The Concept of EST Investment

EST refers to ethical, sustainable and thematic investment.

 

Risk and return are the two principal criteria in making investment decisions. Typically, investment professionals concentrate on short-term horizons, relying on earnings forecasts and working with assumptions based on consensus in the market. With many city jobs dependent on short-term performance, financial markets may be ill-placed to recognise, and react to, the structural changes which are taking place in the world and which will shape our future.

At Holden & Partners we invest for the long-term, which means delivering returns that are both reliable and sustainable. A key part of uncovering investment potential is to identify the trends which are driving global change and anticipate potential opportunities, and risks, that may arise as a result. There is no guarantee that the areas of the market which have enjoyed sustained growth up until now will continue to do so in the future; the trends set today could well be the norms of tomorrow.

If there is one thing we, as investors, can be certain of, it is that resource scarcity, climate change and demographic shifts will influence the movement of financial markets to an even greater extent in the future. Energy efficiency, for example, will continue to be a driving force of investment performance as long as governments across the globe are faced with the challenge of reshaping their energy mix to include cleaner forms of power generation. Long-term investment involves recognising the changes which are otherwise overlooked by the rest of the market and using this information to shape financial decisions.

We call this unique approach EST – ethical, sustainable and thematic – investment. The concept is simple: investing in a way that acknowledges future threats and opportunities, whilst considering a wider range of issues than past performance to assess potential returns. This may be achieved through the purchase of ethical funds, which screen out areas of the market engaged in controversial industries or those exposed to a particular sector-wide risk; sustainable funds, which focus on the ability of companies to ensure the longevity of their products, processes and business models; or thematic funds, which identify global macroeconomic themes and seek out opportunities which are best-placed to capitalise upon them.

At the heart of this strategy is the assessment of environmental, social and governance (ESG) factors, which is crucial in providing a realistic indication of the risk and return characteristics associated with a particular investment.

There is increasing pressure on companies and asset managers alike to heed the social and environmental impact of their activities, and the emphasis placed on ESG can offer a valuable insight into the quality of a company’s management, culture and risk profile. These factors ultimately help to scrutinise a business prior to investing, mitigating the risk of an event occurring which could affect its financial performance.  In this respect, our EST approach is an essential means of creating enduring value for clients – investing with a limited focus on short-term results is neither sensible nor sustainable.

Read more about the potential impact of ESG characteristics [PDF]

Some of our peers within the investment and advice industries do not recognise the importance of alternative strategies, but we, at Holden & Partners, value our EST methodology highly. The idea that commitment to sustainable principles and good investment performance cannot be combined is an out-dated concept, albeit one which can deter potential investors. In actual fact, strategies such as these frequently outperform – in the 12 months prior to August 2013, the average EST fund returned 24 per cent, 6 per cent more than its non-EST equivalent.

Our in-house investment team carefully select funds which we believe will deliver sustainable returns in a manner which will not supersede the financial objectives, or values, of our clients. Not only can this approach reap significant social and financial rewards, the diversification benefits of analysing opportunities according to their ESG characteristics are stark, and can considerably reduce investment risk.

It is impossible to say when the market consensus will shift and valuations will move to reflect the investment potential of global megatrends, but we are certain that our EST approach, combining ethical, sustainable and thematic investments, provides sufficient scope to benefit from the opportunities that arise.