Opportunities for sustainable investing are starting to emerge in new places, demonstrating that the investment style is no longer a trend, but well and truly in the real world. Given its rising popularity and increasing importance, Jake Moeller, Associate Director, Responsible Investing was joined by three industry experts to discuss the current strong momentum behind investing sustainably. They were: 

●    Rob Harley from Stewart Investors
●    Paul Skinner from Wellington
●    My-Linh Ngo from RBC Global Asset Management (RBC GAM)

Our panel explored how investing in companies that are solving difficult problems, meeting vital needs, and helping the world do more with less can be a great way to generate excellent long-term returns and manage risk effectively. 

Key takeaways

• When investing sustainably, keeping a long term time horizon is key.
• Investing in well-managed, well-structured companies, while being aware of risks, can translate into strong financial performance. 
• Working with companies and acting as a force for good is a crucial way to ensure businesses continue progressing on their sustainable journeys. 

Balancing short term performance vs long term returns

Sometimes there's an implicit assumption that there has to be a trade-off between short term performance and long term returns when investing sustainably. However, it is important to remember that sustainable investments have strong structural tailwinds as they address systemic environmental and social challenges. 

That being said, any good sustainability company should be prepared to sacrifice short term profits, if necessary, to achieve better long term outcomes. So, when it comes to performance, the question is more about time horizons. Short and medium term issues need to be put in the context of a broader strategy’s long term goals. Doing so improves investor understanding that fluctuations are part of the process, while transparency and clarity from all parties are crucial. 

In general, though, ESG-minded or sustainability-focussed investors do naturally have a longer time horizon. They’re more willing to weather short term noise because they understand resilient returns often require patience. Investing in companies that aim to make the world healthier, cleaner, or more productive takes time, so long term investing aligns with these goals. 
Bond investors naturally focus on the long term too, assessing risks over 10-15 years. Currently, short term bond demand aligns with long term investment goals, creating a favourable situation in the fixed income space. For instance, newer, adaptive industries are offering opportunities that attract long term interest, with both short and long term goals supporting each other.

Demographic dynamics 

Population dynamics and demographics are major structural factors influencing markets, posing both risks and opportunities. The growing strain on finite resources is a risk, for instance, but it also creates opportunities to address these challenges. Incorporating such trends into investment strategies with a global perspective is key, focussing on responsible resource use, circular economies, and inclusive societies. For example, expanding renewable energy requires technological development and an educated, upskilled workforce, which also demands investment.

From a bond perspective, demographic shifts impact capital flow as wealth passes from older generations to younger ones eager to address social and environmental issues. Additionally, an ageing population creates opportunities, particularly in healthcare.

On the equity side, demographics influence performance and the evolution of sustainable investing too, as shifts in populations affect both consumption and the labour force. On the consumer side, companies such as Unicharm are adapting to these shifts. Unicharm produces both feminine hygiene products and incontinence diapers, catering to the needs of ageing populations, especially in countries with growing elderly demographics. From a labour point of view, companies providing automated software are well placed to take advantage of the changing workforce. 

Working with companies

Growth in bond investment opportunities is exciting, allowing firms to be agile, select the right bonds, and generate strong performance from them. Investing at the origination stage can be crucial for bond investors. In fact, large firms like Wellington Management are often brought in to consult, helping issuers structure bonds effectively. Wellington has even influenced the bond issuance process for developed market European sovereigns. For example, one issuer initially had strong green projects, but Wellington pushed for mechanisms to ensure capital could be tracked into those projects. As a result, systems were implemented to monitor the use of proceeds. 

The green premium

This year, the “greenium” (the premium on green bonds) has been flat at issuance, with green bonds trading at the same levels as non-green equivalents. However, a premium tends to emerge as passive funds and ETFs buy-in later in the month - creating a profitable opportunity.
Furthermore, while demand for green bonds has surged, supply remains limited, with many investors holding onto these bonds, reducing liquidity in the secondary market. And, as the market matures, differentiation between green bonds is increasing, with credibility measures developing similarly to credit ratings. It's important to renew the market is still young, with short term dynamics that may not last.

Avoiding crowded trades

From time to time, some companies have become very popular, attracting a lot of buyers. However, it’s important to remember iconic sustainability names aren’t always the best investments. Many have governance or financial issues, so finding companies that balance sustainability and quality is key. Often, better opportunities lie further up the value chain, with companies producing components or technologies for others to use. Rigorous research is essential to understand which technologies will endure and how regulatory changes and capital flows will shape the market.

Acting as a force for good

At Wellington, continuous engagement with investments is crucial. Clear guidelines dictate what to buy, hold, or sell, but close collaboration with companies ensures progress in sustainability journeys. Every investment in Wellington’s impact bond fund has key performance indicators (KPI), which are tracked annually to monitor social or environmental improvements. This engagement fosters better outcomes for both the companies and the investments. Wellington also supports smaller and emerging countries by helping them structure issuances focussed on social or environmental causes. This extends to smaller issuers, such as conservancy and nature funds.

On the equity side, Stewart Investors engages strategically on issues affecting multiple companies, collaborates with other investors to push for change, and engages directly with businesses to improve company-specific operations and services.

At RBC, investments must align with sustainability themes, but company conduct is equally critical. Engaging with sovereigns is also vital because they regulate natural resources where private companies operate. Additionally, it is important to recognise that public-private partnerships and debt markets play a key role in conserving nature and biodiversity.

Taking a long-term view 

Short term volatility often concerns investors, but this space offers immense long term opportunity. Addressing critical issues like climate change, nature loss, and social unrest requires time, and companies improving their operations and offerings need that time to evolve. A long-term perspective allows investors to benefit from compounding returns and reduce reactions to market noise.

Ultimately, investing for both financial return and social or environmental impact is the future and how companies “Do Good”, “Avoid Harm” and “Lead Change” as defined by the three pillars of 3D Investing. We believe that those who identify well-managed, sustainable companies early will see capital flow in behind them, proving that positive impact and financial gain can go hand in hand.

Find out more about the 3D Investing framework and benefits here >