Much of the language around the way the economy will evolve in the years to come compares the emerging investment themes with the wider technological revolution, but this is not the right way to consider what is to come, according to Matthew Tillett, manager of the Brunner Investment Trust.
Tillett says that while trends such as internet shopping are a zero-sum game, with those companies that have the wrong business models going bust as the revenues once earned by those companies have moved to the new technology-enabled businesses, it will be different in areas such as energy.
He says: “The key is that total energy consumption globally is rising, the pie is getting bigger, and while renewable sources of energy will certainly gain more of the market, fossil fuels will also be a very significant source of supply in the years to come.”
Zsolt Kohalmi, global head of real estate at Pictet Alternative Advisors, says businesses that do not embrace sustainability in future will find that they are treated more negatively by the market than are those that are constructed in a more sustainable way.
He says assets will “lose liquidity” if the market perceives them to not be sustainable in nature.
Martyn Hole, equity investment director at Capital Group, says: “One thing that has been very noticeable has been the impact on valuations. Anything in the market now that is seen as an 'old economy' is viewed as toxic, and trades at a toxic valuation, while the stuff that is sustainable trades at higher valuations. And I think this trend is likely to continue.
"We are noticing from clients, particularly in Europe but also in the UK, that they want to own funds that are categorised as eight or nine under [the Sustainable Finance Disclosure Regulation].”
The SFDR ranks funds by how sustainable the investments are, with a ranking of nine indicating a fund is sustainable.
Hole’s view is that as clients increasingly demand sustainable funds, the likelihood is that companies that are not eligible for inclusion in category eight or nine funds will have less demand for their shares, and as a result will be stuck on cheaper valuations for the long-term.
He cited tobacco companies as an example of this trend. Hole says that the valuations at which these businesses trade has been rendered permanently lower as a result of environmental, social and governance concerns, despite the dividends paid by these companies remaining very high.
Engaging with companies
Francesco Conte, who runs the JPMorgan Climate Change Solutions fund, says: “Combating climate change will require a meaningful reduction in our use of fossil fuels, as well as a significant increase in our use of greener, less carbon-intensive forms of energy.
"We believe this transition to a lower carbon world will impact all companies, across all sectors, as they seek to provide the same goods and services we need, but in less carbon-intense ways. For investors, it is important to consider the transition-readiness of their portfolios."
Conte adds: "Evaluating how well companies manage their emissions, as well as their broader use of natural resources and their management of climate-related risks, can help investors tilt into the companies that are best positioned for the transition to a low-carbon world, while avoiding the laggards. This can help lower a portfolio’s carbon footprint, while also leaning into the companies that should be best positioned to outperform over the long term.
