Bruno has been involved with sustainable investing for over 30 years, and has watched it gain momentum with institutional and individual investors as understanding grows about the benefits sustainability can bring to a portfolio.
1. Climate change, water scarcity, energy efficiency…What do you see as the most promising solutions to the resource depletion challenge? What actions are companies taking and what can investors do?
On the topic of climate change, one of the big areas that we've been looking at closely is transport. Transport is a large component of fossil fuel usage, representing about one-third of fossil fuel consumption. And combustible-engine cars are major contributors to pollution. If the ongoing electrification of the auto industry continues, that would go a long way to moving us to a '2-degree'1 world.
In conjunction with that, is the concept of ride sharing. Most autos are used only 5%2 of time. If companies offer alternatives, some car owners will decide they don't need to own their own car, they might decide to co-own an electric car, for example.
When you talk about water scarcity, that is an interesting issue. The essence of the problem is most fresh water supply is located in areas where not that many people live, and in areas with the highest concentration of population, there is frequently not enough water. We see this in areas of China and Africa in particular.
Part of problem can be solved through design and technology, which can take many forms. Rainwater conservation in cities, repairing and rebuilding water system infrastructures are two areas that can help. In some parts of the world water leakage from water systems is a major contributor to scarcity. Brazil is a case in point. Technology for metering systems or technology that can provide alerts for leaks, the development of piping that is better suited to the area, can all make a major impact.
Another part of the solution is conservation, helping to change consumer behavior, such as by providing low-flow appliances, designing homes and commercial buildings that make better use of water. Desalination is another way to help solve the problem, and some innovators are working on technologies that use solar panels to power desalination projects.
The problem is water scarcity is complex and will have to be addressed through a multitude of products, services and technologies. Investors are identifying companies that offer the most effective solutions across a range of technologies and approaches.
2. How do you identify the long-term winners for your portfolio?
For a stock to be in the portfolio, it has to have meaningful products and revenue derived from one of our long-term investment themes. We have to ask ourselves does this company's product solve a problem? An example I like to use is a candy company. It could be the model of a sustainable company, but no matter how well it is run, it is not likely to improve global, social or environmental challenges, so we would not choose it for our sustainable thematic strategy.
The second element of selection, is using our valuation system and ESG ratings, to find companies that have investment promise. This is important, investors want to improve the world but they need returns too.
3. Do small- to mid-cap companies have a different appeal for our long term themes than large companies?
In some sectors, an innovative smaller company may get a tailwind that helps it grow over a relatively short time. Some companies that supply equipment to the alternative energy space have grown enormously over last decade, and have gone from mid-sized companies to quite large industry leaders. The growth of wind energy is an example. Wind energy is the cheapest form of energy in Texas, a big oil-producing state, which has helped this sector grow quickly. Some wind turbine companies are a lot bigger than they used to be.
On the other hand, the appeal of some large companies is they have the wherewithal, in terms of capital, people and know-how, to address big problems. Amazon is interesting because of its strong position in Amazon web services, which is an immensely powerful energy saving-solution for applications using large amounts of computer data. For example, Netflix movies and photos on a number of photo sites are stored on Amazon Web Services.
If you consider the environmental consequences of storing all that data in an energy intensive building, compared to energy-efficient servers in buildings that are cooled passively, or that use alternative energy for power, you get net savings, which ends up having the same effect as taking numerous power plants offline. Scale is a huge advantage in some areas. We see the same effect in other large companies in the pharmaceutical sector, when it comes to research and development costs, for example.
4. We often hear that sustainable investing has moved from a 'nice to have' to a 'must have' in an investment portfolio, what has been the main driver behind this change?
There are two drivers. One is the realization that looking at material sustainability factors improves the investment process. In addition to traditional financial analysis, looking at these material non-financial factors gives a more complete view of a company, and helps investors make good investments. Why? Because companies that are energy efficient, that have better employees, strong supply chain management are often better competitors that grow faster.
If you can identify those companies and invest at attractive valuations you may have an advantage. Second is that investors, whether large asset owners or individuals, are asking more questions than they used to about the content of investment portfolios. They want competitive returns but they also want to know how that return is being produced.
This is a broad cultural shift. When I was young, if my mother made me a sandwich, I would never have thought to ask where lettuce came from. Now, people not only want to know where it was grown, they want to know if it is organic and locally sourced. People are asking the same kinds of questions about their investments. They want to know how these companies treat their workforce, how do they improve environment, do they make the world a better place? They still want to make money, but today, investors want to do it in a way that is sustainable.