The importance of an authentic investment approach
In an investment world where a commitment to ESG has almost become passé, the importance of fund managers being authentic in their approach to these investment principles has never been more important. To use that old-fashioned phrase, they must be able to “walk the talk”.
For those fund managers who make a genuine commitment to having an authentic approach to ESG, they will be ideally positioned to capture the tailwinds that are underpinning sustainable investing.
Make no mistake. These tailwinds are gathering momentum. Although geopolitical crises such as the Ukraine and now the Middle East do see a spike in fossil fuel prices, the long-term trend towards decarbonisation is as undeniable as it is inevitable.
In our view, there are four key drivers – legislative and regulatory policy, consumer choice, cost of capital and innovation – that are laying the foundations for a world where renewable energy will be front and centre.
On the legislative front, take the US. In August last year, President Joe Biden signed into law the Inflation Reduction Act (IRA), a legislative program boasting over US$1 trillion in loans, grants and tax incentives to accelerate the transition to net zero in the US by catalysing investments in domestic manufacturing capacity and kick-starting R&D and commercialisation of leading-edge technologies such as carbon capture and storage and clean hydrogen. In addition, the legislation allocates money directly to environmental causes – provided recipients can demonstrate their “green” credentials.
It’s not just the US. That throw-away line, “when America sneezes the world catches a cold”, is applicable to sustainability policy. Within six months of the IRA becoming law, the European Commission launched its US$270 billion Green Deal Industrial Plan to provide a more supportive environment to scale up manufacturing capacity for the net-zero technologies and products required to meet its ambitious climate targets.
To quote EU President Ursula von der Leyen, “Europe is determined to lead the clean tech revolution”.
In Australia, the Safeguard Mechanism, which was introduced in 2016, has been revamped to require Australia’s 215 biggest polluters to make deep cuts to their carbon emissions. A limit on the amount that can pollute each year has been imposed and will be progressively lowered until net zero is reached.
Certainly, we’re increasingly seeing companies having to align their businesses with greenhouse gas emission reduction targets and invest in technologies or solutions to align themselves with regulatory climate goals. For which they are now being penalised for not doing so.
These legislative initiatives reflect growing voter concern about climate change, especially among the younger generation, with the Teal vote at the last federal election evidencing this. But voters are not content to leave it to the politicians. They, too, are making choices as consumers by preferring sustainable products and services, with research suggesting that they're prepared to pay a premium to do so.
A survey of 2,000 Australians by the strategic consultancies Nature and The Lab found the environment was a hot topic with consumers, with eight out of 10 expecting businesses to be environmentally sound and four in 10 saying they would stop buying from brands that weren’t. The research also showed the demand for sustainable businesses is stretching across various industry sectors.
On the cost of capital, there is mounting evidence it is cheaper for companies in sustainable markets, while the cost for companies in sectors being disrupted by legislation or regulation is rising, leading to potentially better returns from the former for investors, especially if they get in on the ground floor.
For the $240m Perennial Better Future Strategy, these are tailwinds that simply can’t be ignored, with investors increasingly attuned to them.
Indeed, it is our strongly held belief that there remains an “expectation gap” between investors wanting a Sustainable Investment exposure and what some fund managers deliver. Particularly as clients tell their advisers that they want to invest in responsible investment funds but not getting what they expected when they looked under the hood.
Certainly, it is the responsibility of the fund manager to articulate their ESG strategy to ensure that the types of companies they hold dovetails with how the client wants their money invested. Just because a fund uses words such as “sustainable”, “ESG” or “environmental” doesn't mean that their investment style matches their clients’ expectations. In short, they may lack authenticity.
So the message from us is to take care when picking responsible investment funds, because each fund is designed to achieve something different to the next. An authentic approach towards sustainable investment matters because we believe it allows investors to access global tailwinds unique to these industries.
Damian Cottier is portfolio manager on the Perennial Better Future fund.