The tailwinds propelling sustainable companies have started to become far more prominent, according to Damian Cottier, portfolio manager of the Perennial Better Future Trust.
Mr Cottier noted that in the early stages of sustainable investing, investors aiming to keep in line with their mandate would exclude certain industries such as gaming, alcohol and tobacco. Today, however, companies are taking a much broader approach.
“It [excluding industries] was an important step that allowed all investors – institutional, wholesale and retail – to adopt an approach to investment that pursued positive financial returns, whilst avoiding harmful industries,” he said.
“But it was only a first step, and now we are seeing a far more proactive approach to investment that focuses on those companies that are having a positive contribution to society and the environment.”
Mr Cottier added that these tailwinds are particularly evident in global climate policy, with the greatest impact on sustainable industries stemming from government initiatives.
Namely, he said the Inflation Reduction Act, which was legislated in the United States last year, is designed, among other things, to direct new federal spending towards reducing carbon emissions by “jump-starting research and development and commercialisation of leading-edge technologies such as carbon capture and storage and clean hydrogen”.
“Across the Tasman, a NZ$300 million investment in an electric arc furnace, to be co-funded by BlueScope and the New Zealand government, will see NZ Steel’s Scope 1 and 2 greenhouse gas emissions cut by at least 45 per cent,” Mr Cottier added.
Emilie O’Neill, co-head of ESG at Perennial, agreed that regulation and policy continue to provide a steady backdrop and strong foundation for sustainable investing.
“For example, at a global level, by the end of October 2021, the International Energy Agency estimated that US$470 billion had been earmarked by governments to support clean energy initiatives,” she said.
According to Ms O’Neill, the Principles for Responsible Investment – a United Nations-backed international network – found that 97 per cent of new sustainable financial policies were developed after 2000.
As such, Mr Cottier projected that government-funded initiatives will play a significant role in generating ESG tailwinds but highlighted other important factors to consider.
“Employee preference for companies paying heed to ESG principles is increasingly important in the competition for skilled staff in a tight labour market. Consumers, too, are making deliberate choices to direct their spending towards these companies,” he explained.
“Capital, debt or equity, is increasingly attracted to ESG-focused companies, while its cost is falling as they are perceived to represent lower risk, a trend we expect to gather momentum.”