The greatest challenge facing sustainability investors

Views from WHEB Asset Management

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The challenges for ESG investors
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The challenges for ESG investors

One of the greatest challenges for sustainability investors is the price the investee companies charge for goods and the balance with the longer-term social impact, according to Ted Franks, a partner in the specialist investment group WHEB Asset Management.

He said: "Pricing power, and the ability to earn good prices, are obviously a huge part of investing, and probably more so for equities than for any other asset class.

"Looking back, it seems we have had a big couple of years for pricing issues in our universe. And at the same time, the focus and interest in measuring the impact of our investments has also increased. So we have been thinking about these two big trends and how they are related.

"Investors love pricing power because there is no better way to drive returns than to increase your prices, if you can hold everything else constant. If you do not need to increase spending at all and you can just lift your prices a little bit every year, that is cash that goes straight to the bottom line."

Franks, who is also part of the investment team running WHEB's Sustainability fund, uses the pharma sector as an example of the dilemma between pricing power and impact with some "amoral" examples, particularly in the US, of drug companies being accused of exploiting pricing power.

One of WHEB's investment themes is health and well-being, as well as resource efficiency.

WHEB publishes the positive environmental impact of each £1m investment

"We do not own any specialty pharmaceutical companies, for reasons which certainly include these impact issues. But the risks around the pricing dynamics there have rightly spilled over into lots of other parts of the US healthcare value chain, and are sitting like a cloud over equity valuations in that sector," said Franks.

He added: "Balance is one of the central contentions of our investment philosophy. Our resource efficiency theme in particular works because resources would otherwise become scarce and create cost pressures which other companies are keen to avoid.

"At the moment, the balance is to oversupply, and the world has been in a period of widespread and surprisingly resilient deflation, probably for three decades.

"The ultimate expression of this phenomenon is possibly the very strong performance of the theme during this period of deflation. In essence what that says is, so long as prices drop faster than input costs, there will be a case for technologies that use less resources, which is good news for the impact investor."  

Franks points to solar energy as an example of this "tension".

He said: "The astonishing drop in the price of solar modules is rightly a cause for celebration around the world. It is amazing just how cheap they have become, and how quickly.  

"But the way we have done this has been horrible for investors. Rampant overcapacity by Chinese manufacturers has simply not slowed down. Fighting to supply every new project has been intense. Whole swathes of capital have been rendered obsolete well before their time.

"Now, we think the potential for more stable pricing is still there. When it comes, the industry will be revolutionised, from an investment point of view. But in the meantime, this has been a huge impact positive, but a huge investment negative."

Franks, and fellow WHEB partners George Latham and Seb Beloe, will be speaking on Thursday (29th June) at the group's annual investment conference for investors and professional advisers.

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