“Most commonly, new positions open up because of change… new needs emerge as societies evolve…..When such changes happen, new entrants, unencumbered by a long history in the industry, can often more easily perceive the potential for a new way of competing. Unlike incumbents, newcomers can be more flexible because they face no trade-offs with their existing activities.” Michael E. Porter; What is Strategy? Harvard Business Review (Oct-Nov 1996)

Is excluding a company from investment based on what it sells, an arbitrary judgement based on values? Is it purely a principled act separate from investment returns? We think not.

The long-term negative externalities of unsustainable products (such as cancer or deforestation for example) create market frictions that eventually flow back to those that promote or facilitate them.  Where such market frictions exist and incumbents do little to resolve them, innovators and entrepreneurs eventually appear with solutions that remove them.

In resolving a meaningful societal or environmental friction (such as plastic waste for example), entrepreneurs create value for their shareholders. Furthermore, in doing so, these innovators create disruptive frictions for the incumbents. The more unsustainable a product is, the riper it is for disruption and the more aggressive the innovators are likely to be.

Extend this further. Is it time that “traditional” business school-trained investors started giving those who care about these things a bit more credit?  We are used to hearing about the “opportunity costs” of excluding certain sectors; but what about the opportunity cost of investing in these unsustainable areas instead of elsewhere? Like somewhere that is resolving damaging frictions rather than creating them?

Source:factset

For us, the sustainability of a company’s product is directly linked to its strategic positioning.  When we think sustainably, the long-term strategic positioning of a company comes into focus. Companies that sell unsustainable products will inevitably face strategic dilemmas.  As Michael Porter recognised and other leading thinkers have observed, incumbents find it very difficult to reposition or ‘pivot’ themselves strategically.  So as sustainable growth investors, why would we not focus all of our energy searching for the best and most impactful disruptive challengers to invest in?

Clients and regular readers will be familiar with our three dimensions of sustainability framework below. What if we replaced the words sustainable product with ‘strategic positioning’ and the words sustainable practices with ‘operational effectiveness’? To be clear, ‘operational effectiveness’ as described by Porter also directly links to our definition of sustainable practices (i.e. how well a company is run day-to-day). We believe it is a fallacy that you can get one without the other over the long-term.

Being strategically positioned away from areas that sustainable investors typically seek to avoid has provided a performance benefit over the last three and five years. Meanwhile daring disruptive innovators who are mission-driven (i.e. care) are inventing new business models and leveraging the declining costs of technology to deliver positive impact, many creating economic value as they do.  Perhaps caring is the way to win in the long-term?

About the author

Craig Bonthron is an investment manager in the Equities team, responsible for actively co-managing high conviction global equities portfolios. He focuses on analysing disruptive and sustainable investment trends within the technology, healthcare, industrial and consumer sectors in order to identify high conviction stock specific investment ideas.

He joined us in 2014 from SWIP, where he was an investment director in global equities. Prior to SWIP, he was a portfolio manager at Kleinwort Benson Investors. Craig has a 1st Class honours degree in Building Surveying and an MSc with Distinction in Business Information Technology Systems from Strathclyde Business School. He has 18 years’ industry experience.  *As at 30 April 2019.

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