Hamish Chamberlayne, Head of Global Sustainable Equities, explores the most recent developments in the world of sustainability amid the COVID-19 crisis.
- As lockdown restrictions ease and economic activity picks up, many investors, encouraged by substantial central bank stimulus, are hopeful for a V-shaped economic recovery.
- Despite continuing climate disasters, the prospect of a “green recovery” in the European Union (EU) is promising, with fiscal stimulus packages directed toward renewable generation, green building technology and materials, and e-mobility.
- We expect to see mixed success for companies as restrictions ease and believe those that are aligned with the transition to a low-carbon economy and digitalization might be more resilient over the long term.
The second quarter of what has been a tumultuous year saw equity markets rebound strongly as the global growth rate of COVID-19 infections slowed in some regions, giving investors hope that the worst of the pandemic may be over. Lockdown restrictions were eased in several countries, with economic data highlighting increased activity levels, fueling hopes of a V-shaped global economic recovery. This sentiment was supported by the remarkable scale of stimulus, both monetary and fiscal, that has been announced by central banks in recent months. The U.S. market outperformed the other major markets, registering its best quarter since the fourth quarter of 1998. This performance was helped by the ongoing outperformance of technology stocks, with the Nasdaq Index reaching new all-time highs.
How Has the World Fared from an Environmental Perspective?
In our first-quarter update, we remarked that the COVID-19 pandemic had given us a glimpse into what a sustainable future could look like, with large declines in carbon emissions and air pollution. Initial readings from satellite data indicate a 30%-60% reduction in nitrogen dioxide and particulate matter pollution in major cities across the world, driven by reductions in traffic congestion, air travel and heavy industry. With economic activity starting to rebound, however, this will be nothing less than a short-lived interruption and will have had a negligible impact on slowing down the climate crisis, which continues to escalate.
Amid the pandemic-dominated news headlines, it is easy to overlook the most recent environmental disasters: Reports of record-high temperatures in the Arctic and a record number of forest fires in Siberia. These events follow the record number of wildfires in Australia and the Amazon last year. It is, however, encouraging to see that many governments have not lost sight of the imperative to decarbonize economies, and we are optimistic about the prospects of a “green recovery” in the EU, with fiscal stimulus packages directed toward clean technology sectors such as renewable generation, green building technology and materials, and e-mobility.
Tech Stocks Lead the Way
The move toward a digital economy has been an important theme for the last few years, and the pandemic has accelerated this transition.
For example, Avalara, an innovative developer of sales tax management systems, and design software developer Autodesk both performed strongly after announcing higher-than-anticipated revenue growth that highlighted the resilience of their business models. Similarly, Cadence Design Systems benefited from strong demand for its cloud-based collaboration software, which facilitates circuit board design and electronics manufacturing.
Indeed, companies that provide cloud solutions were in high demand as employees across many businesses started working from home. Adobe reported robust revenue growth driven by its Creative, Document and Experience Cloud businesses while Microsoft reported strong demand for its Office and Azure offerings. Technology hardware companies with exposure to cloud data centers also benefited.
“Winners” and “Losers” of the COVID Crisis
As lockdown restrictions are starting to lift, economic activity has rebounded, but the mixed success of the lockdown easing across the globe serves as a reminder that it will not be an easy process. Sectors such as retail stores, restaurants and in-person entertainment will continue to struggle until more normal activity levels resume. Conversely, digitalization – a trend that we believe is aligned with a sustainable economy – continues to accelerate. The resilience of the digital economy thus far, with many companies seeing increasing demand for their services, has served to underline the idea that many people and businesses can lead lower-carbon lives.
We firmly believe that the transition to a low-carbon economy will continue; the unstoppable momentum in clean technology combined with rising regulatory burdens associated with carbon continues to make investment in fossil fuels less attractive, and we expect a continuation of the regulatory support for the transition to clean energy. An increasing number of companies across the power generation, transportation and manufacturing industries have committed to multiyear investment plans aligned with the transition to a low-carbon economy. In the coming decade, we believe an enormous increase in renewable generation capacity, breakthroughs in battery technology and broad consumer uptake of electric cars is inevitable. We believe this will be the decade in which we will see clearly the prospect of peak oil demand.
There are many other areas where we expect little change. For example, the need for essential health services, driven by aging populations, has only increased due to this crisis. There remains great need for insurance and risk management services. Population growth and urbanization will continue, and with them the need to invest in sustainable infrastructure, public transport, energy-efficient buildings and water technology. Finally, innovation will advance with respect to the circular economy, and there will still be demand for many consumer goods and services in relation to sports and leisure, entertainment and healthy eating.
Environmental, Social and Governance (ESG) or sustainable investing considers factors beyond traditional financial analysis. This may limit available investments and cause performance and exposures to differ from, and potentially be more concentrated in certain areas than, the broader market.
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