Global Sustainability Reaches Tipping Point

Hamish Chamberlayne, Head of Sustainable and Responsible Investment (SRI), discusses recent developments in sustainability and environmental issues.

Key Takeaways

  • Climate change dominated headlines last year as wildfires ravaged both heavily populated areas and pristine wildernesses, often accompanied by record temperatures. On a more positive note, more and more businesses have embraced sustainability, and clean technologies continue to get cheaper.
  • We remain constructive on the outlook for equities and believe a sustainability framework can lead investors to companies with resilient growth characteristics and the potential to compound wealth through periods of economic turbulence.
  • In our view, active managers can make a positive impact by allocating capital to companies that contribute to a sustainable planet and away from firms that cause harm.

From a sustainability perspective, 2019 has been an important year, with several economically impactful ecological events making headlines. We cannot help but wonder if we will look back and see last year as a tipping point for broader public awareness and concern over the immediacy of global environmental issues.

Last year marked the first bankruptcy directly related to climate change as California energy utility Pacific Gas and Electric Company (PG&E) filed for Chapter 11. Terrible fires, often accompanied by record temperatures, dominated headlines throughout the year, from heavily populated areas in California, Southeast Asia and Australia to pristine wildernesses such as the Amazon and the Arctic Circle. In 2019, we also saw a 16-year-old girl from Sweden become a household name and the face of a worldwide climate protest movement.

On a more positive note, awareness of plastic pollution became prevalent over the past year, and people started to gain awareness of the environmental costs of meat production. Plant-based meat went mainstream, and more and more businesses embraced sustainability, with many putting it at the heart of their growth strategies. Clean technologies kept getting cheaper, with the cost to build new renewable energy falling below the running costs of coal. Electric vehicle sales had their biggest year ever, and automakers committed $225 billion to electrification in the coming years.

While there are positive signs on the sustainability front, it is not hard to find causes for concern globally. Slowing economic growth, geopolitical instability, the ongoing U.S.-China trade war and Brexit are heavy burdens on business and investor sentiment, and we understand why many people are arguing for caution when it comes to equities.

Our Investment Outlook

Despite these concerns, our view has not changed. We remain constructive on the outlook for equities, especially those with superior growth characteristics. We have now had several quarters of industrial and manufacturing weakness, and there are signs that the stock-building cycle and industrial momentum may be close to bottoming. The semiconductor sector is often a leading economic indicator, and, in the last few quarters, we have seen evidence of stabilization in memory prices, with management teams commenting that they expect to see a recovery in 2020.

The shift by central banks toward more accommodative monetary policy is highly supportive of growth equities, and we still see substantial upside potential. While it is true equity valuations are above long‑term averages on an absolute basis, they are at historically low valuations relative to bonds.

We are mindful that a lot of uncertainty remains. But we believe a sustainability framework can help investors navigate that uncertainty and uncover companies with resilient growth characteristics and the potential to compound wealth through periods of economic turbulence.

In our view, there are plentiful opportunities in firms that are on the right side of secular trends. Technological change and innovation have not slowed down, and sustainability issues continue to rise in importance. We believe active managers can make a positive impact by allocating capital to companies that contribute to a sustainable planet and away from those that cause harm.

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