The UN Sustainable Development Goals and the 2050 Paris Agreement are becoming increasingly integrated into corporate culture and government policy.
The growing familiarity with and adoption of these policies will influence consumers, businesses and governments. Stakeholders will respond proactively and reactively to these issues, depending on their beliefs, preparedness and determination. We think winners and losers will emerge and therefore incredible investment opportunities.
We have a responsibility to you, as investors, to deploy your capital within a prudent research and risk management process. Traditional research and risk management often ignores events that cannot be analysed through a financial model. For example:
- How do we account for climate risk?
- How much time do we have? Do we have time?
- What value will be ascribed to an asset if the cost of
- carbon changes dramatically?
- Could an asset value fall below 0 because of its
- environmental impact?
- How will sustainability factors influence consumer behaviour?
- Will management succession to a younger generation, who view the world differently, transform sectors as we know them?
These are big questions and we must work hard to think about scenarios and identify compelling investments offering “risk, reward and impact”.
An outdated misbelief is that one must compromise returns for impact. A recent report from the IMF concluded that there is no difference in returns for sustainability investors, when compared to more traditional firms. Our analysis suggests that it is rational, economic and right to look through a sustainability prism. Environmental, sustainability and governance factors (“ESG”) are a core part of our research, investment and risk management process.
Profitability over the longer term:
The World Bank concluded that the average shareholding period for an institutional investor has fallen from three years (in the 1970s) to less than one year (today). While the transition and implementation of an ESG strategy is difficult in a world absorbed by short-termism, we believe that the potential for longer-term profitability – achieved through an ESG transition – is enormous.
Engagement with companies:
- ESG factors can catalyse change, drive competitive advantage and shareholder valu
- We speak with management teams globally about their businesses, end markets, the competitive landscape, R&D, corporate culture and much more. We engage on sustainability issues and often encourage companies to increase disclosure
- Where appropriate, we aim to provide constructive thoughts on ESG strategy that drives competitiveness and profitability over the long-term
Examples of where ESG can meaningfully impact profitability:
- Lower the cost of funding as more investors and banks lend to ESG forward thinking businesses
- Attract and retain new customers who are aligned with business practices. Customer acquisition costs may fall and a network effect could accelerate
- Better manage costs and operating expenses, to expand margins
- Use technology to understand the carbon footprint, manage staff, supply chains and operating expenses more efficiently
- Gender diversity in male dominated sectors increases productivity
- Influence company culture where ESG is embedded in the DNA of the organisation
- Negative screening is a common ESG practice which involves the exclusion of sectors from a portfolio. Whilst we do not invest in the gambling, factory farming, fossil fuels or tobacco sectors, our incorporation of ESG principles is much broader. No person, company or government is perfect and we must remember this as we look for opportunities and engage
International Groups that Conduit Capital supports:
- United Nations Principals of Responsible Investing (UN PRI): We are proud signatories to the UN PRI, the global leader in responsible investing. The PRI provides support to asset managers and helps them introduce ESG strategies into their investment decisions. Members manage assets in aggregate worth $100 trillion https://www.unpri.org/
- FAIRR Initiative: We are a proud Member of the FAIRR Initiative’s investor network, helping to build a more sustainable food system by raising awareness of the material risks and opportunities present in global protein supply chains https://www.fairr.org/