Article 31 May, 2022

Seeing the wood for the trees

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This is a different sort of ESG paper.

We have reflected deeply and philosophically on the current sustainable investing phenomenon and find it enormously unsatisfactory. Excluding companies with low scores from third-party ESG[1] rating agencies, or conversely investing in those that screen well on a particular metric such as low emissions, makes limited practical difference to the amount of greenhouse gas emitted. As we (the industry) sit in our steel and cement buildings, all the while refusing to invest in those sectors, we are starving these industries of the very capital they need to reduce overall CO2 emissions. We therefore (counterintuitively) believe sustainability represents the greatest contrarian investment opportunity of our careers.

What then? If we are to hit our climate targets, we unequivocally need to decarbonise the polluting sectors, rather than just avoiding the issue by only investing in companies which happen to be low carbon by virtue of their business model. The capital investment required to decarbonize the world, address water needs and shore up transportation and other critical systems is $6 trillion per annum to 2030[2].

Spending on renewable energy has been taking place for decades and as interest in all things ESG has increased significantly over the past few years, some of the more high-profile companies have seen their stock market valuations soar. As valuation conscious, contrarian investors, we look at some of the well-known ESG darling stocks with amazement. Yet in dozens of other sectors and industries these changes are just about to start. This is our broad investment opportunity to make the returns we want for our clients, and the investment that is going to allow society to hit our climate targets.

Put another way, is it better to invest in a company with a low carbon footprint because it is capital light, or does it do more actual good, for example, to invest in a steel company with the technology to halve the carbon intensity of its products? As an industry we’ve tried the former and it has undoubtably failed to produce the reduction in carbon emissions we so desperately need to achieve, as we discuss later.

We are absolutely focussed on changing this, for the good of society and for the good of our clients’ investment returns. This opens up a huge number of unloved areas of the market, which are likely to experience a better cycle than they have over the last decade. Our approach results in a happy confluence of having a positive impact on the world and operating in line with our contrarian, pragmatic philosophy; exposing our investment strategies to re-rating potential.

By investing in companies undergoing positive change, (in line with our sustainability and investment philosophy) we will have more real-world impact and build contrarian, valuation-disciplined portfolios, in stark contrast to the plethora of consensual, ‘ESG good’, growth funds in the market today.

Click HERE to read the paper in full.

[1] ESG stands for Environment, Social and Governance. The term ESG was first coined in 2005 in a landmark study entitled “Who Cares Wins” by the UN.
[2] Singer et al. (2021). “Green Capex: Making Infrastructure Happen”. Goldman Sachs.

Learn more about our philosophy and process

Our distinct investment philosophy and process for our UK, global and European equity strategies places sustainability at its heart

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