Sustainable consumption on the rise

investment viewpoints

Sustainable consumption on the rise

Didier Rabattu - Head of Equities

Didier Rabattu

Head of Equities
Pascal Menges - Client Portfolio Manager (Equities)

Pascal Menges

Client Portfolio Manager (Equities)

Didier Rabattu, LOIM’s Head of Equities, and Pascal Menges, Client Portfolio Manager, spoke to Credit Suisse as part of a special report on consumer responsibility. In this Q&A, they discuss how sustainable consumption represents a structural shift prompting both disruption and opportunity, and the role that financial institutions can play.

 

Research shows that interest in sustainable consumption is on the rise. Is sustainable consumption a passing fad, or is it here to stay?

Today, the global economy faces challenges that require a sustainable solution more urgently than ever before. At the heart of these sustainability challenges is a complex relationship between human development, economic growth, and the planet. In short, this relationship is currently unsustainable. Our economic model today requires that we use resources at a rate that is 1.5 times what Earth can sustain in any one year. As our population increases and the middle class expands, we will be using three times what Earth can sustain by 2050 unless we change our approach to consumption and production1.

We urgently need to adopt a more sustainable model to safeguard the future prosperity of humanity by decoupling our resource use and environmental impact from economic growth.

 

Sustainable Consumption QA Didier_EN.jpg (Integrating Sustainability into...

 

This requires that we fundamentally rethink the way we consume.

Pressure points are everywhere and gathering force, whether that be excessive food waste and virgin plastic use, or rising greenhouse gas emissions. These issues are pushing regulators, businesses and consumers to drive changes in how we behave. 

Policy makers are already starting to alter market behaviours by using regulation as a tool to create change. We are seeing a surge in the number of issues being regulated globally, such as energy, packaging, emissions, recycling, and the ‘right to repair’3. Through landmark policy action such as the 2015 Paris Climate Agreement4 and frameworks such as the EU’s Circular Economy Strategy5, these topics are now on top of the regulatory agenda.

Companies are also innovating, creating solutions to challenges and driving down prices of sustainable goods in their efforts to improve efficiency, gain a competitive edge and enter new markets. Digitisation and big data is also enabling the implementation of new solutions and efficiencies across many industries.

Consumers are also driving demand for sustainable products and practices. Consumer awareness is growing, especially among Millennials and Generation Z6. These sustainability-minded consumers will eventually account for the majority of global spending which will create a widespread shift in consumer preferences.

These three drivers are accelerating and are deeply interconnected: developments in one area often supports or creates new initiatives in another (for example, regulation forces innovation, which allows regulation to tighten further). The combination of these three drivers is empowering change across every sector and across entire value chains.

And it is not a fad. This is a structural shift that we believe will fuel an increasingly rapid transition.

 

Do you see this as a threat or an opportunity for business?

Transition on this scale naturally creates risk of disruption for companies that are unwilling or unable to change. On the other hand, the transition will generate large-scale opportunities and profitable growth for companies that genuinely embed sustainability into their DNA and focus on challenges that are particularly material to their sector.

Importantly, decoupling is not limited to consumer-facing companies. It ripples across entire value chains – a company cannot rightly claim a product has a better footprint if the entire supply chain has not evolved. From the manufacturing to the transformation, production, distribution and eventually repurposing, recycling or re-using - all steps within the chain will feel the pressure to transition. In order to substantially decouple our economic growth from our environmental footprint, we need to rethink how we feed ourselves, how we consume, how we produce and how we organize our cities.

For example, if we look at the food industry and its supply chain, projections show a US$250bn7 opportunity exists within precision farming, including real-time crop monitoring, on-demand delivery of irrigation and nutrients, automated vehicle steering, and custom seeding to improve yields. Supply chain optimisation could create another US$700bn2 opportunity by improving efficiency in expiration dates, water usage and food distribution. Companies at the forefront of these sustainability evolutions will thrive. Those that don’t will be left behind.

This sustainability transition will shape multiple sectors in multiple regions, creating a plethora of challenges and opportunities for investors. Within sustainable consumption alone, we see four key investable themes: Sustainable Food, Sustainable Supply Chains, Sustainable Lifestyle, Sustainable Urban Systems.

 

In which sectors of consumption and production do you see the most opportunities?

The sustainable economy is a trans-sectoral challenge that will create opportunities beyond traditional consumer sectors, and into industrials, materials and technology-driven sectors. The systemic nature of the sustainability opportunity can also improve the scope for diversification, which may help to increase the resilience of a portfolio to market cycles.

Consider the effect of electrification on the energy space, for example. It has the potential to address challenges across sectors and themes, including lifestyles and urban systems. On-site energy storage and generation empowers consumers in their energy supply choices, and is a rapidly-growing feature of modern electric systems with far reaching consequences for traditional electricity utilities. This trend forces the integration of more renewable sources of energy, pushes for adoption of smarter grid technology, energy storage and eventually more automated control devices and energy management applications. In many countries, consumers, supported by regulation, are a key driving force for this evolution. Meanwhile, innovations in solar panels, wind turbines and batteries have exponentially reduced costs8.

The packaging industry is another area of rapid change. 2018 saw a turning point in the level of regulation associated with plastics, which has been a bedrock of packaging for decades, but has also left a disastrous environmental footprint. Plastics play an important role in sustainability – for example in saving food waste – but we expect to see rapid and widespread improvements in recyclability across the value chain from product design to end-of-life collection and processing. We also see a resurgence in paper-based packaging and bio-based alternatives are expected to grow at a rapid rate9. These trends will be particularly key for companies across the value chain in Fast Moving Consumer Goods (FMCG).

 

Do you believe that financial institutions have a role to play to increase the sustainability of companies?

We believe sustainability will be the most significant driver of returns and should, therefore, be central to any investment decision today. As the key drivers of change continue to gather pace, sustainable investment opportunities offer the potential for above-average growth and returns.  At Lombard Odier, we believe it is essential to differentiate between the winners and losers in this transition to a more sustainable economy. We believe the winners will be companies with solid financials, healthy business practices, and a business model designed to thrive over the long-term. 

This means putting sustainability at the heart of what they do and focusing on challenges and opportunities that are particularly pertinent for their sector.

But financial institutions, including Lombard Odier, are also agents for change and have to take our fiduciary responsibility seriously. As more investors recognise the underlying financial risks associated with sustainability challenges today, and the scale of opportunity presented by the transition to a sustainable economic model, they are increasingly holding companies and their boards to account. 

We need to promote sustainability and ensure invested companies commit to provide greater transparency and a clear strategic position with respect to sustainability. This needs to include enhanced reporting on areas that are most material to their activities and their stakeholders, and detailed information on how companies are managing those highly material issues. We believe this can further inform the investment process, improve investment outcomes and deliver measureable impact.

We also have a responsibility to provide the same level of transparency to our clients through regular reporting on our interactions with invested companies and the outcomes of that dialogue. This is an important step in helping to provide better visibility of how companies are embracing sustainability, and in building long-term partnerships with our clients based on trust and shared knowledge.

By embedding sustainability into the investment process, we believe financial institutions also become agents of change. In combination, all of these forces will help to decouple economic growth from our footprint on the planet, which benefits investors, companies and society alike.

 

Please click here to read “The rise of the responsible consumer” white paper from Credit Suisse.


Sources

2018 Global Footprint Network. National Footprint Accounts, 2018 Edition, LOIM calculations

United Nations, Financing Sustainable, Resilient And Inclusive Solutions To Attain SDG 12, Dec 2017

Ourworldindata.org, Carbon Dioxide Information Analysis Center (CDIAC) (2016); ourworldindata.org, Food and Agriculture Organization of the United Nations (FAO) (2017); ourworldindata.org, Geyer, R. Jambeck et al. 2017

4 United Nations, United Nations Treaty Collection, Paris Agreement (2015)

5 European Commission, Circular Economy Action Plan (2015)

6 Innovation Group, J. Walter Thompson Intelligence, Comsumer ranking of UN Sustainable Development Goals

7 LOIM, LOIM Calculations, Bloomberg, as at 30 June 2019

8 Bloomberg New Energy Finance; Federal Reserve Economic Data; IMF stall calculations. Falling Costs Make Wind, Solar More Affordable, IMFBlog, April 2019

9 LOIM, Storaenso, SmithersPira, 2018

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