You are using an outdated browser. Please upgrade your browser to improve your experience.

Our views 20 March 2024

SustainAbility: What’s in a name?

5 min read

Word association is a powerful thing. Hear a word and what is the first thing which comes to mind? Thatcher, Nvidia, Sustainability? These are all words which mean different things to different people.

Since I started managing sustainable funds in 2003, word association with ‘sustainable’ investing has gone from being negative to positive to somewhere in between. Between 2003 and 2017, sustainable investing was word associated with underperformance, green, niche, and other descriptors, often despite compelling evidence to the contrary.

Many sustainable funds delivered strong performance in the 2000s and 2010s, with some of them being at the top of their investment peer groups (which included non-sustainable funds) but that was not the perception. It took societal changes and a growing interest in investing positively for investors to notice the strong performance of sustainable investing.

After a period of positive word association for sustainable investing, the last couple of years has been more negative. This started in 2022 when the only area which delivered good investment returns was the oil & gas sector, an area sustainable funds tend to avoid. This was compounded by higher interest rates, which impacted the valuation (but not the operational performance) of growth-orientated companies which are more sensitive to interest rates than that of the average investment. Sustainable funds are typically more exposed to growth companies. This has coincided with the zeitgeist around sustainability becoming more reticent as the costs, rather than the opportunities, of evolving into a more sustainable future have become the focus of attention.

What has gone unnoticed however is the strong rebound of several sustainable franchises in 2023, including ours. This has continued into 2024 and reflects the strengthening of many investment trends which support sustainable investing.

How soon word association with sustainability will become positive again is hard to tell. To me it seems inevitable, for reasons I will now explain.

Electrify, digitise, and lose some weight!

One theme we’ve been coming back to in recent months is this idea that whilst the macro outlook could be described as unclear, the micro outlook is compelling. Since the start of 2022, investors have, in hindsight, spent way too much time thinking about interest rates and inflation (important but unforecastable) and not enough time thinking about artificial intelligence (AI), electrification and weight loss drugs (important and forecastable). This has led to some generational investment opportunities being missed.

Take electrification or, described another way, the use of electrons. Electricity was first used in a practical sense in 1821 when Michael Faraday invented the electric motor. There is evidence of knowledge of its existence going back even further to the 1750s. How can a technology that has been around for more than 200 years still be transforming society?

The renaissance of electrons has been driven by two factors. The first is the desire to replace carbon-based energy with more renewable sources. Electrons can be created from wind, hydro and solar power; carbon molecules cannot. The second is the huge demand for power due to the explosion of computation, itself driven by artificial intelligence. This double whammy could see demand for electrons and electricity grow by as much as 10% a year for many years to come. This has profound implications for the amount of investment which will be needed to support this growth. Many companies that are highly investable for sustainable funds, such as Schneider Electric and SSE, should benefit from this.

AI is not new either. It first became an area of scientific discovery in the 1950s and has been the subject of science fiction movies ever since. The fundamental inputs of it are data and computing power, and it is the explosion of both in recent years which has allowed much more sophisticated models (and AI is ultimately about modelling) to be created.

It takes approximately 20 hours for a 17-year-old to learn how to drive, yet Tesla is nowhere near this after millions of hours training, But while AI is unlikely to overtake human intelligence anytime soon, it will allow many more tasks to be done by machines. This is important as demographic trends are pointing decisively to shrinking working populations and it will enhance economic productivity, which should help with inflation.

It seems likely to us we are still in the early stages of the digitisation of society. For many this will bring fears as well as opportunities, in much the same way the personal computer and the internet did. Technological progress is however one of life’s inevitabilities and sustainable funds can and do benefit from it.

Weight loss drugs are the other social revolution in its early stages. Obesity could be argued to be partly responsible for climate change, through excessive consumption and the pressure that puts on resources, as well and many serious illnesses such as diabetes and heart disease. That there may be medicines which, with clinical supervision, can be taken to reduce cravings for food could be the most underestimated of areas with the potential to transform society. As such, healthcare is an obvious area of interest for sustainable investors.

In summary, a choice can be made to invest from a macro perspective and focus on interest rates, inflation, and economic growth. Or on a micro basis and focus on electrification, digitisation, and health. I know which one I would choose, and which has served investors better. Sustainable funds give investors exposure to these areas of investment markets, and that is why I think they remain a powerful way to invest.

Postcards from results season

Nearly every company we invest in has reported now. Here are a few things they are saying:

  • There is no sign of a recession in the order books of companies, or in meetings with the CEOs we’ve had. Most CEOs are surprised by the resilience of the global economy, but now interest rates have likely peaked, they see future growth, not a recession, ahead.
  • The investment in US infrastructure, via government-led incentives, is a once-in-a-generation opportunity for companies and investors. One company described it to us as the fourth industrial revolution which will see many years of strong growth in certain end markets.
  • UK-listed companies and global investors are far less concerned about the well-being of the UK equity market than UK investors and media are. Global investors are happy to own global companies listed in the UK and many of these, such as Compass and Sage, have seen a material increase in the proportion of overseas investors on their share registers.
  • Investors are so pessimistic! As one CEO said, pessimism isn’t a valuable behaviour, it leads to missed opportunities. We couldn’t agree more.

Corporates can be wrong. Like investors, they only see what is directly in front of them. That said, the message they are giving should be of some reassurance.


This is a financial promotion and is not investment advice. Past performance is not a guide to future performance. The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.