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29 January 2018
By John William Olsen
Sustainable investing can naturally mean different things to different people. From my perspective, as an investor in company shares, it boils down to the long-term durability of businesses.
If a company is to succeed for the years and decades to come, and consistently generate value for its investors, it needs more than leading products and efficient processes. An essential ingredient for sustainable success is a responsible approach to managing a company’s activities, considering stakeholders, as well as shareholders, in the process.
Social consciousness is an integral element of this – how a company treats its customers and employees, as well as the environment, can have a material impact on its ability to generate superior returns over the long term.
We often refer to the tenets of responsible investing as ‘ESG’ factors – environmental, social and governance. Disregarding any of them could damage a company’s performance – as well as its share price – perhaps irreparably.
It should go without saying that if they are to command market-leading positions for the long term, and enjoy success that is durable, companies cannot afford to denigrate either the environment in which they operate or their brand. This is perhaps especially so in an era when corporate misdemeanours can be so swiftly and effectively brought to light before the court of global public opinion.
To me, identifying sustainable companies starts with in-depth research that integrates analysis of ESG factors, with these factors further considered at every stage of the investment process. If we are looking to hold shares in a company for the long term, we need to consider the operational risks – such as environmental incidents and reputational damage – that they face, the structural headwinds and tailwinds that could shape their outlook, and evaluate the management’s ethics and behaviour.
I also believe that actively engaging with companies is crucial to evaluating their ongoing commitment to sustainability, and to inspire and advocate sound and responsible decision making in the long-term interests of their shareholders.
Many companies today trumpet their sustainable credentials, sometimes without merit. As a custodian of investors’ money, targeting sustainable returns, I am committed to challenging such assertions and asking difficult questions to hold management to account. I need to be convinced that companies are on the right path and genuinely doing their best to continue in that direction.
There is sometimes a misplaced perception that a focus on sustainability comes at the expense of investor returns.
If we take a myopic view, looking only at the short term, this could indeed be true. A company could raise margins by slashing its wage bill or under-investing in waste disposal, for example. However, being a poor corporate citizen will undermine its business over time, to the detriment of its investors as well as society or the environment.
Over the long term, I do not believe the trade-off between sustainability and returns exists. To the contrary, I would argue that investing in companies that put their responsibilities first is supportive of long-term returns, helping to create sustainable wealth for their investors.
Please remember that the value of investments goes up and down and will fluctuate over time, and you may not get back the original amount you invested.
The views expressed in this document should not be taken as a recommendation, advice or forecast. We are not able to give any financial advice. If you’re at all unsure about the suitability of your investment, please speak to a financial adviser.