15 April 2019
Why has Fidelity decided to use the term ‘Sustainable Investing’ when describing environmental, social and governance (ESG) issues? The label is simple but what it describes is far less so. Sustainable investing, as a concept, aims to enhance returns and promote responsible capital allocation and has come a long way in recent years.
The corporate landscape is being significantly altered by new business models enabled by technology as well as increasingly demanding customers who can make frictionless switches between competitors. This combination is accelerating the pace of creation and destruction of companies across many sectors. Finding companies with genuine staying power means spending as much time analysing what cannot be modelled on a spreadsheet as what can.
Transparency is no longer just a regulatory requirement but expected by society. Highly successful, well-established and profitable organisations are having to think about their stakeholders in novel ways, while at the same time the definition of stakeholder is changing and broadening. In the past a ‘supernormal’ level of profitability was lionized and considered evidence of a well-managed business. Today investors have to dig further to ensure that it is not due to an excessive rent being extracted from the environment and society at large - one that a company will struggle to sustain under public scrutiny. This is a new world for investors where these high returns can confer as much risk as reward and raises the game for asset managers as company analysts.
So back to what we call all this activity. The term ‘ESG’ struggles to capture the full scope of stakeholders and the off-spreadsheet areas that an organisation needs consider and manage. Take cybersecurity, which is not captured neatly enough by the E, S or G categories but can be a major vulnerability for companies and lead to big shifts in their long-term value. This is why I think that the term Sustainable Investing better articulates what we aspire to as asset managers and stewards of our clients’ capital. This drives us to sharpen our pencils as long-term security analysts and focus our thinking on how, as asset managers, we can actively contribute to the wider corporate sector.
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