Veteran sustainable investor Andrew Parry feels “worryingly fashionable” for the first time in his life as the growing wave of climate change activism amplifies pressure on super funds to be greener.

But the head of sustainable investment at global firm Newton Investment Management, says his advice to fiduciaries is always to integrate sustainability into an investment decision rather than see it as an overlay.

“I did feel I used to be a lone voice in the wilderness, now I’m worryingly fashionable for the first time in my life,’’ Parry told Investment Magazine’s Fiduciary Investors Symposium.

“I think there is a real tension that has built into the market but fiduciary purpose hasn’t changed. Our role is actually to make a financial return to support the long-term interests of the members and I think sometimes that can get lost in the rush for virtue at the moment.

“(An ESG focus) shouldn’t be something laid on top to make you feel good, it all has to be an integrated part of looking at the whole, about the quality of the investment decision and the insights that many of these investments give you on the future direction of travel.”

Parry said climate change was an “externality” for many institutional investors five years ago but had “come home to roost” by manifesting itself into the poor performance and returns of individual companies.

“People were beginning to see that the rhetoric was not just about tree hugging and something that’s going to happen in 30 years,’’ he said.

“We’ve seen a shift in the last 18 months with civil society. Look what’s happened in the Last six months China, Japan, Korea and now America are all now signing on to net zero.

“That’s going to recalibrate the allocation of capital to the order of many trillions of dollars over the next 10-30 years if those aspirations will be put into action. I think they increasingly will be.’’

There has been a tendency to view Environment, Social and Governance (ESG) investment as a label when, in reality, it is a complex series of nuanced inputs that vary across industry, across regions and, importantly, dynamically over time, Parry said.

He said the UN’s 17 Sustainable Development Goals, created in the aftermath of the Global Financial Crisis (GFC) as a framework for national governments, initially excluded finance from much of the conversation and only about four per cent of corporates that used these goals, set performance targets against them .

“It is about understanding what they really represent and the opportunities which aren’t always universal in their application to investment,’’ he said.

ESG-focused investors need to think continually about where in the value chain that opportunities will accrue.

This would be particularly important when, say, a tipping point occurs for the majority of electricity coming from green sources.

“We could get a collapse in electricity prices which is fantastic news for decarbonising heavy emitters and fuel poverty but thinking about in the future where those benefits accrue will be key,’’ Parry said.

And beware the bubble that comes from “chasing a label”, he said.

“We began to see some premiums built into popular stocks in February that really were not justified by the underlying growth and return expectations. Some of my favourite stocks over five years had seen their valuations treble. That would be great if the margins increased – but if they were steady, you’re left paying a very big premium,’’ he said.

“We have to be very careful not to just chase the label, the business models, cash flow, competitor analysis, valuation all matter, a heck of a lot. We remember SolarWorld, the world’s biggest solar company in Germany nearly a decade ago, went bankrupt because of competition from China.’’

Investors must think about transitions – companies that are a challenge today in difficult industries that are adapting faster than the transition curve needed to achieve net zero, he says.

“Some of those are offering really interesting value opportunities from reallocation of capital and reduction of ESG risk premiums. Perhaps we can encourage and support them through active and forceful engagement,’’ Parry said.

“We need to be creative in our thinking about where the investment opportunities are and stop and look at some inefficiently priced areas of the market where people are reluctant to go.

“Not all of them will be winners; many will be failures, so this is where good stock picking will come to the fore.”

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