Looking back at 2023, De Vries concludes that the rise in interest rates exerted pressure on share valuations, hitting small caps and renewable energy companies hard. "We felt this in our portfolios, which include many growth stocks from these segments. In the last two months of the year, however, we saw some recovery for many of these equities, so overall it was not a bad equity year for us in terms of performance."
De Vries: "What we did successfully in 2023 was to increase the duration of the bond portfolio in time. This bucked the trend, but it allowed us to benefit from the reversal in monetary policy. We made that decision because we thought the inflation rate expectations were too high."
De Vries expects that by 2024, Triodos portfolios will be less sensitive to specific factors like growth, and instead focus more on value. "For instance, businesses like sustainable utilities with strong cash flow."
Optimistic for 2024
De Vries is surprisingly optimistic for 2024. "While there is certainly reason for caution economically and geopolitically, the fear of inflation and high interest rates has subsided. There is still plenty of potential upside as equities remain attractively priced. Our portfolios are in a good position for this. 2024 could be a good year for equities."
De Vries sees many opportunities for circular companies worldwide in 2024 and beyond. "There will be a real emphasis on this, both politically and economically. This goes far beyond the reuse of raw materials and products, as it involves the entire chain from production to consumption. Far less waste, good repair capabilities and a closed recycling chain. Companies have a lot to gain too. Your company will have greater control over its costs, creating financial benefits and impact."
The power of impact-driven investing
Many investment managers start their investment process with an exclusion list. They select companies from the remaining universe based on risk and return. Instead, the Triodos model focuses on impact, return and risk, with impact as the starting point. De Vries: "With every investment, we ask ourselves how it contributes to (one of) the five transitions we have identified. This results in a smaller selection, but one with huge impact potential."
Triodos IM's five transitions are: food, resource, energy, societal, and wellbeing. These transitions are in line with the UN Sustainable Development Goals.
De Vries expects financial investment results to be even more clearly linked to impact. Companies that have a positive impact on people and the environment will benefit from lower interest costs because investors are keen to lend to sustainable companies. And companies that have already made green investments will have a competitive advantage over those that are still at the beginning of the process. Consumers will also demand more sustainable products and services, something you will eventually see reflected in company revenues.
A head start for impact investors
De Vries expects Triodos IM to make a significant impact shift in 2024. "The quality of ESG data has greatly improved, and that simply means achieving even more data-driven impact. "Better data and better insights into impact, risk and return lead to better investment decisions. We are gaining a better understanding of things like concrete climate risks. We can incorporate these and other insights into the valuation of company shares. Companies like Triodos IM will make better valuation estimates with the help of this impact data. Ultimately, that gives you an edge over other investors."
Triodos IM invests in the large Japanese housing builder Sekisui House. The company builds wooden houses, offers real estate services and sells building and DIY materials. De Vries: "This company is barely on the radar of other investors. However, Sekisui House has already sold more than 50,000 'zero energy houses', presenting huge impact potential. The shares are doing very well in our portfolios."
We also receive lots of questions about our investment in Japanese car manufacturer Toyota. "Yes, Toyota still manufactures a lot of traditional cars, but it is a company in transition with a lot of promise. The Japanese company has a clear plan for its long-term transition to electric cars with advanced technology, long range, and fast charging. Toyota is poised to take huge steps."
De Vries is concerned, however, about the political and public headwinds in the US, particularly against climate policies. The situation is not so bad in Europe for now, but consumers here are also feeling the cost of sustainability. De Vries: "That is why we continue to emphasise that sustainability ultimately will bring many benefits. We expect a huge efficiency drive in renewable energy to come, thanks to grid improvements and better energy storage. Costs come before benefits, even in a sustainable world, but those benefits will be there, for producers, consumers and investors."