Quality of life, cleaner energy and efficiency are just some of the broad themes that sustainable investors can add exposure to within portfolios, according to Janus Henderson’s Hamish Chamberlayne.
Chamberlayne, a portfolio manager with Janus Henderson’s global sustainable and responsible investment (SRI) team, said the development of the world economy has now reached a “critical juncture” and this will lead to widespread changes.
“Over the last century [the global economy] has depended on the availability of cheap resources to drive economic growth. However, the supply and use of many natural resources are approaching their limits,” he said.
“Climate change is the most subtle, yet arguably the most important, constraining factor. We believe the defining investment issue of our time will be transitioning to a low carbon and sustainable economy while maintaining the levels of productivity required to deliver the goods and services that growing and ageing populations require.”
Performance of fund vs sector and index under Chamberlayne
Source: FE Analytics
Chamberlayne has managed the £656.5m Janus Henderson Global Sustainable Equity fund since December 2013, over which time it has outperformed both its average peer in the IA Global sector and its MSCI World benchmark.
The portfolio is built around companies that are tackling the challenges created by global megatrends and those attempting to transform the industries in which they operate. His portfolio has a balance between environmental and social stability.
In order to achieve this balance, Janus Henderson’s SRI team considers five environmental themes and five social themes – which Chamberlayne explains in the following article.
Sustainable transport
The first environmental theme is sustainable transport, as transport currently accounts for 23 per cent of the global greenhouse gas emissions that stem from fuel combustion. This makes it a prime target for government curbs.
“This risk presents an opportunity for companies at the forefront of pioneering new energy technologies, vehicle efficiency and public transport infrastructure,” Chamberlayne said.
He added that public transport, including rail and bus networks, is an important area of investment for reducing emissions, noise pollution, and congestion through shared journeys. Furthermore, governments are promoting cycling for health and environmental reasons, which is supportive of companies with goods and services linked to it.
Water management
World Health Organization figures estimate that one in 10 people lack access to safe water while one-third do not have access to proper sanitation. Meanwhile, half of the world’s population could be under threat of water scarcity by 2030.
“Water is under growing pressure both on the supply side (insufficient fresh water, uneven distribution, poor quality, climate change) and the demand side (increasing use in agriculture, industry, and municipal/residential areas),” Chamberlayne said. “Governments cannot act alone to solve shortages – significant investment is required in infrastructure, alongside behavioural changes among all consumers to bridge the supply gap.”
Efficiency
Efficiency improvements are essential if the world is to achieve economic growth while keeping carbon emissions within recommended levels; the fund manager pointed out that around two-thirds of the primary energy contained in fossil fuels is wasted.
He argued that efficiency is not just needed in obvious areas such as the industrial and transportation sectors. Residential and commercial buildings, for example, are the largest and most inefficient users of energy.
Cleaner energy
Chamberlayne said investment in renewable energy is crucial if the world economy is to have any chance of limiting the increase in the average global temperature to 2 degrees over pre-industrial levels.
The International Energy Agency believes solar could become the world’s biggest single source of renewable energy by 2050, even though it only accounts for less than 1 per cent total. The Janus Henderson manager said one area of opportunity within this is the falling costs of viable energy storage solutions, as these will be needed to smooth the peaks and troughs associated with variable output from solar and wind farms.
Environmental sciences
World Bank estimates suggest that the amount of global solid waste produced is on course to exceed 11 million tonnes per day by 2100, unless steps are taken to curb this.
“Rather than being recycled, the vast majority of waste that is collected goes straight to landfills or is incinerated, releasing lethal toxins, greenhouse gases and leachate (liquids),” Chamberlayne said. “Companies involved in waste management, recycling, and environmentally-focused engineering and infrastructure consultancy companies will be at the forefront of enabling this to change.”
Sustainable property & finance
Moving on to the social themes examined by Janus Henderson’s SRI team and the fund manager pointed out that financial institutions can be “a force for good” as they lend to the real economy and allocate capital to where it is most productive.
Janus Henderson Global Sustainable Equity looks at retail banks that provide essential products and services for savers and borrowers – such as current accounts and residential mortgages – as well as those that offer services to small- and medium-sized enterprises.
Another element of this theme is finding social sector organisations that deliver affordable housing and supported living to those that need them, and life insurance companies providing financial security and peace of mind for families.
Quality of life
While gross domestic product remains the primary measure of economic wellbeing, Chamberlayne noted that a growing number of national and local governments are looking to happiness, health and wellbeing data to guide their policies.
“Companies that are well-governed, act as responsible employers, promote societal well-being and consider their impact across all areas of their respective supply chains, are vitally important for creating a sustainable global economy,” he added.
Health
Health provision and social care services in many developed economies are already under systemic pressure because of ageing populations and this is likely to spread to developing economies over the coming years.
Figures from the Organisation for Economic Co-operation and Development suggest that more than 25 per cent of the global population will be over-65 by 2050, up from just 15 per cent today. Chamberlayne said this means companies helping to provide affordable care and services for this growing segment of society will be vital.
Safety
Janus Henderson’s SRI team puts several areas under its safety theme, including workplace safety, road safety, consumer safety, and safety from cyber-attacks and financial crime.
“According to the World Health Organization injuries continue to kill more than 5 million people each year. Of this, about 2.3 million people die as the result of workplace accidents or occupational illnesses, and road traffic injuries claim around 1.25 million lives. Outside of these figures, many more people are seriously injured or left with permanent disabilities,” Chamberlayne added.
“In the area of consumer goods, complex global supply chains mean extra vigilance is required for assuring the safety of food and household goods/products. Lastly, cyber-attacks are growing in sophistication and frequency, resulting in an increased demand for cybersecurity.”
Knowledge & technology
The final social sustainability theme examined by the team is knowledge & technology as this is the only way the global economy can address slowing productivity growth and ensure sustainable GDP growth over the long term.
“Productivity improvements can come from many different sources: among these are mobile communication and networks, connectivity, intelligent use of data, improved access to knowledge and education materials, robotics, additive manufacturing, and advanced material science,” Chamberlayne concluded. “Technical innovation is also catalysing ‘the sharing economy’, a socio-economic ecosystem built around the efficient sharing of human and physical resources.”