Oct 20, 2021
When I began my career as an investment banker at Morgan Stanley in 1997, the concept of sustainable investing was ill-defined. I enjoyed the challenge of finance but also really wanted to do something that was in an area I felt had more potential positive benefits. So, I left the bank in 2002 to work for Kashf, a non-profit organisation in Lahore, Pakistan, focused on providing small loans to women from low-income households.
I was eventually drawn back to Morgan Stanley in 2005 to help with its sustainable finance initiative and a few years later joined Ecofin, a boutique specialising in sustainable investment. Here I looked after a number of strategies, including a decarbonisation mandate for the Norwegian Sovereign Wealth Fund. It was a really good experience working for the world’s largest Sovereign Wealth Fund – thinking about how best to invest in the sector both for output (returns) and for impact (on the environment).
I joined Ninety One in 2019 and we launched the Ninety One Global Environment Strategy. We are now managing two and a half billion US dollars. It is a highly concentrated portfolio, investing in the companies that are both the biggest beneficiaries of decarbonisation and also those having the biggest positive impact.
I’ve been bowled over by the speed of change on the decarbonisation front. In the past year or so alone, the European Union has launched a Green Deal, the United States has re-joined the global fight against climate change and China, the world’s biggest emitter of CO2 emissions, has committed to being net zero by 2060. There’s been more progress in the last year than in the entire previous 19 years of my career.
It’s hard to explain why interest in impact strategies has only just taken off as opposed to two or three, or even 10 years ago. It’s not as if the climate crisis has suddenly become significantly worse. It’s been bad for quite a long time and it’s not as if we didn’t have social issues before.
Perhaps the fact that environmental, social and governance (ESG) and impact strategies have generated strong returns throughout the pandemic has helped. In addition, positive regulatory momentum, extreme weather events caused by climate change and heightened consumer awareness of environmental issues via social media and activism have also steered the conversation and forced the industry to sit up and take note. We believe we are moving relatively quickly to a world that is really taking into account, not just financial shareholders but all stakeholders.
It’s great that it’s happened over the last year but it’s perhaps a little late. There’s no question this year that emissions will grow by about 5% against last year, and that’s the single biggest growth in emissions ever, other than in 2009 (emissions are highly correlated with economic growth). Last year there was a big decline because economies worldwide declined but as the economies come back that trend will be reversed.
This is a really important question, because I believe it’s a misunderstanding that there need be a trade-off between them. I think you have a higher probability of outperforming if you understand a company in the context of all of its stakeholders – which is what a fundamental investment approach that incorporates sustainable investing helps you to do.
Sustainability data provides additional insights into a company’s business model and culture, including whether it has a competitive market position, which in turn helps you build better forecasts for revenue growth and returns.
Simply put, to be in the best position to provide long-term returns to investors, I think a fund manager absolutely must understand a company’s sustainability performance.
One of the advantages of decarbonisation as an investment theme is that it encompasses companies of different sizes across industries and regions. As well as the obvious businesses like renewables-focused utilities, global decarbonisation requires, for example, technology companies that are making factories more efficient; chemicals companies that are reducing the carbon footprint of industrial processes; software and semi-conductor companies that are enabling the electrification of transport; logistics companies that are reducing the emissions from transporting goods worldwide; and so on across sectors.
So there are multiple ways for investors to play this theme. The key thing, we think, is to select from within this broad ‘decarbonisation universe’ the companies that have the best growth potential and competitive advantages, and that represent good value. And as with any area of investing, it’s important to have a diversified portfolio.
When seeking to capture the structural growth driven by decarbonisation, we think it’s crucial to be highly selective. Our portfolio is concentrated because decarbonisation is a very disruptive process, and only the strongest companies with the best technologies will emerge as winners. So we focus on companies that are leaders in their fields and that have competitive advantages.
Secondly, we put great emphasis on valuation discipline. In many areas, the market is yet to appreciate the growth opportunity that decarbonisation is creating for select companies. Other areas – such as parts of the hydrogen economy – look expensive to us at present. We do a great deal of valuation analysis to try never to over-pay for a stock. Finally, we think it’s important to assess the sustainability of companies in a broad sense. We spend a lot of time analysing ESG factors, and meeting with management teams, to become comfortable that the companies we invest in are treating all of their stakeholders appropriately.
A key aim of COP26 is not only to get more countries to commit to decarbonisation, but to ensure that these commitments are backed by credible plans. If that happens, the pathway to a low-carbon economy will be much clearer, which will likely accelerate growth for businesses positively exposed to decarbonisation. That’s exciting for an investment strategy like ours.
I’d also like to see more recognition of the essential role that emerging nations must play in achieving global decarbonisation. There needs to be much more investment in the developing world to help them decarbonise, and much more discussion on how to ensure that the energy transition is inclusive and that we support the world’s least advantaged communities.
People who make decisions as to where capital is invested have an enormous impact, and as of today only a tiny minority of the world’s investable capital is run by women; but the importance of allocating capital sustainably to address the world’s challenges – climate, natural capital, diversity, sustainable development and other global challenges – has never been greater. My strong belief is that diverse teams will unquestionably do a better job of allocating capital more sustainably and this has been my career mission. That’s exactly the mission of Girls Who Invest – to take that percentage of the world’s investable capital that is managed by women from single digits today to 30% by 2030. I really feel very strongly about mentoring and growing young women in the asset management industry, it’s an incredibly rewarding and interesting job, and is one that maybe isn’t high enough on the agenda for bright young women graduating and thinking about what they might want to do with their lives.
Don’t give up. My favourite quote is by Samuel Beckett: “Try again, fail again, fail better!”
China is on a mission to achieve independence in key technology-based industries. Yet, China still imports around half of the key components needed to build commercial jetliners. We engaged Chris Miller, assistant professor at the Fletcher School of Tufts University, to assess China’s progress in developing technological independence.