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The choice between a wall and a wind turbine

08 January 2020

Phoebe Stone, Head of Sustainable MPS

"When the winds of change blow, some people build walls and others build windmills" - Ancient Chinese proverb

In the final weeks of 2018, we wrote an article prophesising that 2019 could be the year of sustainable investing. The article concluded "the reality is that sustainable investing is going to become 'mainstream'".

Investing aside, 2019 certainly was the year of sustainability. Every major business looked to be deliberately and visibly pivoting their corporate rhetoric, and in some cases commercial strategy in the direction of sustainability. The aim - capturing the zeitgeist, positioning for future growth and mitigating both potential catastrophes and value destruction.

If the somewhat turbulent geo-political events of last year showed us anything, it is that climate change is at the forefront of the public consciousness. Individuals such as Greta Thunberg, Time's 2019 Person of the Year, have captured the minds of the public and commanded the attention of world leaders. In the UK, the combined impact of Extinction Rebellion, David Attenborough and school climate strikes catapulted climate change to the top five most important issues cited by the country last year. As a result, during last summer our government pledged to reach net-zero greenhouse gas emissions by 2050 in a bid to be compliant with the Paris Agreement goals.

However, governments are not alone in responding to pressure from stakeholders and the public at large. At the UN Climate Summit in September, 87 major companies representing a combined market capitalisation of over $2.3 trillion, 4.2 million employees and headquarters across 27 countries, committed to setting clear and ambitious climate targets across their operations and value chains.

At the UN Convention on Climate Change in early December, asset managers representing over $37 trillion, ratified the global investors' statement on climate change. The signatories, including LGT Capital Partners, agree that it is vital, through collaboration, to not only look to reduce the systemic risks climate change represents, but also to accelerate the transition towards a lower carbon economy.

Within the financial industry, whilst it has been on the radar of insurance companies for many years, climate change is now being considered a significant risk factor. The Task Force on Climate-related Disclosures (TCFD) backed by the Financial Stability Board has set expectations for a fully considered response to climate change. In April, these TCFD standards were firmly reinforced by the Bank of England with the issuance of a consultation on managing climate change risk. It is not unrealistic to expect that the TCFD recommendations may become compulsory for UK financial institutions in the near future. Our parent company is a supporter of the TCFD and over the past year has been considering the recommendations and creating scenarios on how we as a business are likely to be affected by climate-related financial risks.

Within this context, it is interesting to see the start of widespread change in the attitude of investors as well as by the financial institutions themselves. The legislative and economic risk of being tied to "stranded assets" is only increasing with many large institutional investors last year opting to divest from certain fossil fuel assets, namely coal and big oil. This is of course happening concurrently to Saudi Arabia creating the biggest publicly listed company in the world, with the IPO of Aramco. Many commentators are viewing this sale of the crown jewels as an attempt to cash in, before it is too late.

Elsewhere, the war on single-use plastics could not have garnered stronger or more convincing support than it has done over the past twelve months. Multiple countries have announced plans for single-use plastic bans over the course of 2019 including the European Union nations, the UK, Canada, New Zealand and India. Plastic bags are banned in 32 countries worldwide including China and Bangladesh and 18 in Africa alone[1]. Whilst the argument around plastics is nuanced, most agree that the production of virgin plastic should be eradicated, and replaced with the concept of a circular economy, i.e. making plastic out of 100% recycled content. This theme has very much gathered pace this year as increasing numbers of corporates sign up to the initiatives of the Ellen MacArthur Foundation. 

The investor community is awake to these shifts in attitude, with investment philosophies changing in line with them. A UBS survey of over 600 asset owners, published in June[2], assessed the percentage of those incorporating Environmental, Social and Governance (ESG) factors into their investment process. Unsurprisingly, on a regional basis Europe came out top with 82%, and encouragingly in Asia, Oceania and Africa 20% of asset owners are also incorporating these factors.

Over the course of the past year in the UK, the scale of sustainable investing has grown exponentially due to the increased collaboration between mainstream and specialist institutions to make the market accessible and economically viable for investors. The deluge of new products and innovations into the market to meet consumer demand provides many interesting opportunities and potential developments in this space. At the start of 2019, sustainable or ESG investing was perceived by most, if they were being truthful, as a niche investment style. In a relatively short time frame, within wealth management, ESG has gone from something reserved for specialist investors and progressive clients, to a factor that most investment committees are considering at some level.

Looking forward, we can clearly see some nascent trends developing which are likely to dominate in 2020.

Over the year to come, investors that are primarily using ESG as a way to mitigate risk will increasingly view sustainable investing as a way to tap into opportunities connected with sustainable global megatrends including urbanisation, resource depletion, need for accessible and affordable healthcare and climate change.

Another key trend for 2020 will be the creation and utilisation of technology capable of collecting, collating and analysing vast amounts of ESG data. Data sources that are becoming increasingly available include diversity targets, employee health & safety and emissions. The use of Artificial Intelligence, big data and real time ESG information will become more important as investors look for differentiated ways to assess sustainability, and measure positive impact.

Whilst the use of single use plastics has been firmly under the spotlight for the past 18 months, 2020 will likely shift the focus onto the apparel industry. The retail sector is heavily resource consumptive, with the manufacturing process for three pairs of jeans requiring the same volume of water a Brit uses during over the course of an entire year[3]. Once these products are made, shipped, sold for low value, and then discarded, it is almost impossible to recycle them. Many retailers are investing in solutions along with launching or joining initiatives to find ways to tackle these problems.

Over the past twelve months, sustainability has developed to become a significant tailwind for many investors. As this shift continues to take shape, trends in sustainable fibres, recyclable apparel, big ESG data, and positive impact investing are certainly ones to watch as we enter the next decade.

[1] https://www.economist.com/graphic-detail/2019/07/24/ever-more-countries-are-banning-plastic-bags

[2] "ESG: Do you or Don't you?" UBS Asset Management, 2019.

[3] 'Fixing Fashion: clothing consumption and sustainability' House of Commons Environmental Audit Committee, 2019.