As part of NordSIP’s new series of insightful interviews with sustainable investment experts, we meet George Crowdy, a fund manager at Royal London Asset Management. He has been in the industry since 2010, starting as an analyst. Soon thereafter, Crowdy joined a sustainable investment team at the same firm.
“When I started 13 years ago, the investment merits of sustainable investing were still very much underappreciated. It was easy for me to find a part of the investment industry that not only aligned with my personal values but also seemed to make great investment sense,” Crowdy starts. “Today, I co-manage the sustainable equity funds at Royal London Asset Management. We manage a range of funds, from UK equity funds through to global equity funds, as well as some mixed asset funds, investing in both equities and credit.”
A definition of sustainable investing
Many point to the fact that sustainable investments can mean different things to different investors. While regulators and global investor associations try to resolve this lack of uniformity, George Crowdy provides us with the orientation Royal London Asset Management has decided to follow.
“To us, sustainable investing is really all about investing in companies which are making the world cleaner, healthier, safer, and more inclusive,” he explains. “And the way that we approach sustainable investing is by looking at a company in two ways. First, we examine what a company does, trying to understand how its products and services are making the world a better place. Second, we focus on how that company manages its operations and look at it through a multi-stakeholder approach. That is how our approach differs from thematic approaches. We apply an equal weight between what a company does and how it does it.”
Crowdy elaborates on how this approach helps harness inefficiencies in global markets. “The market inefficiency we are trying to exploit with the strategies is to find companies that are underappreciated by markets for their compounding ability. We often find that companies which help address the world’s challenges and solve problems for their customers are more likely to be the types of companies that have higher and more durable growth. We typically also select companies that we call ‘ESG leaders’, which are likely to be less risky and less volatile businesses. Over time, we often find that looking at both those sustainability aspects leads us to investments with underappreciated compounding potential,” Crowdy says.
Selecting global investments sustainably
Royal London Asset Management’s strategy implies several sectoral and geographical tilts. “Firstly, there are some sectors which we absolutely will never invest in,” Crowdy says. “We would never invest in a tobacco company nor in companies that are exposed to gambling. We are not exposed to companies that produce armaments either, for example. The innovative parts of the market are where we find investment ideas. These are typically in sectors like healthcare, information technology, industrials, or financials. Geographically, we are less bothered about where a company is listed. We are much more focused on where that company’s underlying revenues come from. But given the liquidity and the depth and breadth of the US equity market, that is where the majority of the portfolio’s assets are based.”
Circumventing the Magnificent Seven
The performance of global benchmarks, and in particular, the US market, is currently driven mostly by the swings of very few ‘meg-caps’. For a sustainability-focused strategy like Crowdy’s, choosing not to invest in these stocks may inevitably cause swings in relative performance.
“Our portfolio, which typically includes 30 to 50 companies, will always look different from the benchmark. Our active share is 85%. We’re not adverse to investing in mega caps, however. If those companies stack up from a sustainable and valuation perspective, we will invest. We may still take a smaller position than that of the benchmark. It is true that market performance has been driven by the seven mega-cap stocks this year, but we believe that evaluating them as a group isn’t appropriate. The underlying business models, particularly from a sustainability perspective, are very different.”
When it comes to trade-offs between sustainable and financial criteria, Crowdy believes that 99% of the time, there isn’t any. While there are examples where the two dimensions come in conflict with each other, most of the time, sustainability goes hand in hand with financial performance. “Look at offshore wind, for example, where the inflationary environment, rising cost of capital and supply chain challenges make projects a lot less attractive today than they were when they were first designed a few years ago. It looks like sustainability is less attractive from an investment perspective. On the other hand, we have identified some powerful trends such as digitalization, AI, and physical infrastructure in the US which has been underinvested in over the last 40 years. Here we are finding attractive investment opportunities that are well aligned with sustainability. Our investments represent strong companies from a financial perspective because they’re leaders from a sustainability perspective,” he says.
In the realm of AI ethics and sustainable investing, there’s a growing concern about the ethical implications of artificial intelligence. Many investors, particularly those involved in sustainable investing, are keen on understanding the ethical practices of companies delving into AI. Crowdy is keen to emphasize the early stage of AI development, with ChatGPT being a relatively recent addition, having democratized generative AI within the past year. The broader societal impact of this technology remains largely uncertain.
“A good example is a company like Adobe,” offers Crowdy. “As the leading creative design software company, they now offer a product which essentially allows you to make an image appear based on a short text prompt. An AI ethics council made up of internal and external members helps Adobe ensure that the images are responsible and without biases. All the content that the AI relies on comes from the Adobe stock photo library, which addresses copyright issues.”
The ideal target investment
Emphasizing the bottom-up approach of the sustainable investment strategy, Crowdy sums up the criteria that make an ideal portfolio company. He stresses the pivotal role of corporate governance. “Good corporate governance protects you as an investor,” he says. “Ensuring management is appropriately overseen by the board is a non-negotiable factor for investment consideration.”
Beyond this assessment, understanding the company’s corporate culture is key. “We look at how the company treats its employees and evaluates environmental considerations in operations. For example, we consider how the company uses renewable energy, manages waste, and interacts with its broader supply chain,” Crowdy explains. “It is important to consider those that are not just leaders in their own field but raise the bar throughout the supply chain. From a financial perspective, this increases the resilience of the suppliers and procures a competitive advantage for our investment targets.”
As Crowdy initially stated, Royal London Asset Management’s sustainable investment strategy relies on identifying the societal challenges companies and their products and services are addressing and investing in those that meet significant unmet needs. “We often think that sustainability is directly aligned with allowing customers to do things more sustainably and be more innovative. We spend a lot of our time in sectors like healthcare where we find a huge amount of unmet medical needs. Healthcare systems are incredibly inefficient in the way they are currently run in many parts of the world, and we’re very excited about seeing more companies adopting new technologies to improve drug development and discovery.”
Surfing on a Positive Momentum
The popularity of sustainable investing has grown over the last five years, and a plethora of managers have entered the market. As a long-term participant in the market, Royal London Asset Management views this rise in interest from the investment community as a positive. “It’s nice to be reassured that individuals are increasingly realizing that they can invest their savings and investments alongside their own personal values,” Crowdy says.
It seems the general belief in a trade-off between return and sustainable investing has finally been put to rest, he thinks. “Of course, 2022 was a challenging year for many of these types of investment approaches. But over the long term, investing in long-term structural changes will lead to attractive investment returns, albeit with more volatility than broader market indices along the way. The challenge may be that these newer entrants have repurposed and rebadged funds, but when they do so, we have observed that they haven’t gained as much traction in raising assets as the firms that are better established in this space.”
Crowdy notes a wide variety of interest from institutional investors across Europe and Northern Europe in particular. “I’m not entirely sure why that is, if I’m being completely honest,” he says. “I know that some governments are encouraging people to invest sustainably more than others. But the underlying individual preferences also matter, and there are still some countries where the belief in a trade-off between sustainability and financial returns holds, whereas in others less so. A part of my job is to continue to disprove this idea while continuing to try and generate long-term risk-adjusted returns sustainably.”
Find out more about Royal London Asset Management and their range of capabilities.
