Covid-19 has created an urgent sense of change amongst investors, driven by vast shifts in consumption patterns due to lockdown and the limitation or even closure of certain industries to prevent the spread of the virus. But while Covid has created a new reality for the market, a narrow focus on the pandemic can only tell us so much. Indeed, by doing so, we miss the wider structural shifts that were sown long before businesses were pushed to operate virtually. Sustainability, long a buzzword for investors, has been a prominent factor in investment strategies for many years. Covid-19 has only served to exacerbate this trend. Increasingly, investors have put a greater emphasis on sustainability as a long-term driver of change, moving away from those seeking to cash in while they can.
The value of a principled framework
Sustainable investors have, for many years, defended the value that socially conscious investments can have, both in determining the financial outlook of companies (thus helping to calculate the long-term benefits of any investment) and in meeting the challenges of the future. A recent BlackRock report found that companies with stronger records on sustainable investment performed better in 94% of cases during the pandemic.
At Fuse, we believe that a principled framework, driven by environmental, social and corporate governance (ESG), can help to guide long-term investments. Drawn from extensive research, our framework allows us to evaluate investments to ensure they are both sustainable and values-driven to maximise returns.
ESG investing is now more important than ever. Covid has simply accelerated certain trends and the use of technologies that were already available. But the macro-trends that lead to the rising importance of sustainability and values-based investing have been growing exponentially for decades. Having a principled investment framework provides a means through which to understand these trends and maximise returns.
Investing in sustainability
Sustainability assesses the ability of an investment to work to the benefit of many in the long term. For example, we might think of the “circular economy”, where internet-enabled tech platforms enable the more efficient sharing of resources, such as recycling cars and electronic devices. By enabling the more efficient sharing of assets and resources, we extract more lifetime out of devices and reduce waste in society. Using a sustainability framework ensures that investments are not out of sync with society. Being “out of sync” means that there is a misalignment of interest with other interest groups, private or public. This, in the end, means that friction will build up in the business model, which leads to sub-optimal value-creation. Therefore, evaluating the interests of multiple stakeholders will help to ensure long-term durability of investment goals and, hence, superior returns.
This contention is becoming increasingly relevant at a faster-than-ever-pace, because of two underlying factors.
Firstly, we are all more interconnected. Since technology is evolving at an exponential rate, viz Moore’s law, business and product lifecycles are shortening. Waves of Schumpeterian creative “disruption“ are happening more frequently. Furthermore, technology itself has driven more globalisation, and more interconnected-ness and transfer of knowledge and goods. In this way, ever more stakeholders are now involved in the value chain of any good or service.
Secondly, since business and product lifecycles are ever shortening, the continued cycles of innovation are happening faster. This means that possible friction of business models now occurs sooner rather than later, dislocating a business model and causing friction with previously aligned interests to happen sooner. This ultimately leads to the demise in a business model.
Hence, the sustainability lens, which looks at the alignment with multiple interests and for longer, vets an investment for its durability, ensuring alignment of interests with the common good for the benefit of the investment itself as well.
Values matter in investment strategies
As technology continues to evolve, it is human intellectual capital which becomes the most prominent factor in value-creation. Innovation is the greatest creator of value. We have evolved over time into a higher value/weight ratio. “Software will eat the world”, as Marc Andreessen said, but software comes from intellectual capital. Put simply, human talent, is the most important value-creation tool today, to maximise return on capital. So, what helps maximise return on human capital?
As advanced societies have progressed up the pyramid of needs, basic human requirements have become easier to achieve. Modern societies are now in a position to ensure their citizens do not go hungry, though the practical realities may sometimes diverge from the principle. The ascension up the pyramid of needs means that new value-structures are prioritised; increasingly, companies set out to do “good” in society. Often confusingly defined, “good” means adhering to a set of normative values that, throughout time, humans have considered to be good, often termed as “ethics” or “positive values”. This, in turn, informs an organisation’s ability to attract the best talent. Companies with strong, value-driven aims are more likely to pull in the best of the best. Better talent will have a positive impact on growth, and therefore improve a company’s long-term prospects. To put it simply, the values of a company matter for investors.
The lesson for investors
The lesson for investors is that long-term investment strategies must consider the nature of a company and its overall aims. For instance, companies that have good workforce management, or those who place a greater emphasis on environmental sources of energy, will be synonymous with greater financial returns.
The speed at which the recent pandemic has shifted our perceptions has been clear for all to see. These events have forced society, technology and investments faster down a path that was inevitable, since it presented the opportunity for us, once and for all.
Investors look to underlying, long-term trends to predict the future. While the pandemic has increased digitisation, the impacts of sustainability and values are as likely to have a profound effect on investment returns in the future.