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.
Until recently, it was widely thought that anyone who worried about the societal or environmental impact of their investments risked doing so at the expense of their returns.
Fortunately, as more and more research is done into the impacts of sustainable investing, such a view looks misplaced. Companies that perform well by Environmental, Social and Governance (ESG) metrics have outperformed those that don’t this year. Quality ESG credentials, typically, point to quality companies. As a result, sustainable investing is no longer the preserve of the ethically minded investors - it’s making ever more financial sense too.
None of this is news to Kris Atkinson, manager of the Fidelity Sustainable Reduced Carbon Bond Fund. But in his eyes, the options available for bond investors are yet to reflect that reality. There are certainly ways for them to invest ethically - the popularity of ‘green’ bonds is testament to that - but lower returns still seem inevitable when it comes to fixed income.
Atkinson is looking to deliver a new kind of bond fund where no such trade-off is required. He sees “no reason to believe sustainable investing should damage returns”.
Recently, my colleague, Tom Stevenson, caught up with the manager to understand the thinking behind his fund.
Engaging, not excluding
Atkinson explains that the fund was “borne out of the frustration we thought some fixed income investors had when they tried to invest in a climate conscious way, because existing solutions - whether they be green bonds or exclusionary approaches - failed to meet their twin objectives of investing in an environmentally conscious way, but also maximising on risk adjusted returns.”
Atkinson’s approach, in his eyes, signals a departure from the norm within the fixed income universe. As it stands, he feels that those current options mentioned above force bond investors to prioritise the environment at the expense of returns. His ‘engagement’ approach makes no such demand.
By engaging with companies, he’s willing to invest in bond issuers that already deliver low carbon emissions (the “climate change leaders”, as he calls them) as well as companies that are on a credible transition pathway to become future leaders. By ‘engaging’ with the latter, he feels that he can help guide them along that path.
A good - and “controversial” - example of what he means is Volkswagen. Instinctively, Volkswagen’s past governance issues would appear to debar them from this manager’s portfolio. But it’s by looking at companies like Volkswagen - rather than excluding them off the bat - that Atkinson feels his fund offers a real edge. It’s true that Volkswagen has had issues in the past, but it’s a company in which the manager sees real, credible efforts to transition towards a greener future.
As well as investing huge amounts into its electric car range, Atkinson explains how the company is trying to remove carbon from its entire supply chain. Such objectives put Volkswagen on the kind of transition pathway that the manager is looking for.
In addition, he explains how, “as capital providers, we work with companies to help them set that strategy to drive them forward in a positive way.” Atkinson looks to leverage the resources available at a large fund house like Fidelity to propel Volkswagen forward.
In his eyes, this is where green bonds and exclusionary approaches fall behind. The former, which he sees as a “fantastic innovation”, nevertheless struggle to diversify sufficiently and typically deliver lower yields than their “non-green” counterparts. He also feels that exclusionary approaches fail to meet their objectives: “If I exclude a particular sector or company from my portfolio, it doesn’t mean that they can’t obtain capital elsewhere”. He says that he hasn’t “seen any evidence yet that exclusion policies have changed anything for the positive”.
Investing in the future
Atkinson speaks very passionately about both his fund and the environment. He thinks this fund should help dispel the lingering concern that investing in a climate-conscious way must be done at the expense of returns.
But he’s not looking simply to match non-green strategies. He says: “obviously this is something we do not just because it has a positive societal benefit, but because we think it’s the right thing to do from an investment perspective as well.”
Investing is, at its core, about planning for the future - detecting future trends and looking to capture them early. It’s clear that climate-focussed solutions are only going to rise in prominence over the coming years. Far from inhibiting returns, Atkinson would argue that investing in “climate change leaders” will enhance them.
Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. 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. 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. Currency hedging is used to substantially reduce the effect of currency exchange rate fluctuations on undesired currency exposures. There can be no assurance that the currency hedging employed will be successful. Hedging also has the effect of limiting the potential for currency gains to be made. This fund uses financial derivative instruments for investment purposes, which may expose the fund to a higher degree of risk and can cause investments to experience larger than average price fluctuations. 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. 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.