A growing number of people are choosing to invest sustainably in order to align their long-term financial goals with the desire that their money be used in a way that benefits society and the environment.
Of course, investing in this way is also expected to produce strong returns. After a strong run of performance, many sustainable investing strategies have faced headwinds this year, which may have caused investors to question their allocation to these funds.
There are good macro reasons why sustainable investing has been called into question this year. Inflation soared and central banks responded by raising interest rates. At the same time, the rhetoric surrounding the recession has intensified and uncertainty is clouding the future. This has led to a massive sell-off of growth assets in favor of more defensive, value-oriented, inflation-aligned investments.
Does this mean that the age-old trends that have underpinned the case for sustainable investing and moving our societies towards a cleaner, healthier and safer future have come to a complete halt? Bad news about the ongoing conflict in Ukraine, Sino-US tensions and UK politics could lead people to buy into this view, while the positivity generated by last year’s COP26 conference on climate change also seems like a distant memory.
Despite these concerns, however, the enduring themes have persisted for decades and are entrenched. And while individual themes may reach the end of their road, the overall direction of travel remains intact.
Energy is a good example. The attractiveness of renewables and energy efficiency has only increased in recent months as fossil fuel supply insecurity has been exposed by events in Europe.
But with more than 80% of the world’s energy still coming from fossil fuels, many still rightly wonder if this transition is overdone. We think not: change is rarely linear, and when a better, cheaper solution is developed, it can displace the old one at an exponential rate. Yes, progress has been slow, but we are convinced that the rapid growth of renewable energy and the adoption of electric vehicles is exactly one of these exponential transitions.
Renewables have worked for years, backed by regulation and subsidies. Then came a turning point where, region after region, it became the cheapest form of new energy production. Since 2010, the price of solar power generation has fallen by 90% and onshore wind by 60%. As a result, fossil fuels are becoming increasingly obsolete, starting with coal.
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What does all this mean in the context of the recent market sell-off? Renowned economist and investor Benjamin Graham once said that the market is a short-term voting machine but a long-term weighing machine.
We wouldn’t disagree, but would say that over the longer term markets can still be wrong in assessing the value a company will bring. We believe the recent sell-off has been indiscriminate and ignores the potential for future returns from many attractive investment opportunities.
Take Trainline: it is the UK market leader in rail ticketing with strong growth prospects in Europe. It facilitates a cleaner, more efficient and less congested transportation system and we believe it will enjoy strong long-term growth.
While the Covid lockdowns have seen short-term revenue disappear and its share price plummet dramatically, in a longer-term context the events of a particular year become insignificant over the life of a company . The loss of a year of revenue should not have resulted in such a drop in the value of the company.
There are many other attractive companies that have been similarly affected by this sale. For example, shares of Spotify remain weak on concerns about user numbers and the performance of comparable companies like Netflix. Nonetheless, Spotify is a company that we believe is performing very well operationally, with user numbers continuing to grow, albeit less rapidly than before, and signs of monetization of this growing base.
These are just two examples of attractive companies with solid long-term profitability potential that stock market investors should have. We remain convinced that the trends supporting the transition to a cleaner, safer and healthier future will benefit a wide range of businesses whose prospects, due to short-term negative sentiment, are vastly underestimated by the market.
Peter Michaelis leads Liontrust’s sustainable investing team