Investing globally in sustainable equities – why profitable growth matters
Despite the policies of the current Trump administration in the USA, sustainable investments are making a comeback on the stock markets. We explain why challenges related to the environment and society can offer long-term growth potential – and why quality must not be forgotten in the process.
Investing Globally in Sustainable Stocks: Focus on These Three Key Points
- In our view, companies that contribute to sustainable development through their products and services have the potential to achieve above-average growth.
- We see particular potential in sustainable investment themes such as decarbonization, water conservation, circular economy, digitalization, and longevity.
- In our opinion, companies must earn their cost of capital to create value for investors. Therefore, a strong focus on quality and profitable growth is essential.
In times of US policies that have abandoned climate goals and are pushing the promotion of fossil fuels with the slogan "drill baby drill," one development stands out: In many cases, companies contributing to sustainable development with their products and services are outperforming on global stock markets. Currently, we observe this particularly in companies whose activities align with investment themes such as climate protection and decarbonization, as well as the transition to a circular economy.
This development confirms our investment philosophy, which we have upheld for more than 20 years: We look for sectors of the economy explicitly facing challenges in the areas of environment and society. Or, more simply put: we favor equities of companies that, in our opinion, can contribute to making the world a better place with their products and services.
Why do sustainable investment themes offer growth opportunities?
To identify these values within global indices like the MSCI World, we first focus on companies that, according to our independent analysis approach, demonstrate an attractive sustainability ranking (see box below).
We do not act out of idealistic reasons but based on the assumption that such companies can grow faster than global GDP – and thus offer a chance for long-term excess returns. As alpha sources, we have identified no fewer than five sustainable and structural investment themes: climate protection and decarbonization, the fight against water scarcity, digitalization and digital infrastructure, the transition to a circular economy, and healthy longevity.
Five sustainable investment themes in focus
Systematic Screening for SDG and ESG Leaders
SDG Leaders: This is how we refer to companies in our proprietary sustainability screening that can contribute a significant portion of their revenue toward achieving the UN Sustainable Development Goals (SDGs). We pay particular attention to how companies produce their products and services with a focus on sustainability. The investment potential appears enormous: According to United Nations calculations, there is already an annual financing gap of approximately USD 2.5 trillion for the SDGs.
ESG Leaders: In our view, companies classified as ESG Leaders excel with sustainable processes within their operations. To identify these companies, we follow a catalog of strict exclusion criteria as well as a "best in class" approach. We recommend ESG Leaders as a complement to SDG Leaders to ensure sufficient diversification within the portfolio.
Growth potential and classification within a sustainable investment theme are, in our view, not sufficient reasons to buy a company's shares. Equally important, in our opinion, is quality: We consider companies attractive if their growth is profitable and they are characterized by high capital returns, low debt, and management with an excellent track record.
Why is qualitative growth so important?
Especially in light of structural trends such as decarbonization, with the highly capital-intensive renewable energy sector, the importance of this quality approach from an investor's perspective becomes evident. No matter how strong the growth is: If companies do not earn their cost of capital, they do not, in our opinion, create added value for investors.
To narrow down a global equity universe in terms of quality, we recommend a quantitative screening based on a ROIC approach (Return on Invested Capital). Here, a company's capital returns are related to its enterprise value (EV) per invested capital (IC). As a result, companies with high and growing capital returns at attractive valuations can be identified. We hope to find above-average growth again through classification within sustainable investment themes. This completes the circle of the screening we propose.
In search of sustainability and high quality
But where can we currently find areas that convince us with both sustainable and profitable growth potential?
-Energy transition: To counteract human-caused global warming, drastic measures are needed. However, the targeted decarbonization of the economy does not only have to mean renunciation – it could also become a lasting driver of growth. Significant movements are already underway. According to estimates by the International Energy Agency (IEA), nearly USD 2 trillion were invested in clean energy carriers in 2024. This is almost double the amount invested in fossil fuels. To benefit from this transformation as an investor, we see particular opportunities in the areas of power grids and infrastructure. However, the trend also opens up opportunities in energy efficiency and storage, clean infrastructure and transportation, as well as renewable energies.
-Rising healthcare expenditures: According to UN projections, up to 2 billion people could be over 60 years old by 2025. And with increasing life expectancy, the need for treating chronic diseases and age-related conditions rises. This creates a robust market for healthcare products and services. Moreover, innovations are needed to limit the growth of healthcare costs – prevention thus comes to the forefront. For example, treatments against obesity to prevent secondary diseases such as diabetes, cardiovascular diseases, kidney failure, or neurodegenerative conditions. Estimates suggesting that up to 1.8 billion people could suffer from obesity by 2035 underscore the urgency of preventive treatments.
-Circular economy: Humanity is already consuming significantly more natural resources than ecosystems can regenerate, according to the "Earth Overshoot Day" concept. The transition to a circular economy offers an alternative: reducing materials, recycling, reusing, and substituting could lower resource consumption and unlock growth often underestimated by financial markets. The flourishing business of scrap cars or the rental of construction machinery in the USA also appear to us as interesting investment ideas in this context.
Sustainable, qualitative growth must always remain a priority: in our view, companies that contribute to sustainable development through their products and services have the potential to achieve above-average growth. However, if companies fail to cover their cost of capital, they do not, in our opinion, create value for investors.
Fund in focus
Fund in focus
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This document only serves advertising and information purposes, is for distribution in Switzerland only and is not directed at persons in whose nationality or place of residence prohibit access to such information under applicable law. Where not indicated otherwise, the information concerns the collective investment schemes under the law of Luxembourg managed by Swisscanto Asset Management International S.A. (hereinafter "Swisscanto Funds"). The products described are undertakings for collective investment in transferable securities (UCITS) within the meaning of EU Directive 2009/65/EC, which is governed by Luxembourg law and subject to the supervision of the Luxembourg supervisory authority (CSSF). This document does not constitute a solicitation or invitation to subscribe or make an offer to purchase any securities, nor does it form the basis of any contract or obligation of any kind. The sole binding basis for the acquisition of Swisscanto Funds are the respective legal documents (management regulations, sales prospectuses and key information documents (PRIIP KID), as well as financial reports), which can be obtained free of charge at https://products.swisscanto.com as well as at Swisscanto Fondsleitung AG, Bahnhofstrasse 9, CH-8001 Zurich (also acting as representative of the Luxembourg Swisscanto funds in Switzerland) or in all offices of Zürcher Kantonalbank. Paying Agent for the Luxembourg Swisscanto funds in Switzerland is Zürcher Kantonalbank, Bahnhofstrasse 9, CH-8001 Zurich. Information about the sustainability-relevant aspects in accordance with the Regulation (EU) 2019/2088 as well as Swisscanto's strategy for the promotion of sustainability and the pursuit of sustainability goals in the fund investment process are available on the same website. The sub-fund referred to in the document is subject to Article 9 of Regulation (EU) 2019/2088. The distribution of the fund may be suspended at any time. Investors will be informed about the deregistration in due time. The investment involves risks, in particular those of fluctuations in value and earnings. Investments in foreign currencies are subject to exchange rate fluctuations. Past performance is neither an indicator nor a guarantee of future success. The risks are described in the sales prospectus and in the PRIIP KID. The information contained in this document has been compiled with the greatest care. Despite professional procedures, the correctness, completeness and topicality of the information cannot be guaranteed. Any liability for investments based on this document will be rejected. The document does not release the recipient from his or her own judgment. In particular, the recipient is recommended to check the information for compatibility with his or her personal circumstances as well as for legal, tax and other consequences, if necessary, with the help of an advisor. The prospectus and PRIIP KID should be read before making any final investment decision. The products and services described in this document are not available to U.S. persons under the relevant regulations (in particular Regulation S under the U.S. Securities Act of 1933).
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This document only serves advertising and information purposes and is not directed at persons in whose nationality or place of residence prohibit access to such information under applicable law. Where not indicated otherwise, the information concerns the collective investment schemes under the law of Luxembourg managed by Swisscanto Asset Management International S.A. (hereinafter "Swisscanto Funds"). The products described are undertakings for collective investment in transferable securities (UCITS) within the meaning of EU Directive 2009/65/EC, which is governed by Luxembourg law and subject to the supervision of the Luxembourg supervisory authority (CSSF).
This document does not constitute a solicitation or invitation to subscribe or make an offer to purchase any securities, nor does it form the basis of any contract or obligation of any kind. The sole binding basis for the acquisition of Swisscanto Funds are the respective published legal documents (management regulations, sales prospectuses and key information documents (PRIIP KID), as well as financial reports), which can be obtained free of charge at https://products.swisscanto.com/. Information about the sustainability-relevant aspects in accordance with the Regulation (EU) 2019/2088 as well as Swisscanto's strategy for the promotion of sustainability and the pursuit of sustainability goals in the fund investment process are available on the same website. The sub-fund referred to in the document is subject to Article 9 of Regulation (EU) 2019/2088.
The distribution of the fund may be suspended at any time. Investors will be informed about the deregistration in due time. The investment involves risks, in particular those of fluctuations in value and earnings. Investments in foreign currencies are subject to exchange rate fluctuations. Past performance is neither an indicator nor a guarantee of future success. The risks are described in the sales prospectus and in the PRIIP KID. The information contained in this document has been compiled with the greatest care. Despite professional procedures, the correctness, completeness and topicality of the information cannot be guaranteed. Any liability for investments based on this document will be rejected. The document does not release the recipient from his or her own judgment. In particular, the recipient is recommended to check the information for compatibility with his or her personal circumstances as well as for legal, tax and other consequences, if necessary, with the help of an advisor. The prospectus and PRIIP KID should be read before making any final investment decision.
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The products and services described in this document are not available to U.S. persons under the relevant regulations (in particular Regulation S under the U.S. Securities Act of 1933). Data as at (where not stated otherwise): 11.2024
© Zürcher Kantonalbank. All rights reserved.
