of today”.

New metrics and methodologies

Traditional portfolio managers will say that we are merely confirming what they have argued all along: that ESG has always been a sideshow, and that they have always invested sustainably in the sense that their valuations have accounted for any factor that may influence a company’s financial return, including externalities.

But how? Details on companies’ carbon emissions have only been collected relatively recently, and that is at the data rich end of the sustainability spectrum. There is a scarcity of metrics and methodologies that enable portfolio managers to calculate the value of the environmental capital companies create or destroy through externalities that impact biodiversity, land, water and air quality. The same can be said for estimating the social capital value of companies’ impacts on communities, and the changes in employees’ aggregate human-capital value caused by their workplace practices. I know this because my colleagues and I have had to develop them ourselves.

While many believe that ESG data providers collect and collate this information in their myriad datapoints, but what does the percentage of women holding board seats or executive roles really tell you about a company’s future growth and profitability?

More sophisticated assessments

Stephanie Niven, Portfolio Manager: “These often cited diversity metrics offer a neat illustration of where sustainable investing is today, and where it needs to get to. By itself, diversity will not make a company more innovative and responsive to customers’ needs. These drivers of growth will only be unlocked if the company is run in a way that enables people from all walks of life to contribute and exert influence. Analysts and portfolio managers need to appraise not only a company’s diversity, but its inclusiveness. This is a more complicated, qualitative assessment that requires in-depth, direct knowledge of a company”.

Therefore, the final to-do is for portfolio managers and analysts (and the more diverse and inclusive investment teams that will hopefully succeed them) to fully incorporate these new methodologies for valuing externalities into their fundamental analysis, rather than relying on external ESG ratings and other outsourced sustainability insights.

There is no need throw sustainable investing onto the junk pile of bad ideas. In some ways it is coming home, to the heart of the investment process. And it isn’t broken. It just needs to evolve towards new skillsets, better analytical tools, and valuation methodologies that can price the full spectrum of externalities.


1 Sources: OECD, Morningstar, Credit Suisse Research, February 2021
2 For example, see CRR China consumer survey
3 Source: UBS Evidence Lab
4 See

Important Information

The information may discuss general market activity or industry trends and is not intended to be relied upon as a forecast, research or investment advice. The economic and market views presented herein reflect Ninety One’s judgment as at the date shown and are subject to change without notice. There is no guarantee that views and opinions expressed will be correct and may not reflect those of Ninety One as a whole, different views may be expressed based on different investment objectives. Although we believe any information obtained from external sources to be reliable, we have not independently verified it, and we cannot guarantee its accuracy or completeness. Ninety One’s internal data may not be audited. Ninety One does not provide legal or tax advice. Prospective investors should consult their tax advisors before making tax-related investment decisions.

This communication is provided for general information only and is not an invitation to make an investment nor does it constitute an offer for sale. Investment involves risks. This is not a recommendation to buy, sell or hold a particular security. No representation is being made that any investment will or is likely to achieve profits or losses similar to those achieved in the past, or that significant losses will be avoided. The securities or investment products mentioned in this document may not have been registered in any jurisdiction.

This communication may include hyperlinks which lead to websites published or operated by third parties. Providing the hyperlink does not imply any affiliation, sponsorship, endorsement, approval, verification or monitoring of any information contained in the third party websites. Ninety One has not reviewed any third party websites for accuracy or completeness and is not in any way responsible for the content of any third party websites. Using or following the hyperlinks is at your own risk.

In Hong Kong, this communication is issued by Ninety One Hong Kong Limited and has not been reviewed by the Securities and Futures Commission (SFC).

Except as otherwise authorised, this information may not be shown, copied, transmitted, or otherwise given to any third party without Ninety One’s prior written consent. © 2022 Ninety One. All rights reserved.

Past performance figures shown are not indicative of future performance. Investors are reminded that investment involves risk. Investors should refer to the offering documents for details, including risk factors. This website has not been reviewed by the SFC. 

By clicking on the hyperlink of Investor relations below, you are leaving this website with information specific for retail investors in Hong Kong and entering the global website.

Please note that the global website is not intended to target Hong Kong investors. It has not been reviewed by the Hong Kong Securities and Futures Commission (“SFC”). The website may contain information on funds and other investments products that are not authorised by the SFC and therefore are not available to retail investors in Hong Kong. The website may also contain information on investment services / strategies that are purported to be carried out by a Ninety One group company outside of Hong Kong.

Any product documents and information contained in this website are for reference only and for those persons or entities in any jurisdictions or country where the information and use thereof is not contrary to local law or regulation.

Issuer: Ninety One Hong Kong Limited
Email: [email protected] 
Telephone: (852) 2861 6888 
Fax: (852) 2861 6861