Your investment doesn’t have to benefit just you, it can also benefit the world around you. That’s the principle behind sustainable investments – namely that investing in well-managed businesses with interests in improving the environment or quality of life can deliver superior returns over time.
Many investment firms will have made a commitment to invest in sustainable stocks. Some even offer specialist sustainable pooled funds that specifically invest in companies involved in ethical or green industries.
Investor appetite for these kinds of investments is on the rise. Sustainable investment research firm EIRIS puts the amount invested in green and ethical funds at a record £13.5bn at the end of June 2014. They say that half of UK consumers are likely to jump ship to another financial provider if they have ethical concerns over the way it does business. It’s clear that investors care about the impact their money can have.
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You might think that the worthier the investment, the lower the return – when in fact, it’s rarely the case. Many sustainable companies plug into growing social and environmental trends, producing products and technology that an increasing population will need ten, 20, and 50 years down the line, which means a greater and more robust return.
But how does a fund manager select its sustainable investment universe? Some managers employ what’s known as a negative screen in order to exclude companies involved in industries such as weapon production, alcohol and gambling. Others use positive screening, which means they seek out businesses with a solid management team and a demonstrated commitment towards future sustainability. There are general quality standards – ensuring a company has good governance and has made a pledge to improve the social or environmental impact of its business are key. In reality, most managers will use a combination of these.
A sustainable fund would typically invest in solidly managed companies that are involved in producing products that the world needs more of, such as medical equipment, alternative energy resources and education for a growing population. By doing this, it would be investing in a trend or future social change that’s likely to persist over a long time frame.
We spoke to Mike Appleby, Investment Manager at Alliance Trust, who explained their process. They rate each company to give them a score based on two criteria – the sustainability of the product or service the company delivers and the management quality of the company in question. They only hold companies who meet minimum thresholds for each criteria.
Here are five examples of companies involved in sustainable business and why they might make the cut of a typical sustainable fund. Note that these are not investment recommendations. As with any investment, their value can fall as well as rise and investors may not get back the original investment.
FTSE 100-listed Johnson Matthey is a specialty chemicals and sustainable technology company, and is primarily involved in the production of catalytic converters, which turn toxic pollutants from a car’s exhaust into less harmful compounds. As the urban population grows, companies such as Johnson Matthey will be relied upon to produce products to combat the effects of poor air quality.
Novo Nordisk is a Danish pharmaceuticals company primarily involved in diabetes care. It qualifies as a sustainable company as it is involved in manufacturing affordable diabetes medicine for developing nations. As many emerging markets undergo a huge population boom, urbanisation and a move towards a western lifestyle over the next decade, the disease profile also becomes more westernised – and conditions such as diabetes will rise. Therefore, developing nations need access to affordable, good-quality medicines – and Novo Nordisk is one company that provides these.
A company that provides data centres isn’t the most obvious business for inclusion in a sustainable fund, but what Equinix does is provide them with a focus on energy efficiency. The advent of the world doing more business online requires a huge amount of server storage – and therefore a huge amount of electricity to power computers, and then cool them down sufficiently so that they don’t overheat. Equinix constantly evaluates the energy efficiency of its centres and internet exchanges, and adopts other green operational practices to reduce energy usage – and therefore cost – over the long term.
Japanese air conditioner manufacturer Daikin specialises in innovative air conditioning systems. Rather than pumping out cool air in every room in a property that might not necessarily need cooling, Daikin units can sense human presence and tailor the air conditioning levels accordingly. It means that different rooms will be cooled at different temperatures, so as not to waste energy – or unnecessary cash on energy bills.
Continental makes tyres, brake systems and other automotive safety systems that help prevent car accidents. The company taps into the theme of population growth on the roads, with an increased focus on energy efficiency and car safety features. German-based Continental also works to reduce the environmental impact of cars by reducing the level of carbon dioxide emissions from its products and manufacturing processes.
As Winston Churchill once said, “the price of greatness is responsibility”. It pays to remember that investing in responsible companies involved in sustainable development will also pay dividends over time, for both you and the planet.
Learn more about why sustainable investing is important in this short animation.
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