Investors in the UK today face two startling facts. First, the number of individuals with a direct stake in the longterm performance of stock markets has never been higher. Today’s latest crops of graduates, auto-enrolled into their first pensions, might well build up retirement savings over nearly 50 years. Unlike previous generations, whose payouts were defined in proportion to an average or final salary, the value of their pension pot depends on the performance of the investments they and their pension fund make.
At the other end of the workforce, thanks to pension freedoms, more and more retirees are electing not to annuitise their incomes for their retirement – a retirement that could last 20 years or more. These retirees are taking on the investment risk an annuity provider would have stomached in the past.
An irreversibly changing world
Secondly, the world in which these savers are investing is already being changed irreversibly by environmental, social and demographic forces, which are not currently reflected in the investment decisions behind their workplace pensions and individual assets. When sceptics as belligerent as Donald Trump’s White House aides are authorising the publication of reports on the stark dangers of climate change, it is clear that the tide is unstoppable.
A select group of institutional investors is already beginning to pay attention and adjust accordingly. At the end of 2016, HSBC’s multi-billion pound pension scheme began using an environmentally conscious fund for its default equity investment option. However, these adjustments are currently just a trickle of change and are only picked up by forward-thinking investors.
This could present a real long-term opportunity as the trickle becomes a flood, with more and more pension schemes and individual investors likely to place a premium on companies with an emphasis on sustainability, lowering the relative cost of capital for both existing businesses and new market participants.
Those which cater to the big demographic shifts taking place, with a strong focus on providing goods and services in emerging and developing markets, should see sustained levels of growth. The lower cost of capital and stronger growth should both be to the benefit of existing shareholders in these companies. Meanwhile, businesses whose products or production processes have a negative ethical or social impact, and those with poor corporate governance, are likely to become less attractive investment opportunities.
The larger the number of people becoming cognisant of the environmental and social changes, the greater this demand for business models prioritising sustainability will become. The companies that we think are most likely to benefit from investment flows are those that don’t just avoid certain sectors of the economy, but actively deliver a strong net benefit to societies.
Healthcare and technology-focused businesses are key examples of this. It is clear that pharmaceutical firms developing ranges of life-changing drugs provide a genuine social good; an example is AstraZeneca’s development of immuno-oncology drugs to help the body’s immune system actively fight against the spread of cancer. The progressively cheaper access to information and technology, thanks to firms such as Microsoft and IBM, also has the potential to transform millions of lives.
Away from inherently innovative industries, often the leaders in sustainability are implementing it throughout their business models, as they tackle the two linked problems of a rapidly growing pool of global consumers and a rapidly shrinking pool of global resources. For example, chemicals manufacturer Croda gets over 70 per cent of its raw materials from sustainable sources – over 50 per cent more than its nearest competitor.
What ties sustainable companies from these different industries together is the future-proofing inherent in their business models. Many of the companies set to meet the swelling emerging market demand for the same technology, healthcare and consumer goods enjoyed by the developed world are already here. The additional strain on the planet’s resources will make sustainability an ever more important part of a company’s business model, underpinning the investment case for these firms in years to come.
Mike Fox is head of sustainable investment at Royal London Asset Management.
This article is one of our Original Thinker pieces, which are showcased in Money Observer’s annual wealth creation guide. The January 2018 issue of Money Observe now on sale at WHSmith, selected Tesco and J Sainsbury supermarkets and many independent retailers. To order online and ensure you pay the lowest rate per issue, visit our subscription page.
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