As I approach my third decade of sustainable investing at Royal London Asset Management, I've been reflecting on finance and its position as a cyclical industry.
There is nothing unusual in this: many industries are cyclical, from homebuilding to retail and industrials. At times buyers of their products and services want more of them, at other times less. This usually follows the rhythm of the economic cycle, but can be driven by more behavioural things too.
In finance, and in particular investing, cycles tend to be driven by prices. Investments remain one of the few things in life that are in greater demand when they become more expensive, and in less demand as prices fall. Imagine doing your weekly shop and the price of something you need to buy goes down. Would you want more or less of it?
Understanding this cyclicality in investing is one way a long-term investor can improve their returns. Less interest and lower prices in something which has long-term value is a good thing, as it allows the purchase of it at favourable prices.
Stick With The Trend
Within investing, sustainability is cyclical too. At times, understanding the environment, employee relations and good governance seem of high importance in making effective investments. At other points, they seem an inconvenience and an impediment. Reading the news in recent weeks, as politicians and certain industries row back on climate commitments, we are clearly in a time of the latter.
The prices of the most sustainable bonds and equities in the world trade have fallen significantly. Most of this fall has little to do with sustainability; it is the effect of higher interest rates on asset prices, combined with economic uncertainty. Some areas often associated with sustainable investing – such as renewable energy and technology – have been impacted as certain business models have not lived up to their hype, but a good investment process should have kept investors away from these in the first place.
This begs the question: is the rowing back of the sustainability agenda and fall in prices of sustainable companies an opportunity or a change in trend? There are arguments for and against.
Arguing for a change in trend away from sustainability, points include carbon intensive industries, such as oil and gas, remaining essential to society for much longer than previously expected. They can be part of the transition to a more sustainable future. There are also arguments that the societal cost of transitioning to a more sustainable future is too high and will place an unfair burden on society.
The arguments for a recent fall in prices being an opportunity are based around the three key trends of digitilisation, decarbonisation and healthcare. Sustainable investing is about so much more than the environment, although this will always be one key part.
We can see with our own eyes the pace of digitalisation in society, most recently through the excitement around generative artificial intelligence. Decarbonisation continues to occur within every company we invest in, not just because it is better for the environment, but because it often saves money through energy efficiency. Finally, diseases such as cancer, obesity and Alzheimer's are becoming much more treatable, which should result in huge opportunities for those companies developing the drugs to do so.
The Defining Trend of Our Lives
As sustainable investors, we naturally think in terms of opportunities. We think this because it rarely makes sense to invest against progress and innovation. The defining trend of our lifetimes is that each generation lives a cleaner, healthier, safer, and more inclusive life than the previous one.
As this correlates almost perfectly with how our funds invest, and as it leads us towards world-leading companies with significant opportunities ahead of them available now at lower prices, we think it is a great time to consider investing sustainably.
Mike Fox is head of sustainable investments at Royal London Asset Management, where he manages the Royal London Sustainable Leaders Trust, which has a Morningstar Rating of Silver
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