Sustainability became a buzzword in recent years as more people understand the importance of minimizing our impact on the environment. Sustainable investing also is growing in popularity. It refers to consideration of environmental, social and governance factors of investments while still growing value.
We recommend that clients consider sustainability as a key component of their overall investment strategy. Companies with an environmental focus are well-positioned for solid growth in the coming years.
Below are three examples of sustainability concepts that are emerging in investment portfolios.
Sustainable Investing: Reduce, Reuse and Recycle
Many businesses and households have become avid recyclers, keeping items like electronics, paper, plastics, and glass out of landfills. They also are purchasing items made from recycled products and supporting companies that prioritize the environment.
Tremendous economic opportunity exists for using old, used, or surplus products as raw materials. This practice that helps avoid environmental damage caused by mining while also reducing overall costs and waste. We hold an investment position in TREX, the leader in composite decking made from sawdust and plastic bags. Two steel companies, Nucor and Schnitzer Steel, use recycled metals as their raw materials instead of mining for iron ore. All three companies enjoy profitability that exceeds industry averages. This suggests that recycling offers an economic advantage over companies that mine raw materials.
Sustainable Investing: Pandemic Safety
COVID-19 created economic opportunities for businesses that promote healthy indoor air quality. For instance, air conditioning contractors can install ultraviolet (UV) lighting in air filtration systems to prevent further spread of the coronavirus, as well as combatting mold, mildew, and other contaminants. The result is a cleaner, healthier environment to work and live.
Our firm was an early investor in Carrier Corp., a leading global manufacturer and distributor of heating, ventilating and air conditioning systems with an increased focus on clean air. Social responsibility helped drive the initial investment, but the opportunity grew as Carrier emerged as a leading provider of clean indoor air.
Sustainable Investing: Electric Vehicles and Solar Energy
Automotive technology has continued to make strides as manufacturers introduce hybrid and all-electric vehicles. The recent Colonial Pipeline hack, which created widespread fuel shortages throughout the Southeast, may influence car-buying trends for years to come. National media and politicians have increasingly emphasized electric vehicles and renewable energy as a means of reducing greenhouse gases. It is also an effective strategy to offset the rising cases of lung cancer among non-smokers.
Sales at Tesla, an American electric vehicle and clean energy company, doubled from 2018 to 2020. Meanwhile, Tesla’s newly redesigned solar roof and battery storage are emerging business lines that complement its car division. In client portfolios, Tesla was a core holding until earlier this year, when our firm harvested significant profits. We also reduced our position in NextEra Energy, the parent company of Florida Power & Light, as it may soon need to compete with more solar installations.
While the goal for any investor is to enjoy financial growth, sustainable investing is a concept that can offer both financial and environmental benefits. As more Americans integrate sustainability practices into their lifestyles, investors have an opportunity to experience positive returns while having a positive, long-term impact on society, environment, and the performance of a business.
About the Author
Andrew Hill, CFA, is president and co-founder of Andrew Hill Investment Advisors,