Financial returns are paramount of course - they are the point of investment - but wealth creation includes so much more. Stewardship, when fully integrated and collaborative, enhances financial value and unlocks the broader drivers of wealth.
There are three main aspects to our view of wealth creation.
Firstly, we have long believed that sustainability is a key driver of financial outperformance. Secondly, there is rising evidence that investors gain additional value from returns that are created through positive social and environmental impacts. Thirdly, we believe that investors must begin to factor the future state of the planet into their wealth goals and calculations.
The realisable value of your future savings will depend on the future state of the world you spend them in. We invest in companies that can improve our world, but it is stewardship that drives these companies on to deliver the world we need.
“When you serve society and run the business with a purpose, you’re not donating slices of the pie to society and making shareholders worse off. You’re growing the pie”
Financial value creation comes first, for good reason.
Client returns can only be generated from successful companies, and only successful companies can deliver positive impacts. We believe that the greatest profits belong to those who can solve our greatest challenges and look for sustainable companies that can maximise profits through maximising their positive impacts. The evidence has been growing for many years since the work of Eccles, Ioannou and Serafeim, which link sustainability to business fundamentals.
They noted that $1 invested in 1993 in a value-weighted portfolio of high-sustainability firms would have delivered $22.6 in 2010 versus $15.4 for low-sustainability firms.
The idea of gaining additional value from aligning your investments with sustainable development is gaining rapid traction. The assets managed in impact investments rose from $520bn to $715bn last year. Investing in impactful businesses is necessary, but is it sufficient?
Even those of us who target sustainability outperformers find emissions that are not yet aligned with a 1.5°C world, gender and other aspects of diversity falling far short of requirements, and production models that barely approach circularity. If we are investing in the best, but falling short of our goals, stewardship is needed to drive us on.
Finally, it is increasingly clear that the realisable future value of wealth will be determined by the world in which it is spent. We focus on companies that can ‘grow the pie' by improving the quality of our societies and our environment.
As Alex Edmans explained: "When you serve society and run the business with a purpose, you're not donating slices of the pie to society and making shareholders worse off. You're growing the pie".
From 1970 to 2010 the ‘over 65' population on the US coast grew by 89%. Many of us it seems, aim for a retirement on the beach. The future state of our global coastlines depend on the companies that we invest in and the change that we encourage. The IPCC estimate that a 2°C increase in global temperatures will cause a 0.3-0.93 metre rise in sea levels by 2100 and the World Economic Forum estimate this could affect 90% of coastal areas.
To take a popular retirement area as an example, this projection of Florida in 2050 shows land forecast to be below annual flood levels in red.
We need sustainable investment to deliver financial returns but we need stewardship to enhance those returns and collaborate with companies to deliver a clean, safe and sustainable world.
Neil Brown is head of equities at GIB Asset Management