Increasing public awareness of issues such as climate change and social inequality has propelled responsible investing into the spotlight.
What we are seeing now is the powerful interaction of forces such as regulation, technology and consumer demand, not to mention the growing imperative of addressing issues such as climate change and health care. These are accelerating the adoption of responsible investing and, in essence, driving a significant shift in societal values.
A shift of this magnitude will always have investment implications and the mega-trends we are seeing in the market are only likely to intensify. “Green” fiscal stimulus in response to the pandemic; the adoption of net carbon zero targets; and the exciting advances in precision medicine are just some of the drivers that are providing long term structural growth opportunities for companies that can tap into them.
Similarly, there will be companies that are left behind by the shift and it will be for the benefit of our clients and society if the investment industry can identify and support companies that are beneficiaries, and avoid those at risk of being left behind.
Such rapid shifts in markets naturally lead to questions over their longevity. A question often asked by clients is whether environmental, social and governance (ESG) is a fad or bubble. I would respond by saying that I believe it is not. Whilst some specific areas of the market did begin to look frothy based on short-term metrics earlier this year, the long-term case is still incredibly powerful and there is a structural growth tailwind behind a great many areas geared towards ESG. This includes renewables, electric vehicles (EVs) and innovative healthcare amongst many others and it is this breadth that gives me confidence.
Responsible investment has long been part of the DNA at Aegon Asset Management. We believe that active ownership is simply part of good active management and that environmental and social risks are investment risks. Integrating ESG factors in our investment research, therefore, helps uncover exciting opportunities in addition to promoting a long term focus. Two stock examples in particular come to mind at the moment.
Volution Plc supplies ventilation products in the UK, northern Europe and Australasia for both residential and commercial buildings. It has real environmental improvement credentials and structural growth tailwinds from the current macro environment and regulatory drivers, including helping improve energy efficiency and air quality in buildings. When you consider that an estimated 40% of greenhouse gas emissions come from buildings, the need to improve their efficiency is clear – Volution can play a role here.
From a company-specific perspective, Volution continues to make good progress on its own ESG targets. By the end of 2025, it aims to have 70% of revenues from low-carbon products and 90% of the plastics its uses in its products to be from recycled sources. The shares have performed well but we believe there is more to come in terms of product innovation and optionality on the balance sheet for future acquisitions to add to its offering.
The second stock is a recent initial public offering (IPO). We have seen a number of IPOs in the UK market recently and Aegon AM has been highly selective in its participation in them. During March though, we did take the opportunity to invest in Trustpilot Plc.
In an increasingly digitised world, where more and more buying decisions and transactions are taking place remotely, customers need to be able to trust who they are dealing with. Enter Trustpilot, the world’s largest ‘open’ two-sided customer review platform, classified by number of reviews and customer engagement.
Trustpilot generates revenues from selling subscriptions to businesses, allowing them not only to promote raw ratings data but also offering marketing and analytical data from the reviews. A key positive for the business is that it is aligned to structural growth themes we like such as e-commerce, digital marketing and digitalisation. The fundamentals are attractive - it has first-mover advantage and a significant benefit from the dual-sided ecosystem of reviews with integrity. We see a significant runway for scalable and sustainable growth in the future and the opportunity to replicate its success from its UK and Danish roots in other countries, including the US. The economics for the business should continue to improve as penetration grows and the customer base matures.
In ESG terms, we think it provides an important function for consumers (and businesses), contributing to a well- functioning consumer environment where customers can assess potential issues before buying. From a social perspective, we like the fact that it is a founder-led business with strong diversity credentials.
Looking back on the past 18 months, the Covid-19 pandemic has taught us many things. For example, change can happen and happen quickly when the necessity is there. During the pandemic we have witnessed first-hand collective action making change for good. Ongoing momentum we believe can translate into further positive change across a variety of sectors.
This has been clearly seen in the increased spotlight on the ‘S’ in ‘ESG’ - the social aspect. We are seeing increased focus on all stakeholders, including employees, suppliers and customers, rather than a sole focus on shareholders. This is by no means at the expense of the ‘E’ or ‘G’, but instead creates a collaborative environment for progression.
Looking to the future, one issue I hope the investment industry addresses is the use of terminology in the responsible investing space. Such terminology is currently varied and often subjective, which can lead to a lack of consistency and increased confusion for some investors. We are very mindful of this when engaging with our clients, but I believe it is vital that we work together with our peers in the industry to ensure clarity and consistency in terminology and the emerging area of ESG reporting.
Overall, I am hugely positive about the future for responsible investing. The societal shift we are seeing, combined with supportive changes in regulation and a greater ESG focus from both clients and corporates will, we believe, provide further growth opportunities for the responsible investing space for years to come.
Audrey Ryan is manager of the Aegon Ethical Equity fund. The views expressed above are her own and should not be taken as investment advice.