The future world, which is being slowly shaped by contemporary forces, will aim to be a sustainable one. The motivations for sustainability are far-ranging and widely held, but what does the role of investment management have to play? A very big one, according to Luc Olivier, Impact Investing Fund Manager at La Financière de l’Echiquier (LFDE). This latest insight explores how finance can help to shape the sustainable future of the world.
The crisis we are going through reinforces one of our most deeply held convictions: that finance has a crucial role to play in creating a more sustainable and more resilient ecosystem and building the world of the future, particularly impact investing on public markets. Impact investing, in our view, is essential to funding the United Nations’ Sustainable Development Goals (SDGs). 2.5 trillion euros will be needed to achieve these goals by 2030. An estimated 91% of these needs can only be met through public markets.
Investors needed nerves of steel in 2020. European companies with sterling ESG profiles proved to be better at weathering the crisis than others. Closely aligned with the SDGs, our impact investing strategy held up fairly well when the market crashed and was quicker to take advantage of the recovery, with lower volatility than the MSCI Europe Index¹. In our view, this resilience is particularly due to our approach, which places value on SRI criteria and seeks to generate a positive impact with respect to the SDGs.
ESG and Impact Investing: two performance drivers
We firmly believe that ESG and Impact investing will be two major performance drivers in the future. According to the United Nations, the opportunities created by the main SDGs could reach $12 trillion by 2030. Some listed European companies are, in our view, in a good position to seize them. Our investment universe consists of a hundred or so companies that we analyse regularly. After applying our exclusion criteria, analysing ESG criteria and evaluating the contribution to the SDGs, we then select about forty stocks. Large caps account for two-thirds of our portfolio, which is 60% concentrated on growth stocks, 20% on cyclical stocks and the remaining 20% on underpriced securities known as value stocks*.
As not all SDGs are business-oriented, we focus our attention on two factors: the direct contribution a company makes toward achieving SDGs through its products or services, and the overall contributions that a company makes through its products and services. For instance, no product is able to contribute to SDG 5, Gender Equality, but a company’s human resources policies can.
Health, consumption and energy: a direct impact on SDGs
The two SDGs most represented in our strategy are SDG 3, Good Health and Well-Being, and SDG 12, Responsible Consumption and Production. Within the healthcare sector, we pay particularly close attention to three sub-sectors: diagnosis, which has become increasingly important during the pandemic, pharmaceuticals, and medical technology. In the area of responsible consumption, we are looking for companies that produce reusable materials that save on the resources used or offer alternatives to plastic.
We are also interested in manufacturers of semiconductors, such as the German company, Infineon*, which manufactures components essential for renewable energy systems and contributes to SDG 7, Affordable and Clean Energy.
Healthcare, digitalisation and the European Green Deal
Investments in the healthcare sector continue to increase in the short, medium and long terms and today our exposure to this sector is very high. Furthermore, climate change remains a major concern of governments and private investors.
With the Green Deal, the European Union is pursuing an ambitious climate policy, which is expected to enable it to become the first climate neutral region by 2050. Companies such as Michelin*, the French leader in sustainable mobility, or Covestro*, the materials producer, which offer solutions that contribute to meeting the climate challenge are expected to benefit under the plan.
Lastly, digitalisation is expected to continue gaining ground. In addition, we remain particularly interested in companies doing business in cloud computing, or companies like the Spanish wireless telecommunication infrastructure operator, Cellnex*, whose growth benefits digitalisation. In our view, these three trends should become performance drivers sometime this year.
Impact investing, the new frontier of SRI
LFDE is committed to actively contributing to the creation of impact financing and added a second solution to its range in 2020, for the purpose of funding the energy transition.
LFDE is also a member of GIIN (Global Impact Investing Network), and is involved in collaborative engagement initiatives with PRI, a UN-supported network of investors. The stakes are high, and the challenge is exciting.