Sustainable investing promises big returns

‘The winners will be very valuable, the losers will be punished hard’ – Ninety One CEO Hendrik du Toit.
The pandemic, instead of diverting focus away from the big picture, succeeded in getting humanity's attention. Image: AdobeStock

Sustainable investing is currently one of the biggest themes in the investment world and will remain so for years to come – and presents exciting opportunities for investors.

This is the view expressed by Hendrik du Toit, CEO of international asset management firm Ninety One, during a recent discussion of developing investment trends.

“Sustainable investment is much more than just selling a few stocks out of a portfolio,” says Du Toit.

While not ignoring the effect of renewed inflation, the winding down of government policies to stimulate economic recovery, and higher interest rates, Ninety One has identified investing into sustainable companies – and companies that can change their operations to become sustainable – as a big opportunity for investors.

Consequences of human actions highlighted

Du Toit says the Covid-19 pandemic played a part in increasing the awareness of sustainability and a sustainable world by focusing humanity’s attention on how human actions impact on the world.

“It affects everybody,” he says, “from the rural poor in Africa and fishermen in Asia to people living in big European cities.”

Without saying it, he succeeded in dispelling the notion that sustainability is an emotional issue driven by even more emotional people.

What he did say out loud is that change is needed in the underlying sustainability movement.

Read: Ninety One becomes first SA signatory to ‘net zero’ asset managers initiative

“Ninety One took a risk to speak out against short-term targets and measurements. We believe real change will come as a result of planned and orderly transition.

“It must be planned properly and practically or it will not be successful. We look for companies that have long-term plans.

“Reporting short-term emission levels and targets is not enough. In our investments we would like to see a proper transition plan,” says Du Toit. “The potential for winners is huge.”

Carrot, not stick

He adds that, for the first time, major economies have incentives to change.

“It will impact on all businesses and economic players – the value of businesses they own, investment portfolios, and [in terms of] tax.

“For the first time some kind of price is [being] put on the way businesses act.

“The seriousness of the problem is appreciated by all. It will be a key topic for years to come in any economy,” says Du Toit, mentioning for a second time that just selling a few shares in transgressors won’t cut it.

More importantly, it presents exciting opportunities for investors. “The market can be very excited about winners and losers. The potential for winners is huge,” says Du Toit.

He refers to the technology evolution, which started gaining traction in 2000, to drive this point home.

“At the time nobody could image that a company such as Microsoft would become so valuable as what it is today.

“The winners of sustainability will be very valuable, the losers will be punished hard,” says Du Toit.

‘For investors, decarbonisation matters’

Deirdre Cooper, portfolio manager of the recently-launched Ninety One Global Environment Fund, says that for investors, decarbonisation matters because transitioning to a low-carbon economy requires a radical overhaul of the energy system, transport system and many other aspects of the global economy.

“This is changing the risk and return potential of industries and individual companies.

“Global efforts to cut carbon emissions are driving vast flows of capital, fuelling innovation and creating an enduring tailwind for select companies,” she says.

“When the pandemic struck, many people thought climate targets would be shelved. In fact, the opposite happened.

Noticeable progress

“In the past year or so alone, the EU has launched a Green Deal, the US has rejoined 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 preceding 20 years,” says Cooper.

In a recent research note, she attributed the faster pace of change to increased political will, positive regulatory momentum, extreme weather events caused by climate change, and heightened public awareness of environmental issues.

Read: 10 sustainability terms every investor should understand

A portfolio focused on decarbonisation offers investors the potential to gain exposure to an area of long-term structural growth, offset carbon risk in other investments, and make a positive impact by financing businesses tackling one of the planet’s biggest challenges.

“For investors, the structural growth trend being driven by decarbonisation is just beginning,” according to Cooper.

Major growth opportunity

She points out that the world is investing only $600 billion to $700 billion per annum, compared with the $4 trillion to $5 trillion needed in annual investment by 2030 in order to reach net zero by 2050.

“Our mission at Ninety One is to allocate capital sustainably. What that really means is that we want to allocate capital to those companies that we think are investing not just for their shareholders but for all stakeholders,” says Cooper.

Her research note discloses that the Ninety One Global Environment Strategy fund has increased its assets under management to $3.7 billion since its launch in 2019. It aims to invest in companies that are the biggest beneficiaries of decarbonisation and those that have the biggest positive impact.

“We believe that companies whose products and services help the global economy to transition sustainably towards net zero have the potential to grow revenues and profits faster than the market average,” says Cooper.

Trifecta of benefits

“We think that should be good for investment returns, the planet and future generations.”

One of the advantages of sustainable investing as a theme is that it includes companies of different sizes across different industries and regions, she adds.

In addition to the obvious businesses like renewable energy, the trend towards global decarbonisation also requires technology companies that are making factories more efficient, chemical companies that are reducing the carbon footprint of industrial processes, software and semi-conductor companies that are enabling the electrification of transport, and logistics companies that are reducing the emissions from transporting goods worldwide.

“Decarbonisation is a very disruptive process, so we are looking for the leaders operating across different sectors.

“In many areas, the market is yet to appreciate the growth opportunity that decarbonisation is creating,” according to Cooper, “while some other shares are looking expensive.”

Let’s give Du Toit the last word: “Solutions to the challenges will be found. In the 1980s, acid rain was a big problem, but was addressed successfully.

“The opportunities for investors are exciting.”



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