Sustainable investing, considered a niche investment option just a few years ago, is now a key component of a balanced investment strategy for a wide range of investors. The COVID crisis, rather than deprioritise responsible investment, has helped accelerate its development and push sustainability to the forefront. Recent figures from Morningstar track this accelerated growth, highlighting its concentration in Europe as well as the future opportunity elsewhere.
The retail industry and its supply chain are not without controversies and challenges for sustainable investors and consumers alike. As with other industries, retailers are facing increasing pressure to take responsibility for their footprints and what happens in their supply chains: the environmental impacts of their materials, the human rights and labour standards in the workhouses of their suppliers, and how the concept of fast fashion fits into a circular economy.
The election of Joe Biden as the next President of the United States is a relief for those involved in sustainability. From an environmental perspective simply a return to science-based policy making will be hugely welcome. Biden plans to re-join the Paris Climate Agreement on day one of his presidency, and despite potentially not having control of the Senate he should be able to proceed with many of his green goals; a task force put together during the campaign identified 56 policy moves on climate and energy that do not need help from Congress.
Last month was the 50th anniversary of Milton Friedman’s influential report titled ‘The Social Responsibility of Business is to Increase its Profits’, a mantra often heralded as the basis of the capitalist model used globally since, and now quite widely criticised as a cause of social inequalities and environmental externalities. The concept, as we are all aware of, was that business leaders should focus on creating as much value as possible for the owners of the company rather than on improving outcomes for a broader set of stakeholders.
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QUAERO CAPITAL scored an ‘A+’ rating for ‘Strategy & Governance’ in the 2020 PRI Annual Assessment Report, reflecting a continued investment in sustainable investment.
The fast fashion industry has been a significant economic success story of the last two decades, nearly doubling in size, employing 70m people worldwide and contributing 2% to global GDP. This has been driven by huge advances in supply chain management, shrinking lead times from six months to two weeks and enabling retailers to stock more choice, reduce prices and respond rapidly to consumer demand.
An inherent aspect of sustainability is about encouraging the players of a market economy to consider the long term. This is explicit in the European Commission’s Action Plan on Financing Sustainable Growth; one of the plan’s three aims is to ‘foster transparency and long-termism’. If all CEOs and investors were only concerned about the next few quarters, or even years, then it’s easy to understand how sustainable factors such as finite resources, climate change and diversity wouldn’t feature high on the agenda.
There is a consensus emerging that society and investors are best served by companies that focus on sustainable value creation rather than short-term profit. Many companies communicate increasingly loudly about how sustainability is core to their purpose, producing shiny brochures full of positive stories and setting targets such as the wave of 2050 carbon neutrality targets seen in recent months. However, one of the great challenges of sustainable investing is identifying the difference between company rhetoric and action.
European Small Cap Equity
We’re regularly baffled by the ESG scores for companies we know are committed to a sustainable future
We are often vocal about the shortcomings of ESG ratings. This frustration is particularly acute for our European Small Cap Equity team who invest in companies that often do not have any coverage from ESG agencies. For those that are rated, the grades rarely reflect what we understand of the company through our bottom-up analysis and regular company interaction. We’re regularly baffled by the ESG scores for companies we know are committed to a sustainable future.