Long-term investing is about compounding growth steadily over the years, creating a snowball effect as interest builds on interest. As a result, for fund managers focused on the long term, the quality and integrity of a business model and the team employing it are paramount. This means avoiding companies with subpar checks and balances on their accounts, or those risking the reliability of quality growth for vanity projects or short-term profits.
But it’s also about being a part of the positive development of environmental social and governance standards (ESG) across the corporate world. In this sense, sustainability has nothing to do with ethics and everything to do with identifying trustworthy, dependable management with a good track record of delivering business progress and consistent growth.
If a business can make money while leaving the earth in a better condition than they found it or at least put back what they took out, then everyone’s a winner.
Here are three of the most popular sustainability-focused funds on fidelity.co.uk this month.
For Bryn Jones, manager of the Rathbone Ethical Bond Fund the potential downside of investing in companies without a firm handle on responsible business practice is too great. He explains: “Over the past few years we’ve seen a number of situations where businesses have had very poor governance or have done damage to the environment and investors have lost a lot of money. Investors have started to realise that a sustainable income comes from a sustainable business model with strong environmental, social and governance standards.”
But, as is often levelled at this part of the market, do investors have to give up some growth to invest sustainably? Jones explains: “We do a lot of the things you’d expect from a mainstream manager in looking at the fundamentals of a business, so that’s not in any way sacrificed. In fact it’s augmented by additional levels of due diligence.”
Jones’s main focus is identifying responsible governance which sticks to principles investors can understand while being less likely to attract regulatory intervention and, for investors, a knock-on effect on the company’s value.
A common misconception within the space is that this is where the ethical label ends, but rather than just looking to leave out companies that don’t hit the mark, there is also considerable scope to look for companies that seek to do good. Jones explains his approach: "We have a negative screening process which avoids companies with certain negative practices. These can range from environmental damage, mineral extraction, animal testing and pornography to gambling, tobacco and alcohol production. Then our positive screen looks for evidence of social or environmental change, gender equality in employment and work with charities, among other criteria. So, we're not only looking at negative things, we’re also looking for something that's nice and solid that gives a business a strong ethical bias.”
Manager Bertrand Lecourt has been running money in the sustainable space for nearly 20 years and, as head of the Fidelity Sustainable Water & Waste Fund, is supported by Fidelity’s global analyst base as well as 13 ESG research specialists.
The manager looks to invest in companies across the water and waste value chains, actively engaging with firms to maintain strong ESG credentials. The fund holds a blend of large established names and younger firms developing new technologies and efficiencies.
Using a bottom-up approach, Lecourt examines opportunities in the treatment, storage and distribution of water, as well as the transport, management and output (often through energy or fertilizer production) of waste. The manager believes the thematic fund is able to capitalise on one of the most historic megatrends that will only continue to become more important.
With 70% of the world’s population expected to live in cities by 2050, and most western sanitation infrastructure in need of renewal, Lecourt sees opportunity in engaging and facilitating technological change in the space, with an eye on profit for investors.
One of the manager’s aims is to maintain a better ESG profile than the fund’s peers – an aspect he keeps at the forefront of all portfolio inclusions.
Examples of companies in the fund include American Water Works, one of the largest listed water utility companies by revenue in the US, and Waste Management Inc, the country’s biggest solid waste management company.
“We have seen a big increase in the number of socio-responsible funds over the last 10 years but one size doesn’t fit all in the ethical space,” says Audrey Ryan manager of the Kames Ethical Equity Fund.
With initial ethics-based analysis conducted by independent research service Eiris, Kames’s analysts add a layer of in-house scrutiny before prospective investments are passed to Ryan. Companies are excluded from consideration should they fail to meet the 12 social and environmental criteria inherent to the fund.
“Our screening process analyses companies based on their activities or the products they offer. We are one of the toughest ethical screeners and, if we are in doubt as to whether a business meets our criteria or not, we will not invest.” says Ryan.
These proprietary principles discard investment related to alcohol, animal welfare, banks with exposure to corporate or third-world debt, the environment, gambling, genetic engineering, arms, nuclear power, oppressive regimes, political donations, pornography and tobacco.
Ryan then gets on with investing, selecting companies secure in the knowledge that the filtered companies meet the fund’s ethical requirements.
The transparency of the fund’s focus is key for the manager, as she explains: “The fund is designed for investors who want to align their ethical views with their investments. The principles we have are clear and we communicate these with our investor base regularly so we stay on the same page.”
More on Rathbone Ethical Bond
More on Kames Ethical Equity
Important information The value of investments and the income from them can go down as well as up, so you may get back less than you invest. There is a risk that the issuers of bonds may not be able to repay the money they have borrowed or make interest payments. When interest rates rise, bonds may fall in value. Rising interest rates may cause the value of your investment to fall. The Investment Manager’s focus on securities of companies which maintain strong environmental, social and governance (“ESG”) credentials may result in a return that at times compares unfavourably to similar products without such focus. No representation nor warranty is made with respect to the fairness, accuracy or completeness of such credentials. The status of a security’s ESG credentials can change over time. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Overseas investments will be affected by movements in currency exchange rates. Investors should note that the views expressed may no longer be current and may have already been acted upon. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.