Why active management is essential in sustainable investing

Hamish Chamberlayne, head of sustainable and responsible investment (SRI) and portfolio manager, discusses the key trends guiding his investment decisions and major themes his team is watching out for.
Why active management is essential in sustainable investing

Interest in sustainable investing has grown tremendously in recent times, Janus Henderson is no stranger to the theme. Our portfolio boasts a 30-year history and has continued to register healthy performance despite recent volatility in financial markets.

As of March 2020, it is one of the lowest carbon equity portfolios in the world. It has a 30.5% exposure to knowledge and technology sectors, which include robotics and artificial intelligence. This high allocation indicates that companies in Janus Henderson’s sustainability universe are at the forefront of environmental and social sustainability and they are harnessing technology to bring about positive change.

“Our sustainable investment framework helps us to select companies with resilient and compounding growth characteristics by virtue of being on the right side of environmental and social megatrends,” says Hamish Chamberlayne, head of SRI and portfolio manager of the portfolio.

The framework, as described by Chamberlayne, is built around four megatrends consisting of population growth, ageing, climate change and resource constraints. These trends are then broken down into ten long-duration themes, which fall into two categories: environmental and social. The environmental aspect includes efficiency, water management, and sustainable transport. Among the social themes are knowledge and technology, quality of life, health and safety.

Investing based on these long-term themes serves two main objectives, Chamberlayne explains. First, it leads to investment opportunities. “Companies with goods or services that are associated with our themes are going to have superior investment and growth characteristics,” he says.

Secondly, the themes help to ensure that the investments make a positive impact on people and the planet. Specifically, firms that are involved in decarbonisation, the circular economy and digitisation hold long-term value, he adds.

Benchmarked holdings

As part of the investment process, companies in the portfolio are measured against how they are contributing to the United Nations’ 17 sustainable development goals to be achieved by 2030.

“These goals are aspirational, so there is a very strong philosophy of improvement in our investment strategy,” says Chamberlayne, adding that engaging and partnering with companies is an essential aspect of driving progress. This approach, in turn, is linked to another crucial component of sustainable investing- active management.

The active difference

When it comes to sustainable investing, Chamberlayne notes that an active management approach is critical because it is through engagement, in-depth analysis and thorough due diligence that managers can identify companies that are more likely to succeed over the long-term.

“When one allocates to passive, one directly abdicates the ability, as an investor or a shareholder, to make a conscious decision about how capital is being allocated into the world. Having an active approach helps the team make better investment decisions and leads to better outcomes for clients over the long term,” he says.

It is worth noting that to help companies achieve their climate goals, Chamberlayne and his team started a so-called Net Zero Carbon 10 initiative to better engage with portfolio companies around the journey to becoming net-zero carbon.

The triple bottom line

There are sceptics who continue to question sustainable investing’s ability to generate returns, but Hamish believes that abiding by the triple bottom line framework of planet, people and profit can lead to superior returns.

“We want to have all three aligned,” Chamberlayne explains. “Sustainability and generating returns are closely interrelated. What is required is a clear set of principles about the environmental and social issues, and how they influence and impact the investment process and selection. We invest for profit, people and the planet. We believe the best investment returns will be generated by companies with resilient, compounding growth characteristics, and these attributes are more often found in companies that are on the right side of sustainability trends.”

Chamberlayne emphasised the current economic system had been operating on an infinite growth assumption, which means that companies risk running into problems with limited resources in the future. 

“If you're investing in companies that are creating the problems, causing environmental and social harm, this is a much greater risk that you are taking with your capital,” he says.

What’s next?

Chamberlayne is careful to avoid predicting appetite for his asset class over the short term, but he was hopeful the crisis would serve to underscore the attractiveness of sustainable investing and how it can lead to better outcomes not only for investors but also for the environment and society in the long run.

“We are living in a period of such exceptional change – characterised by the low carbon energy transition and the 4th industrial revolution / digitisation of everything – that we do not have an environment of broad-based growth ‘lifting all boats’. In this environment, Chamberlayne observes, “there will be big winners and big losers.”

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