People often say they don’t like change. But for investors, it should be the opposite.
Change is just another term for transition, disruption or even revolution. And when a status quo is being challenged, significant opportunities can arise.
The world is in a series of individual, but interconnected transitions that will reshape how we live, work and interact. By considering this transitioning world from multiple perspectives and exploring beyond the obvious, investors have the potential to capture long-term gains.
Taking the long view
Few people now dispute that to avoid an environmental catastrophe, we need to transform how we live on our planet. It is also accepted that decarbonisation and changes to how humans interact with biodiversity aren’t going to happen overnight, these will be multi-decade-long transitions.
On any long journey, it’s natural to experience fatigue. We might take a wrong turn or two but, in the end, the destination will be worth it. It could be argued that investors are suffering from fatigue when it comes to sustainability.
Without lessening their good intentions, a deteriorating economic environment has meant other pressing concerns have risen to the surface, including stubborn inflation, rising interest rates and a potential global recession.
How to pick up the pace?
In this context, it’s essential to remind ourselves that we are making progress. According to the International Energy Agency (IEA), renewable energy provision is on course to break expectations, with capacity jumping by a third as countries around the world speed up deployment. Meanwhile, a UN update on the depleted ozone layer has shown that safeguarding efforts are paying off and a full recovery is on track
These two wins are important in highlighting that ingenuity and effective policymaking can reverse the unintended consequences of past human actions.
As investors, we need to stubbornly retain our optimism that investing in sustainable solutions and environmental, social and governance (ESG) friendly companies can be impactful both for the planet and for our portfolios, even if the final destination still seems a long way off.
Time to circle back
In parallel with the need to protect our environment, is the need for economic transformation.
For thousands of years, mankind has taken what it needs from the planet without replenishing these natural resources. Yet, as the human population explodes – jumping from 1 billion in 1800 to nearly 8 billion today – this take, make, waste economic model is no longer supportable.
To deal with the man-made depletion of resources, we need to transition to a more circular economic model, an eco-system of reduce, reuse and recycle, that has the ability ‘to meet the needs of all within the means of the planet’.
From a business perspective, this will require businesses to optimise manufacturing strategies: to look at the circularity of their supply chains i.e. are resources fully renewable; can resources be recovered from disposed products; can products’ shelf life be extended? And challenge existing practices. For example, the ‘right to repair’ movement is calling for companies – particularly in the technology sector – to end a system of ‘planned obsolescence’ that encourages consumers to update devices more regularly than necessary.
The shift to a circular economic model is being augmented by people power: consumers are demanding greater supply chain transparency and no longer want to associate with companies perceived to be doing more harm than good.
And this economic transition is rightfully recognised as a value creator by investors. Not only can it enhance returns by generating better business efficiencies or through innovative circular solutions, but can also help mitigate the risk of exposure to companies called out for poor business practice – instances of which can quickly go viral on social media and damage share prices.
Deglobalisation developments
At the start of the twenty-first century the world was on a trajectory towards globalisation, cemented by China’s entry into the World Trade Organisation in December 2001. But this era of closer global integration has become fractured and we are now heading along an opposite geopolitical path.
The transition to deglobalisation, or ‘de-risking’, stems from a combination of factors. A major socio-political shift moved political views away from the centre and towards the extremes, enabling some politicians to take more populist positions such as protectionism. The structural growth of China has challenged the status quo of the international system (US-centric), splitting it between two dominant sources of power and influence. Finally, the pandemic highlighted industry’s overreliance on the manufacturing capability of China.
While deglobalisation is having enormous repercussions on global trade, it is creating interesting new openings for investors. Other nations, such as India, are taking advantage of companies seeking to limit their reliance on China as a manufacturing hub – the so-called China plus one strategy. Governments are offering sizeable subsidies to ‘re-shore’ certain strategically-vital sectors – for example, the US Chips and Science Act is worth USD 280 billion.
In this transitioning geopolitical world, vigilance is becoming a vital component of the investor toolkit.
The social side-effects
Demographic trends are having an equally transformational social impact.
A consequence of Asia’s economic rejuvenation has seen millions of its population escape poverty and become economically secure. In 2020, 2 billion Asians were estimated to be middle class, a number that is set to reach 3.5 billion by 2030 (versus 647 million middle-class people in the US in 2020).
Prosperity in these nations has spurred a shift from rural to urban living, which has been accompanied by a transformation in the region’s consumption habits. As well as exhibiting a taste for luxury brands, Asian consumers’ appetite for meat and seafood is forecast to rise by 78% by 2050. While this may pile further pressure on planetary resources, it has created a thriving market for established Western brands.
Elsewhere in the world, an increasing number of consumers are turning their back on meat products in favour of plant-based substitutes. The trend for veganism or the less rigorous flexitarianism – where people eat meat or seafood occasionally – has transformed the food industry. Plant-based dairy and meat sales are projected to increase from USD 29 billion in 2020 to USD 162 billion by 2030.
Meanwhile, a rapidly ageing population is revolutionising how healthcare services are delivered, hastening the adoption of new technology as well as the development of preventative medicine.
Monitoring long-term demographic pathways can be a useful investment angle, as they can have important implications for economic and social development, as well as environmental sustainability.
Industrial innovation
Collectively, these concurrent transitions are inducing massive upheaval across industry. Businesses are having to react to rapid geopolitical or environmental changes as well as be informed of the latest consumer preferences and appetites.
Perhaps the biggest transformation for the commercial world comes from innovation – both scientific and technological. Hopes are being pinned on innovative solutions hastening positive outcomes for many of the world’s challenges. For example, will nuclear fusion deliver on its potential to provide a near-limitless, safe, clean energy? Can mRNA technology build on its Covid-19 success to develop further essential vaccines?
Perhaps the most imminent and transformative innovation will be the roll-out of artificial intelligence. Artificial Intelligence (AI) is expected to have a broad impact from employment to content generation, data security, energy consumption, and even diversity and inclusion. It has the potential to unlock new growth avenues for businesses and help them become more cost-efficient. Yet, amid such disruption, some businesses will inevitably be disintermediated if they don’t adapt quickly enough. Additionally, AI is already sparking fears over far-reaching job robotisation, workforce displacement and the potential for subversion and misuse. Hence, it’s vital to consider this technology as part of a broader ESG framework.
Investors would be wise to keep a close eye on this rapidly developing technological world, while also being wary of excessive hype and speculation.
A decade of change and action
We are partway through a decisive decade of change, but it should also be considered a decade of action. Governments, companies, consumers and investors must take action to recognise and respond to the often interconnected transitions our world is facing. Inaction is simply not an option.
From an investment perspective, companies’ transition strategies need to be analysed – not only to identify tomorrow’s leaders but also those who are failing to adapt. At BNP Paribas Asset Management, we believe taking a better account of externalities, particularly social and environmental factors, can help us deliver value while making the world a better place. We intend to be a driving force of transformation and, to achieve this, we are working with our clients to meet tomorrow’s challenges today.
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