Amy Clarke, Chief Impact Officer and Fred Kooij, Chief Investment Officer
2020 is ending with some rays of hope. Three Covid-19 vaccines have been announced; increases in national net zero commitments mean over 50% of global CO2 emissions are now covered by countries with an explicit net zero 2050 target; and there is more optimism in the market about our collective ability to tackle the growing climate crisis. It is this sense of optimism and renewed vigour with which we close out 2020 and move forward into 2021. As we approach the new year, we see three connected themes set to drive our sustainable investing agenda:
1. An emphasis on ‘Impact’: 2020 was ESG, 2021 and beyond will be impact
2020 has seen “corporate purpose” become a mainstream narrative, with sustainability assessments now including the essence of a business’ mission. We believe that 2021 will see a continuation of this trend, with companies and investment houses showcasing their sustainable, responsible and future fit business credentials. This will go above and beyond the focus on ESG we have seen this year.
With the strengthening of governmental policies on climate and ecological crises, we believe biodiversity and food will be strong themes for investment in 2021. We expect greater focus on ecology in the due diligence investors undertake on companies, especially relating to the risks embedded in a company’s supply chain. Those investors will need to continue to support greater stewardship of companies. We also anticipate this leading to more natural capital focused investments entering the market.
On the equity side, we expect to see continued earnings momentum among the Covid-19 ‘winners’, such as technology and healthcare, many of which we believe will continue to refine their impact investment theses.
We also anticipate a much greater focus in the credit/debt markets, where there is significant opportunity to create widescale change in business by investing in bonds issued for transition, sustainability and impact related activities. Arguably it is here where the responsibility for more impact can be “owned” as bonds can be linked directly to project and/or specific outcomes, something that is currently not possible in equity markets.
We’ve also seen a number of government Covid-19 credit/bailout lines being linked to transition targets, signalling a strengthening of government leadership between business and society. Given the increase in the number of national and corporate net zero commitments, we also expect there to be an increase in the number of green transition bonds and blue bonds entering the market in 2021 and beyond.
2. The ‘just’ transition; inclusivity will dominate the green agenda as will the ‘S’ in ESG
With strong regulatory and policy tailwinds coming into all markets where net zero commitments have been made, so will increased pressure to ensure transitions are inclusive and just. Workers’ rights will be a key focus, especially those in industries at risk of structural decline, as will the need for climate “equity”, balancing the needs of the vulnerable, where certain economies are given help and the investment to ‘catch up’. Community and social justice will follow, with the role of decentralised energy coming to the fore and the ongoing issue of who pays for the pollution (past, present and future) still set to dominate many of the discussions at COP26 and beyond if no agreed solution is found.
Gender equality is likely to benefit from a wholesale shift in investor focus in 2021, in the face of the Covid crisis. Women’s rights around the world have been set back, domestic abuse has increased, and many women have borne unequal loads relating to childcare in the face of lockdowns. With this in mind, we anticipate credit/debt markets will play an enhanced role, with more gender linked bonds coming to the market, both at sovereign and supranational level. We still feel that equity markets are where we are most likely to see an uptick in gender lens products, but we also expect to see corporate gender bonds aimed to address the issues of women’s and girl’s rights to come through in 2021.
3, China will begin to power ahead but the US will quickly re-focus after the last 4 years
We believe that China’s relative rise is inexorable and while tensions with the West will remain, there will continue to be significant investment opportunities. This is especially true within the world of sustainability, as China seeks to deliver on its announcement at the UN in September 2020, that it will aim to become carbon neutral by 2060. China is already the leading manufacturer of wind and solar components and is likely to be a major force within innovation to reduce the costs of more sustainable consumer products, for example electric vehicles and trucks.
In the US, we believe that with a new President, a new narrative from the White House could foster some bi-partisan support for a stimulus bill that has “green” elements, not least given the employment imperative, since the renewables sector generates four times the number of new jobs in the US than the fossil fuel sector.
The role of the EU will be a focus given the relationships it has with both China and the US, and the leadership role the EU has taken on the sustainability agenda. These three trading superpowers, if they can work together, could bring a global wave of innovation that enhances progress on many of the issues we face collectively.
What these themes mean for Tribe portfolios
We’ve already positioned our portfolios to reflect our views and themes for 2021:
- Increased exposure to the US, especially within infrastructure (including water services) and the renewable energy supply chain. We expect these sectors to do well given the impending stimulus package and focus on a green recovery. However, we retain a sizable underweight to the US as a whole due to high valuations and maintenance of our limited exposure to FAANG stocks. US stock markets are skewed towards big tech names which we believe should perform less well relatively in the post-Covid economic recovery period and may also be subject to greater regulatory scrutiny.
- Retained overall overweight to “growth” stocks and emphasis on companies with focus on impact that will benefit from direct policy support and continued consumer choice trends. We remain sanguine on the risks of a material rise in inflation expectations in the short term; however, we continue to guard against this risk with a strong focus on increasing diversification within our portfolios, for example within our alternatives where we have significant exposure to index-linked revenues.
- Growing exposure to China, moving to a small overweight (constrained somewhat by our comfort levels around corporate governance in the country). China has already surpassed its previous levels of pre-Covid GDP and we see continued momentum with further scaling up of technological investments to reduce reliance on the US and great potential from the 2060 carbon neutral declaration made in September.
In January we’ll get a steer on the progress of the Covid-19 vaccine roll out and whether full economic openings are possible or to be risked. The pace of actual recovery may depend on the willingness of consumers to spend some of the savings that have been accumulated during the lockdowns, which may depend on employment and confidence. The role of key government and the stimulus programmes will therefore remain of fundamental importance throughout 2021.