Sustainability winners over the next market cycle

Mary Jane McQuillen, Portfolio Manager at ClearBridge Investments, 28/04/2021

“Environmental, social and governance (ESG) factors are becoming increasingly important to investors, and the COVID-19 pandemic has been shining an even greater spotlight on them across the globe. While Europe is ahead of the United States in this area, new infra­structure and green energy initiatives are likely to accelerate the environmental component in the United States. We think all three aspects are critical, and that ESG is important to consider from both investment returns and risk perspectives.

Sustainability winners over the next market cycle

“Stocks with strong sustainability profiles generally performed well in 2020 due to a variety of trends. We consider some of these to be secular trends that should support sustainability-focused investments for the longer term, such as helping fight climate change by lowering carbon emissions or overcoming resource scarcity through use of recycled materials.

“Another advancing trend—catalysed by neces­sity due to COVID-19—was the effort of the health care industry to use its capabilities and financial resources to improve the welfare of society. The swiftness of development and the effi­cacy of the two initial COVID-19 vaccines reflect how biopharmaceutical companies’ drive to innovate treatments and cures has made meaningful advances possible not only for rare and genetic diseases, but also for infectious diseases and potentially cancer.

“The sustainability winners over the next market cycle could include: discretionary names improving the sustainability of food sourcing and packaging; financials, which are priori­tising diversity and inclusion; and, industrials companies enabling energy efficiency and electric vehicles.

“We are positive on the long-term return potential for ESG portfolios. There are numerous studies documenting the long-term performance benefits of investing consistent with ESG principles. Depending on your time frame, there will be fluctuations in the market that may affect ESG-focused portfolios with less exposure to fossil fuels, for example, as oil prices change. We maintain a long-term view of market opportunities and returns but are watching how higher interest rates will play out across economic sectors and how variants of COVID-19 may delay full reopening in some parts of the globe.

Sustainable food and packaging offers a major opportunity


“While investors seemed to focus on the impact of renewable energy innovators and enablers in 2020, there are certainly other areas of the market to find examples


of where innovation is leading to impact and strong performance potential for stocks. We are interested in a diversity of impact, for example, in sustainable food and packaging. Many packaged goods companies have acquired approximately five years’ worth of new consumers since March 2020. While not all will be kept, the industry has woken up to the increased relevance of sustainability credentials for both their consumers as well as their investors, with data showing consumers, especially younger ones, are willing to pay more for sustainable brands. An increased focus on packaging, as well as sustainability across the whole product lifestyle, from regenerative agriculture to recycling/waste reduction, should be a differentiator in the space in the coming years.


All investing will eventually be ESG investing


“ClearBridge has long believed that all investing will eventually be ESG investing, that one day it will no longer be considered a separate discipline. Our experience has shown that inte­grating material and relevant ESG factors into fundamental research and investment decision-making has consis­tently added value to our investment process and supports our views as long-term shareowners.


“Not surprisingly, as a result of the exponential growth of new investment strategies focused on ESG, there is corresponding growth in the risk of confusion and dilution of process. For many investment managers, the bulk of ESG analysis is outsourced— although no active manager would think of outsourcing the bulk of invest­ment research. There is often a disconnect between ESG integration claims and practice.


“For those struggling to make sense of ESG investment offerings, we recom­mend looking at the experience of the portfolio managers in managing assets with ESG factors, the history of the firm’s ESG investing, the ESG infrastructure, the investment process and track records over multiple business cycles.”


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