By M&G Investments Sustainable Multi Asset Team
Despite the pandemic and the recent slowdown in global economic growth, the take-up of sustainable investment strategies continues to expand, forming a permanent fixture in the investment landscape for millions of private and institutional investors the world over.
Opportunities across the spectrum of sustainable investing continue to grow, as companies and governments strive to develop products and solutions to meet the world’s social and environmental challenges.
The spectre of persistently high inflation now threatens to deliver an environment of lower growth and shrinking corporate profits in many countries. As stock and bond markets demonstrated during the first half of 2022, these fears, combined with significant hikes in interest rates, can easily translate into a challenging environment for investors. Some sceptics argue that a significant deterioration in the outlook will affect ESG and sustainable investing disproportionately, as investors could begin to question its wisdom in the face of lower growth, geopolitical uncertainty and energy security concerns.
However, we believe the opposite is true: sustainable investing presents long-term solutions to many of the challenges we are currently facing. Therefore, we attempt to position our sustainable multi asset portfolios towards various structural tailwinds, as governments, industries and consumers direct capital towards lowering emissions, driving efficiency, reducing waste, bringing equality to underserved groups of the population, or providing an efficient, innovative and affordable healthcare system. As long-term investors, we pick what we consider to be quality securities that we would be happy to hold for many years, through multiple economic cycles.
We think that many of the long-term growth success stories of tomorrow will come from today’s attempts to tackle systemic risks, such as climate change. We must also acknowledge the long-term investment horizons of sustainability-related holdings, which can make them, in some cases, potentially less susceptible to bouts of volatility during times of uncertainty.
Where are we seeing opportunities?
As nations rush to enhance their energy independence in the wake of the recent geopolitical turbulence, a focus on companies leading the transition to a renewable energy future seems sensible to us. Renewable energy specialist SolarEdge Technologies has been a successful long-term holding in our sustainable multi asset strategies range. The company is a global leader in solar technology and offers a diversified product range for residential and commercial use, including its main product proposition, photovoltaic (PV) inverter solutions. The rapid deployment of solar PV could help solar energy become the largest source of low-carbon capacity by 2040, by which time the share of all renewables in total power generation is expected to reach 40%.
Another recent and particularly relevant investment – given that severe drought has affected so much of the world in 2022 – is global water technology company Xylem. The business designs and manufactures equipment and services for water and wastewater applications. The company operates across the full cycle of the water usage process, from collection and distribution to use and return to natural environment. Sustainability was brought into the heart of its funding strategy in 2020 when the company announced its inaugural green bond worth US$1.0 billion. The proceeds are being used to fund projects that will help improve water accessibility, water affordability, and water systems resilience.
Sitting within our Social Inclusion holdings, Home REIT, a member of the FTSE 250 index, is dedicated to fighting homelessness in the UK by funding the creation and acquisition of high quality accommodation for the homeless. The firm helps to convert or refurbish existing buildings and accommodation and also provides forward funding for new-build projects. We think the firm’s portfolio delivers much-needed, tailored accommodation for vulnerable homeless people, and we have been invested since its IPO in October 2020.
Investing towards a better future
At M&G we believe the investment industry needs to evolve. Rather than short-termism and quick wins, we believe investing requires forward thinking, a long-term outlook and active engagement with companies, helping them to adapt and make a more meaningful and lasting impact on our world.
We think the cross-asset nature of M&G’s sustainable investable universe (green bonds, supranationals, listed infrastructure, equities) affords us the breadth of opportunities to invest flexibly for the long term, in order to help us generate returns and have a lasting impact on the world’s future.
When it comes to the world’s most pressing issues, there’s no quick fix. But by investing sustainably in a pragmatic and measured way, we can work towards a future that’s better for everyone, delivering positive returns for both investors and the planet.
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