Shaping a sustainable future: the impact and promise of ESG investing
By Steven Pyne, Managing Partner:
2023 has been our 20th anniversary year and it has been a good time to take stock of where we started and where we are today. There are many aspects of the business and the relationships we have forged over the last 20 years of which I am tremendously proud, but on a personal level, our commitment to Environmental, Social and Governance (ESG) Investing since the very beginning is stronger than ever.
Align profit and purpose
In the last 20 years, perhaps one of the biggest shifts we have played our part in is that of perception. ESG investing is not about sacrificing returns for values. Our own experience and studies consistently show that companies with strong ESG practices often outperform their peers over the long term.1 Investing in environmentally conscious companies or those committed to social causes isn’t just about doing good—it can be a sound financial decision and it is possible for profitability and purpose to go hand in hand.
Take control
There have been moments of intense frustration, not least this year when the UK Government rolled back on commitments to sustainability (such as plans to phase out petrol and diesel cars) and announced plans for new oil and gas licenses in the North Sea.2 It is in these moments that we realise the true importance and power of private investment. It can make a significant difference in its own right, and also signal to government that there is real desire for change.
Each of us has a choice about where we invest our money, including our pension. It is staggering to think that today the average pension holder invests £3,096 in fossil fuels 3 – that’s £88bn invested by the UK pension industry. There are many clean energy investments out there, that offer a return but not at the expense of environmental damage. If you would rather your pension was invested in a way that aligned with your values, then that choice is yours to make. It is something however we have never been dogmatic about.
Renewing the case for renewables
The world’s media has once again focused on climate change targets this month with COP28 taking place in Dubai and the delegates arriving haltingly at an agreement. There are many saying it does not go far enough in its pledges and personally I would have liked to have seen real commitments to hasten the transition to clean energy, but all would hope that UN Climate Change Executive Secretary Simon Stiell’s closing remarks are heeded by governments across the globe: “Whilst we didn’t turn the page on the fossil fuel era in Dubai, this outcome is the beginning of the end. Now all governments and businesses need to turn these pledges into real-economy outcomes, without delay.”4
Conflict in the Middle East this year hot on the heels of the Ukraine war caused a spike in oil prices, as we would expect. Ongoing turmoil demonstrates that investment in renewables is politically and economically shrewd for countries. It strengthens their energy security and can reduce exposure to peaks in oil prices making it an attractive investment for the longer term.
Take a long-term view
Many sustainable portfolios have, over periods which exceed three years, outperformed their conventional peers. Inevitably Sustainable Investing was always going to encounter a difficult period. And over the short term, there is no doubt it’s been tough going as the cycle has switched to more defensive assets. Over the past five years however, sustainable investment indices have generally outperformed conventional indices. It’s always worth taking the longer-term view with investing (and of course noting that past performance is no guide to future returns).
Understand the diversity on offer
I find that it can still take people by surprise that while clean energy is clearly a focus, the range of sustainable investments available today is vast. In our sustainable portfolios we embrace the full spectrum of ESG opportunities, all looking at building a cleaner and more equitable world for everyone. Here are just three of the companies in our portfolios that might not immediately spring to mind when you envisage the sector:
- Agronomics is a London-listed holding company focused on investing in cellular agriculture – the production of agricultural products (particularly cultivated meat) directly from cell cultures rather than via traditional agriculture methods, reducing carbon and land use. (Sustainable Development Goal (SDG) 12 – Responsible Consumption and Production).
- Rentokil Initial is a world leader in commercial pest control and hygiene services. According to the WHO, every year there are more than 700,000 deaths from diseases caused by parasites, viruses, and bacteria. Rentokil Initial’s products and services protect people from the dangers of pest-borne disease and reduce the risks of poor hygiene and airborne pollution, enhancing lives, and contributing to a healthier society. They also increasingly focus on innovation around non-toxic and sustainable solutions and are committed to reach net zero from operations by the end of 2040. (SDG 11 – Sustainable Cities & Communities)
- Software AG is a German multinational software company that provides digital transformation software solutions and is focused on reducing its carbon footprint and promoting sustainable business practices as well as addressing diversity and inclusion issues in the software sector. (SDG 9 – Industry, Innovation and Infrastructure).
Supporting companies with a desire to behave responsibly and continuously improve is a smart strategy for the future and long-term investment. Companies with robust governance structures tend to exhibit greater stability and resilience in navigating market volatility and external challenges. Similarly, investing in companies with strong social practices not only fosters a more equitable and diverse workplace but also aligns with ethical principles, mitigates risks related to controversies or employee issues, and often leads to better long-term performance.
Embrace regulation
When sustainable investing hit the mainstream, we witnessed a rapid increase in ESG badged investments, leading to some overblown claims and a lack of genuine impact. For this reason, at Holden & Partners we welcome new legislation such as the EU’s Sustainable Finance Disclosure Regulation coming into force. This mandates ESG disclosures on asset managers. Last month the UK’s new Sustainability Disclosure Requirements, investment labelling and anti-greenwashing rules 5 were released. These measures are currently focused on fund managers, but we are working on them too because we believe they will enhance client confidence in the sector.
Our commitment to sustainability
At Holden & Partners, we’re more committed to a sustainable approach than ever.
We are signatories to the UN Principles for Responsible Investment, the world’s leading proponent of responsible investment, supporting us to use responsible investment to enhance returns and better manage risks. We’re also excited to say that we have just recertified as a B Corporation company and increased our score in all of their measures.
For us, Sustainable Investment is all about offering people a choice of how their money should be invested between both sustainable and non-sustainable approaches. We have always believed that the investment case for sustainable investments stands up on its own merits which is why for many years we have included funds which specialise in clean energy in our non-sustainable portfolios.
The growth of the ethical and sustainable sector over the last 20 years has been a real success story and something that we are proud to have played a part in. Inevitably, there was always going to be a period in which it was tested, but in our opinion the case for investing sustainably has never been stronger.
New regulations and greater scrutiny will mean that investors will benefit from better products, more transparency and new alternatives.
The environmental problems the world faces unfortunately aren’t going away and with the range of investments in the sector greater than at any time, investors continue to have a real opportunity to make a positive difference with their money.
I am always on hand to talk about sustainable investment, let me know if there are topics you would like to hear more about in the future.
2. https://www.theguardian.com/politics/2023/sep/20/uk-net-zero-policies-scrapped-what-do-changes-mean
4. https://unfccc.int/news/cop28-agreement-signals-beginning-of-the-end-of-the-fossil-fuel-era
5. UK Sustainability Disclosure Standards – GOV.UK (www.gov.uk)