PM Corner: Sustainable Investing with Andrew Stern
U.S. Sustainable Leader’s Andrew Stern discusses our approach to sustainable investing and the opportunities he sees today.
While ESG investing is a nuanced endeavor, the overall objective, in our view, is quite simple: using a differentiated lens and rigorous investment process to separate the sustainable winners from laggards over a full market cycle.
Why should I care about sustainable investing?
When done right, sustainable investing is about investing for the long term, supporting companies that are best positioned to take advantage of trends that will play out over multi-year time horizons. While ESG investing is a nuanced endeavor, the overall objective, in our view, is quite simple: using a differentiated lens and rigorous investment process to separate the sustainable winners from laggards over a full market cycle.
How has sustainable investing evolved and how do you approach sustainable investing differently?
There has been so much change in this space over the last decade. Managers used to take an existing investment process and layer on a set of exclusions to meet a client mandate or preference, instead of building an investment process around investing sustainably, or thinking about how to deliver on what should be a differentiated style of investing. We think it’s critical to shift the conversation away from ESG investing as an approach that might limit an investment universe to one focused on the promising names we are investing in, and the place a fund like ours occupies in a client’s portfolio.
Why is your process differentiated, and how do you overcome the challenges many managers face with ESG data today?
To do sustainable investing well, you need scale. Having access to management and unique insights into a company’s strategic growth plan, plus fundamental research, data, and stewardship are all invaluable resources managers need to analyze companies’ long term prospects. Very few firms have the depth of J.P. Morgan Asset Management and its tenured fundamental analyst team. ESG is a complex, rapidly changing space and you need capabilities to identify truly sustainable companies and those that will win over the long term.
A robust and rigorous research process is essential:
First, the team leverages the insights from more than 20 industry analysts with an average of 20 years of experience covering their sectors. Instead of turning to backward looking company or vendor data, they provide forward looking insights into which companies are sustainable, and which companies offer the best long term investment potential. As part of this fundamental analysis, we have a proprietary ESG questionnaire filled out on a regular basis for over 900 companies in the U.S. alone.
Second, we combine that fundamental expertise with the firm’s vast data capabilities. The goal is to create proprietary information sources that fill in gaps in data coverage by using non-company reported information that goes beyond what the rating agencies provide.
And lastly, our investment team of ESG specialists put that mosaic of information together. By using these three elements we identify and select sustainable leaders that create long-term value in our portfolio.
The industry’s past reliance on exclusions often forced conversations to center on what you were giving up … today, data indicates ESG can actually enhance risk adjusted returns.
Do you think ESG investors have to sacrifice alpha in order to invest sustainably?
At the end of the day, we’re seeking to outperform the S&P 500 Index. The industry’s past reliance on exclusions often forced conversations to center on what you were giving up to have a sustainable portfolio vs. what you were investing in. Yet today, data indicates ESG can actually enhance risk adjusted returns. Moreover, investors and clients recognize that trends and topics like electrification and innovative medicine are structural forces with the potential to change the global economy and create new growth opportunities. And these trends are developing despite different political climates.
What areas of opportunity are you seeing in sustainable investing today?
Companies are looking to use ESG as an opportunity, capitalizing on consumer preferences and behaviors. One classic example is the electric vehicle (EV) space. Whether you are someone who believes in sustainability or not, the numbers are dramatic. By 2030, for example, we expect the fleet of EVs in operation to rise to 17 million cars on the road from one million*. But electric vehicle manufacturers aren’t the sole opportunity -- it’s the entire transportation and energy ecosystem. The battery technology, the renewable generation that will be needed to service increased demand, grid infrastructure to handle increased load, and the charging stations that will need to be built over the next decade... all these areas will become more dynamic in the years to come.
While electric vehicles may appear to be an obvious answer, we find opportunities across sectors, including cyclical ones such as industrials. And that’s partly because they’re building the tools, systems, and components driving us to a sustainable future.
How can an ESG fund fit into my portfolio today?
We believe this strategy is well positioned to complement clients’ existing offerings. The strategy uses a differentiated lens that focuses on investing for the long term. And that means selecting companies that have durable, sustainable businesses that are taking advantage of trends set to occur over decades, not just years. It’s a strategy for clients who care about ESG issues as individuals, and also a strategy for clients who are looking to invest with a focus on the long term and the potential for innovation. With that philosophy and process in hand, we’ve outperformed the benchmark and delivered a differentiated, uncorrelated source of alpha to our clients.
Investing on the basis of sustainability/ESG criteria involves qualitative and subjective analysis. There is no guarantee that the determinations made by the adviser will align with the beliefs or values of a particular investor. Companies identified by an ESG policy may not operate as expected, and adhering to an ESG policy may result in missed opportunities.
*Source: Autodata, 9/30/2021