In a low-growth world where advisors need to seek alpha, companies that incorporate sustainable factors as part of their business practices may have a competitive edge.
Karina Funk, head of sustainable investing, Brown Advisory Funds, used computer-data-storage company EMC as an example of how the firm’s focus on political and social risk and steps needed to mitigate that risk protected Egyptian workers from riots during the 2011 uprising there. Additionally, its focus on environmental issues helped the company rapidly recover from the 2011 Thailand floods which disrupted the supply chain for many industries. EMC’s decisions had positive bottom-line impacts, even though they were driven by sustainability goals which involve non-financial data.
Funk spoke at the Morningstar Investment Conference about incorporating sustainability into the investment process.
The growth in sustainable investing is twofold, said Lynne Ford, executive vice president, Calvert Investments. Clients who buy sustainably focused funds approach it from a values perspective, and more investment specialists are thinking about the environmental, social and governance factors as risk management. This view about sustainable investing has evolved from its origins of screening out sectors such as weapons.
There is more relevant data regarding sustainability, and with more technological advancements in data analysis, active managers who can navigate the sustainable space could have an advantage over other managers, Ford said. This is especially true since now nearly every piece of financial data is available around the world instantly.
Department of Labor’s decision to rescind its ban on sustainable investing may only increase interest in the investment style, said Ingrid Dyott, managing director, Neuberger Berman. While there is more interest in sustainability and more companies thinking about including these factors in their business models, there is more complexity, especially since standards vary.
“Lots of things have changed, complexity has gone up. It takes a discerning eye to know which issues may derail a business, and which businesses are in a better position,” Dyott said.
Portfolio managers who add sustainability to their investment research still continue to focus on the basics of sound management.
“I carry a healthy technology skepticism. It’s important to do breakthrough work, to do the technology and to do the R&D, but they need to roll out these initiatives at scale. That way they’re good for the bottom line … and good for customers,” she said.
Funk said there are opportunities to invest in companies that are dedicated to sustainability across every sector. One example is health care.
“There isn’t a single health care CEO that isn’t concerned about sustainability, whether he or she can see it. She’s worried about where all the clean water will come from, their energy use, the complex medical waste they need to away with in a safe way. We seek sustainability champions who have a strategy they’re pursuing and why they make these investments for their own future,” Funk said.
Dyott said using sustainable factors can also uncover problems with companies. For instance, she said that companies with high executive compensation in the medical-technology space were often flagged by the Food and Drug Administration for quality problems with its devices. Both of these issues are of interest to investors.
With societal values changing and looking to companies to start to address problems, and investment fund managers seeking a competitive edge, Ford said incorporating sustainability factors will become the norm in the future.
“I see a future where it will be very routine and ordinary to think about the risk and opportunity in what we think about non-financial data,” Ford said.