Last month I wrote a feature for FT Adviser about transition investing (you can read it here) and why it’s an important part of the ESG story.
Transition investing focuses on investing in companies that want to shift away from having harmful business practices to become more sustainable. I include some examples of what I mean by this in the feature.
The reason it’s important is that we need incumbent companies that are causing harm to change and improve. When building an ESG-focused portfolio, it’s easy to include new companies providing “green” solutions but this isn’t going to change the world.
Waiting for companies to change before choosing to invest in them carries the risk that they stay the same. As I say in the feature, for companies to change their business models, requires capital (in the form of investment), expertise (in the form of engagement) and pressure from shareholders to do so.
If no pressure is brought to bear on existing practices, then there is no incentive for companies to end harmful activities.
Benefits
There are more benefits to investing in companies in transition than simply environmental and social. From an investment perspective, there’s potential for outperformance. Again, I give an example of this in the feature.
So, when looking at an ESG portfolio, consider the whole story. As with so many things, ESG investing is complex and not a matter of good and evil. It’s easy to back those who already champion ‘the good’ but challenging ‘the bad’ can reap rewards in so many ways.
