Sustainability tackling long-term risks, not a label
Sustainability is often seen as a green-washed label slapped on funds to allow for higher fees, but Stewart Investors uses a screen-less strategy that employs environmental, social and governance (ESG) values through looking at the implications of company structures on long-term financial risk factors.
While their client-base is generally self-selecting, so twisting an investors’ arm to invest ethically isn’t an issue, Stewart Investors told Money Management that their strategy employs neither negative nor positive screens, and merely looks at the macro financial issues around the globe and assesses whether the structure of a company will be impacted financially by those issues in the future.
Given the self-selecting clients, fees don’t tend to be an issue, but nonetheless can be explained by the scarcity of capital the firm can allocate in a particular region.
“They aren’t fees bolted on a vanilla fund because it has a sustainable label,” said Nick Edgerton, who leads the CFS Worldwide Sustainability Fund.
He said the fees, as well as a reflection of the scarcity of capital, also contribute to the commissioning of mostly non-broking research houses, and truly reflect active management.
Emerging markets (EM) were a specific focus, with Jack Nicholson leading the EM team in its pursuits.
He said while it was true that investing in the EM space and investing sustainably was often hard to combine, a lot of EM companies in developing countries were run by the founding families, who often had to look at long-term horizons in order to ensure their companies were still fruitful for future generations.
“Those natural timeframes mean to be successful, these companies have to think about sustainability,” he said.
The chart below shows the performance of the CFS – Stewart Investors Wholesale Worldwide Sustainability Fund, and the CFS – Stewart Investors Global Emerging Markets Fund across the last five years to date.
Over five years, the EM fund returned 8.66 per cent, while the Worldwide Sustainability fund returned 13.32 per cent.
The MSCI World Index returned 15.16 per cent over five years, slightly higher than the Worldwide Sustainability fund, but Nicholson noted the investment firm’s strategy was such that it tended to underperform in strongly rising markets but held its gains a lot better in market downfalls.
In terms of trends, recycling looked to be the next big thing in the sustainability investments space, given NSW recently passed new recycling legislation allowing for the return of recyclables for money.
Nordic recyclables company, Tomra, was a market leader in recycling infrastructure, and was a perfect example, according to Edgerton, of a sustainable investment not costing investors returns.
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