What does sustainable actually mean?

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Daniel Lane - Fidelity Personal Investing

11 January 2019

The jargon in the investment industry can be mind boggling. There are the obligatory TLAs (three letter acronyms) and the inevitable Greek letters but I find some of the most confusing to be those terms that tend to change meaning depending on who’s using them.

Sustainable seems to be one of these words. I’ve mainly heard it in conversations around ethical investing as well as discussions over the integrity of various business models. The thing is these conversations can start to sound like two sides of the same coin, often without anyone realising.

But with ethical investing sometimes at odds with traditional balance-sheet based stock picking in the minds of investors, I think it’s worth exploring how the sustainable label can bridge the gap between the two, rather than be the dividing factor.

Sustainable business practice

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.

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. Wild swings in a firm’s performance or erratic changes in corporate strategy don’t scream sustainability to most people.

Environmental & social concern

Probably the most common understanding of sustainability is that attached to the positive development of societal or environmental concerns. 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.

The issue is that investors sometimes equate this to sacrificing profits to satisfy emotion-led agendas, a point of view that needs to change according to David Osfield, co-manager of the EdenTree Amity International Fund. He says: “There’s been an enormous amount of academic and commercial investment bank-led research about these strategies and they’ve found a positive approach that has led to superior risk-adjusted returns over the long term.”

And this is often where investors find the two sides start to complement each other. Sustainable business attributes don’t necessarily need to be tied to ethics. However, where they form the foundations of a company’s character, they often inform business strategy and end up in long-term sustainable practices.

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.”

And as for the sustainability vs profits argument? Jones opines: “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.”

In the end, sustainability (from an ethical mind-set or not) is about 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.

More on the Rathbone Ethical Bond Fund and the EdenTree Amity International Fund

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. 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.