Sustainability & Disruption: Natural Twins

 In Market and Investment Insights

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 favor 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 aging and growing populations are some of the most complex megatrends humanity has faced and demand innovative and 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 digitalize to remain competitive, and digitalization 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 company 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 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 tech companies 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. Investments in electric vehicles announced to date include at least $19B by U.S. automakers, $21B in China and $52B in Germany. At the same time, the list of cities committed to combating 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 $368B into renewable energy projects by 2020, and SoftBank’s Vision Fund plans to support a $200B, 200-gigawatt solar power development in Saudi Arabia. Aside from the environmental benefits, growth of the solar industry could save the Kingdom up to $40B 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 tons 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 toward alternatives, and greater recycling, is another negative for the long-term oil price. 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

sri-chart

There is strong evidence that investment trends continue to favor 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 aging and growing populations are some of the most complex megatrends humanity has faced and demand innovative and 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.

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Sources:

1Greenpeace

2Alfred Wegener Institute, Helmholtz Centre for Polar and Marine Research

3Ellen MacArthur Foundation

4Ocean Cleanup Foundation

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

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