It is difficult to reconcile sustainability with short-term investing, according to Rob Harley (pictured), senior portfolio manager at Stewart Investors.

“For us, the two things dovetail quite nicely: a long-term approach and an emphasis on sustainability,” he said.

“We find it quite difficult to reconcile the idea of sustainable investment with a short-term investment approach because we’re investing in companies that are willing to take a longer-term view of how to evolve their franchises and remain competitive.”

“We see sustainability as a driver of returns and a mitigator of risk. But we also recognise that backing companies pursuing a sustainability approach requires a certain amount of patience and a long-term outlook.”

It is hard to think of many firms with better sustainability credentials than Stewart Investors (the firm eschews the term ESG, which Harley describes as denoting “a certain number of quite specific things. So, we sit quite uncomfortably with ESG terminology”).

It launched its first sustainability funds back in 2005 and now all of its funds are registered as article 9 under the EU’s SFDR. It is also one of only eight asset managers out of 108 firms globally to have received the ranking of leader in the field from Morningstar.

Sustainability is embedded into the entire investment management process. Engagement and voting are core responsibilities for the investment team, albeit there is a dedicated team called impact communication and engagement to support the investment team given how time-consuming engagement can be.

It is quite typical for a lot of their portfolio managers to have hands on experience in sustainability roles including Harley who worked in the not-for-profit sustainable development sector for eight years.

Overall, it is difficult to pigeonhole the firm as investors as their bottom-up and benchmark agnostic approach means that they do not easily fit into either the growth or value buckets.

While they traditionally are more associated with value investing, Harley underscores that they will never descend the quality spectrum in order to pay a cheaper price for a company.

Alongside sustainability, quality is the other important criterion Stewart Investors use when screening investors, which they divide into three pillars, namely franchise, financials and management.

Harley emphasises that while there are plenty of companies with impressive sustainability stories but make poor quality investments and vice versa, the two often tend to go hand in hand.

“For us, sustainability and quality make natural bedfellows,” he said.

The firm relies primarily on two frameworks for sustainability, namely Project Drawdown and the firm’s proprietary human development pillars.

The latter is based on the theory advanced by Nobel prize winning economist Amartya Sen, who proffered the idea of development as freedom.

Meanwhile, Project Drawdown is a non-profit organisation that seeks to help the world reach ‘drawdown’, in other words the point at which the levels of greenhouse gases in the atmosphere stop climbing and start to steadily decline.

“In Project Drawdown, we found a framework that just resonated with us. It provides a very comprehensive set of environmental solutions, which can help us get as close as we can to the 1.5-degree warming target,” said Harley.

Notwithstanding its relationship to Project Drawdown, Stewart Investors generally uses third parties sparingly. It does use third-party data providers, although Harley acknowledges the flaws in those data sets.

“We do use it as part of our analysis but we don’t use it in a singular way and we certainly don’t rely on it. We’re mindful of all the shortcomings in a lot of that data. The data is improving and it will improve all the time but it’s far from perfect,” he said.

Similarly, with regards to voting, while Stewart Investors does use a proxy advisory firm, it will frequently diverge from their recommendations, particularly around board composition given.

Unsurprisingly, given Stewart Investors’ long-term focus, they do like companies where there is an economic steward, often in the form of a family that has a controlling stake, for example.

Despite their nuances, Stewart Investors is at the sharp end of a number of difficult trends, most notably the backlash against ESG.

Harley acknowledges that this backlash is real and notes that 2022 was a turning point when growth stocks fell off and Russia’s invasion of Ukraine plunged Europe into an energy crisis. However, he notes that this does not detract from the long-term global shift towards sustainability, which dovetails nicely with the firm’s emphasis on long-term investing.

“The idea that sustainable investment has had its time in the sun and we should turn back the clock to an age when everything was much simpler and the social and environmental costs of economic progress could just be overlooked, we think that’s wishful thinking.”

“The need to advance human development in a way that doesn’t exhaust the planet’s resources is only getting greater. So, we’re talking about a fundamental philosophical point of view that we think is enduring.”