Has the sustainable revolution gone into reverse?

A few years ago, in the long-forgotten period that preceded the pandemic, anyone interested in investing could not do much without hearing about sustainability.

With environmental disasters piling up and devastating communities, the science increasingly showing its incontrovertibility and our own impact on the planet that supports us becoming ever clearer, it became nigh-on impossible for even generalist investors to avoid alluding to incorporating some ESG methodology into their investment process. Sustainable fund launches were announced weekly and houses specializing in these funds were in the ascendency.

Fast forward to 2023 and the picture is very different. A cost-of-living crisis, war and the reversal of the growth-led equity market that dominated for a decade have all served to distort the narrative surrounding sustainability.

Admittedly at least some of the perceived shift is down to sustainability simply receiving less airtime; the majority of fund managers are still incorporating ESG factors into their processes, albeit with much less fanfare as this lens is so much more normalized. Further, the factors listed above demand a more immediate response due to their (at least in the popular imagination) more pressing nature. Sustainable stocks have also tended to fall into a more “growthy” profile, the kind that typically underperforms in an inflationary, high interest rate environment.

However, there has also been a shift in both the appetite for sustainability and the momentum behind it. As investors have faced a crunch in the value of their portfolios, including pensions, some will find that sustainability is less front-of-mind as their investment goals fall further away. Further, the long-acknowledged challenges of defining, applying and measuring sustainability have only become more apparent as a genuine solution has yet to be realized.

As a result, the pace of regulatory intervention has certainly slowed, with industry groups cautioning against further new regulatory requirements while these challenges are ironed out. Meanwhile, sustainable funds have seen outflows.

Yet, the issues that fuelled the charge towards sustainable investing remain. Only this year, record-breaking heatwaves have been recorded on almost every continent. Correspondingly, other countries have experienced unseasonal rainfall, a less-discussed but no less potent impact of climate change. Shareholder groups continue to pressure individual companies regarding their climate goals – with Glencore only this week coming under intense scrutiny.

While the pace of the sustainability revolution has slowed, innovation and evolution in the offerings available to investors continues. At the same time, work is being done by fund buyers and regulators to refine reporting and improve understanding among end investors. Sustainability remains a crucial aspect of the investing universe – albeit, not one dominating the news cycle at present.

In the investment trust universe, that innovation is especially evident. One example is Foresight Sustainable Forestry (FSF), which benefits from two separate valuation influences and also has iron-clad sustainability credentials in the form of its afforestation projects, amongst other biodiversity efforts committed as part of its land ownership.

Our analysts think this is an interesting time for the trust, saying in our most recent note:

“FSF has intriguing financial and sustainability attractions. The value that the managers have demonstrated they can unlock through finding good locations and completing the afforestation process is notable, and recent announcements of milestones achieved at a number of projects could see valuation uplifts in the upcoming NAVs.

“Additionally, the long-term supply and demand mismatch in the timber market is interesting, and could be a secular driver of returns.”

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