Sustainability & disruption: natural twins

06/08/2018

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​Hamish Chamberlayne, Portfolio Manager of the Global Sustainable Equity Strategy, discusses how these interlinked themes are penetrating every sector of the economy.

There is strong evidence that investment trends continue to favour those companies transforming the world for the better. We believe that only those firms committed to building a sustainable economy are likely to thrive in an environment that is rapidly evolving. Climate change, resource constraints, and ageing and growing populations are some of the most complex megatrends humanity has faced, and demand innovative, lasting, solutions. We view sustainability and the disruption necessary to bring about positive change as being natural twins: sustainability helps drive innovation, and innovation needs to be sustainable for long-term survival.

The fastest growing sub-sectors in the market are aligned with sustainability and helpful disruption. We are finding exciting opportunities in the evolving areas of cloud computing, artificial intelligence, the electrification of transport, smart cities, industry 4.0 and sustainable infrastructure. Even the more ‘traditional’ companies within financial services, education and research, and healthcare are fundamentally changing the way they deliver goods and services through technology. Companies adapting in this way look likely to grow regardless of economic and political cycles, giving us confidence about the future of our investments.

Tech disruption: cloud gazing

The reality is that technology is penetrating every part of the global economy. When examining any potential investment, we therefore need to determine whether a company is on the right side of technological disruption. Enterprises are being forced to digitalise to remain competitive and digitalisation is considered a top priority for senior management. Equally, as some technologies are still in their infancy, we are focused on identifying companies that are responsive to new developments or leading the way through their own advances.

Microsoft is one example of a multi-thematic holding that is having a positive impact on the sustainability of many different industries. Its cloud computing platform is providing the tools to a wide range of users, from water filtration services to public transportation systems, to healthcare. Other companies we favour that offer cloud-based solutions include Adobe, Salesforce.com, Autodesk, and SAP. Their solutions can be quickly deployed, and provide a way for customers to improve efficiency and customer service.

Adobe is transforming creative industries and information sharing, with education one of its largest end markets. Autodesk provides software to architects, engineers and manufacturers, enabling them to design low carbon buildings, resilient infrastructure, and sustainable products with more local supply chains. Salesforce and SAP provide software to help businesses run more efficiently and get closer to their customers.

Many of our tech investments are addressing more than one sustainability theme. Semiconductors, for example, are the backbone of a smart and connected world. The industry is evolving from serving computing and smartphone markets to being adopted in numerous industrial and internet-of-things applications.

Cleaning up: transport and energy

In the auto industry, the shift to electric and autonomous vehicles is resulting in far more semiconductor content in cars. In January 2018, Reuters reported that investments in electric vehicles announced to that period had included at least $19bn by US automakers, $21bn in China, and $52bn in Germany.. At the same time, the list of cities committed to combatting air pollution and climate change is swelling: central Rome has joined Paris, Madrid, Mexico City, and Athens in pledging to ban diesel vehicles by the mid-2020s. We expect rapid technological improvements, combined with government support for a low carbon transition, to disrupt companies that are slow to change.

2018 has also seen more progress on renewable energy development. China plans to invest $368bn into renewable energy projects by 2020, and SoftBank’s Vision Fund plans to support a $200bn 200 gigawatt solar power development in Saudi Arabia. Aside from the environmental benefits, growth of the solar industry could save the Kingdom up to $40bn annually by obviating the need to burn its own oil; this new solar installation is expected to generate the power equivalent of approximately 200 average-sized nuclear power stations. The world’s largest oil economy so visibly diversifying its energy sends a warning to those who have yet to switch to a low carbon investment approach.

Oil and the plastics pandemic

Following the BBC’s critically acclaimed Blue Planet II series, the spotlight has firmly fallen on society’s obsession with plastic and the shocking extent of ocean pollution. Plastic is clearly an unsustainable resource: scientists estimate that, if current trends continue, there will be roughly 12 billion tonnes of it in landfills or our natural environment by 2050.

Regulation against plastic will doubtless increase – the European Union has recently proposed a bloc-wide ban on single-use plastics, such as straws, cutlery and cotton buds. UK legislation prohibiting microbead use in personal care products came into effect in January, and Prime Minister May has urged all Commonwealth countries to sign up to the newly formed Commonwealth Clean Oceans Alliance in a pledge to fight marine waste.

As oil is a primary raw material in plastic, a global shift away from its use towards alternatives, and greater recycling, is another negative for the long-term oil price. Our strategy has very little exposure to companies contributing to these issues: we do not invest in oil and petroleum stocks and we owned just one consumer staple company at the end of June. In the few instances where plastic is used, we will be engaging with company management to better understand what they are doing to reduce its use and waste. Our world is changing; we strongly believe that companies championing environmental sustainability are more likely to prosper than those that fail to adapt. Think of it as natural selection.

Plastic pollution in figures:

Sources: 1 Greenpeace, 2 Alfred Wegener Institute, Helmholtz Centre for Polar and Marine Research, 3 Ellen MacArthur Foundation, 4 Ocean Cleanup Foundation (August 2018)


Glossary

Industry 4.0 - a name for the current trend of automation and data exchange in manufacturing technologies.

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The information in this article does not qualify as an investment recommendation.

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