Global Sustainable Equity: News and Opportunities (October 2020)

During the lockdown, it has been hard at times to comprehend the monumental effect COVID-19 has had on the global economy by driving us indoors and online at a rate never before seen. While  digitization has been a major investment trend for several years, the pandemic has undeniably accelerated it, and we believe digitization will be one of the dominant drivers of investment returns over the next decade.

Closely linked to digitization is the transition toward low-carbon energy. This trend has also been supported this year through political commitment toward investment in renewable energy, electrification of transport, energy efficient technologies and sustainable infrastructure. We have been encouraged to see governmental fiscal stimulus targeted toward green projects.

Political Steps Toward a Low-Carbon World

The European Union (EU) has earmarked 30% of its €750 billion COVID-19 recovery package toward sustainable projects including renewable energy and storage, sustainable buildings and public transport. There was further positive momentum from the incoming EU president, who outlined ambitions to reduce emissions by at least 55% by 2030 instead of the 40% previously targeted.

In other welcome news, China committed to peaking its carbon emissions by 2030 and achieving carbon neutrality by 2060. China is the world’s second-largest economy and the largest emitter of CO₂, so the announcement is a huge step toward a sustainable global economy. We hope these goals can be quickly met and surpassed.

We have also seen more than 20 countries implement end dates for the sale of internal combustion engines. There is a broad trend to bring forward decarbonization goals from a vague mid-century point toward a highly visible 2030 target date, which sets us up for a decade of innovation.

The third quarter saw economic activity around the world begin to thaw as governments were required to balance the need to reopen countries with continuing to manage the COVID-19 pandemic. Against this backdrop, global equity markets ended the quarter higher; the MSCI World Index delivered a total return of 7.9% in U.S. dollar terms. The best-performing sectors were information technology, consumer discretionary and industrials, whereas the energy, financial and real estate sectors underperformed, with the energy sector falling by more than 15%.¹

Can Digitization Reduce the Environmental Harm Caused by Economic Activity?

The world’s struggle to ease lockdown restrictions is continuing to impact parts of the economy that rely on getting people together physically. Counter to that, we are seeing digitization accelerate. While this phenomenon has been spurred on by COVID-19, we expect that many of these digital trends will persist as people embrace the ease of use, enhanced productivity and efficiency that digitization offers.

Despite the encouraging adoption of digital trends, which we regard as being complementary to reducing the negative environmental impacts of economic activity, the increasing frequency and severity of climate-related events reminds us of the urgent need to accelerate investment in the low-carbon energy transition. Fortunately, the pandemic does not appear to have had a significant negative impact on this front. There is real momentum building behind this transition, thanks to exciting business innovation in clean energy technologies combined with strong regulatory support from many governments.

Nowhere was this innovation more evident than in Tesla’s recent update, which mapped out a clear investment plan to accelerate adoption of electric vehicles and clean energy. By 2030, Tesla’s goal is to have multiple terawatts of battery production in place to allow 20 million affordable electric vehicles to be produced annually as well as large scale energy storage installations to support renewable energy systems. We anticipate that Tesla’s ambitious vision will catalyze a further step up in investment across the broader automotive and energy industries.

2020 has been a challenging year, but we are optimistic that the global economy will emerge from this pandemic more resilient – and on a more sustainable trajectory – than before. Instead of undermining it, we are hopeful that this crisis will serve to underline the attractiveness of sustainable investing and how it leads to better outcomes, not only for investors but also for the environment and society.

¹Morningstar, as at 30 September 2020. Net Asset Value (NAV) to NAV, gross income reinvested where applicable.