Despite the easing of lockdowns throughout the world, there remains speculation about whether the old demand trends for fast or luxury fashion, as well as eating, drinking and travel, will hold. For example, only 9% of people polled by YouGov in the UK wanted things to return to exactly how they were before the crisis.
From our perspective, we see a great opportunity in companies that are positioned to transition to a more regenerative form of capitalism – where companies that treat workers well, don’t exploit vulnerable communities in their supply chain, that take proactive action in a crisis, and that limit their impact on the environment, will be more attractive to investors.
We anticipate that asset prices will increasingly reflect this. In fact, Harvard published a white paper in May that looked at parallels between US share prices and salient corporate social responses to Covid-19 (such as sick pay policies, appropriateness of government aid acceptance, dividend cuts), and concluded that there was a clear alpha correlation between the two.
Sustainable investment themes have accelerated
Sustainable themes have accelerated as a result of the Covid-19 crisis. Firstly, momentum for environmental policy has gathered pace, despite the fragile state of the global economy. Policymakers have been quick to draw the link between the coronavirus and the environment – like viruses, greenhouse gases care little for borders. The debate around carbon policy, and specifically carbon tax, has notably speeded up. The recent eye watering impairments within the oil sector brings further caution to the broader carbon capital at risk in the system.
There has also been important research quantifying pollution reduction, one of the few positives from this crisis. There has been a staggering drop in emissions through the crisis, at a level that is obviously unsustainable but has at least demonstrated the efficacy of urgent policy response. As a result of the global measures to combat Covid-19, the IEA (International Energy Agency) expects global CO2 emissions this year to decrease to levels of 10 years ago. This is significant and could support the case for a more agile economic culture that includes more working from home. It is effectively an ‘investment-free’ solution to help deliver the legal commitments of the Paris Agreement.
There also continues to be strong momentum in human capital management within the sustainable companies that we focus on, with an increasing correlation between fair treatment of workers and share price returns.
Finally, another interesting new theme is sustainable supply chain management. For years, efficiency has been the overriding aim in supply chains – “just enough, just in time”. Covid-19 has shifted the focus to security. While this has implications for working capital, it also offers new revenue opportunities. For example, infectious diseases have previously been mischaracterised as an issue mainly for developing markets. But R&D investment into non-Covid infectious diseases in developed markets is increasing, which has the potential to create entirely new revenue streams.
All in all, we expect the journey ahead to be much more complex than the Q2 market rally might suggest. As active long-term investors, our focus remains finding high quality companies that are leading the transition to a more sustainable world.
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