Seb Beloe, partner and head of sustainability at specialist sustainability investors WHEB Asset Management, says change is in the air in mainstream finance, and critics who disregard environmentally or sustainability themed funds could end up eating their words.
“First they ignore you, then they laugh at you, then they fight you, then you win.” Mahatma Gandhi
In a quote that will surely come back to haunt him in the not-too-distant future, Rex Tillerson the CEO of ExxonMobil told shareholders at the company’s 2015 annual general meeting that his firm had not invested in renewable energy because “We [ExxonMobil] choose not to lose money on purpose”. In a similar vein, though perhaps lacking quite the same bravado, in May 2014 Sergio Marchionne the CEO of Fiat Chrysler Automobiles took aim at Californian environmental rules that force the company to sell a US$32,500 battery-powered Fiat 500e. “I hope you don’t buy it,” he said, claiming the company loses US$14,000 on every vehicle sold.
Gandhi of course was not thinking about technological disruption in the oil and automotive industries when he made his comments (see title), but his quote nonetheless seems apposite to the oil and auto industries’ views of these new technologies. Environmental- and sustainability-focused investment funds have received similar levels of opprobrium from the mainstream investment community. The first ethical fund in the UK, for example, was famously called a ‘Brazil fund’, because ‘you’d have to be nuts to invest in it’!
Change is in the air
But change is clearly in the air. Within the power generation sector, for example, renewable energy now regularly features as the largest recipient of energy-related infrastructure investments. Bloomberg estimates that renewables will command 60 per cent of total new capacity and two-thirds of power investment globally over the next 25 years.
The electric vehicle industry is also approaching critical mass. At the Frankfurt Motor Show in 2014 every single major automotive business had a hybrid or electric vehicle on display. There are now more than 40 plug-in and electric models available on the market and while Fiat-Chrysler might be losing money on every electric car they sell, Tesla certainly isn’t.
But much in the same way that Rex Tillerson has failed to see the advance of renewable energy, so the mainstream financial community has failed to see how sustainable investment funds have evolved.
The FP WHEB Sustainability Fund, for example, focuses on investing in companies that ‘provide solutions to sustainability challenges’ such as climate change, resource depletion and aging demographics. Perhaps unsurprisingly, companies that provide products and services that address these challenges are serving end markets that are growing more quickly than the market as a whole.
The 1200 companies in the WHEB investment universe have had average annual sales growth of more than 10 per cent over the last five years, compared with less than 8 per cent for the wider market (as measured by the MSCI World Index). Looking forward twelve months, the disparity gets even larger with sustainability-focused businesses expecting to grow at over 11 per cent. Meanwhile the MSCI World is expected to grow less than 5 per cent over this period.
For many mainstream actors whether in the automotive, financial or oil and gas sectors, environmental and sustainability-oriented businesses and technologies have been disparaged and in some cases actively undermined. At best they have been seen as niche, appealing only to a small, marginal community; uncompetitive with mainstream approaches and practice.
Investors often still see environmentally or sustainability themed funds as being primarily about ‘doing good’. Increasingly though there is a recognition that by investing in this way, investors can also do well. Not only is sustainability not at odds with attractive financial return, but the two are increasingly positively correlated, in our view. It is precisely because of their positive environmental or societal impact that we expect our portfolio constituents to be able to deliver strong commercial returns. Rex Tillerson’s laugher will, we believe, be short-lived.
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