investment viewpoints
Outlook 2021 – sustainability
The sustainability transition to a Circular, Lean, Inclusive and Clean (CLIC™) economy.
In our view, sustainability will remain high on the agenda in 2021 and is likely even to accelerate beyond the levels seen in 2020. While there has been a considerable focus on ’building back better’ during the COVID-19 crisis, there was also a need, in the first instance, to focus on the provision of emergency funds. However, with time we have seen a more considered approach to integrating sustainability considerations into recovery funds.
At Lombard Odier, we see sustainable investment as a core conviction and the greatest driver of future risks and returns. We believe it is vital to focus on company preparedness for future sustainability challenges and the pandemic has only reinforced the importance of forward-looking active management and judgemental analysis of company business models. It is vital to understand which companies are the most prepared and able to adapt to future sustainability challenges. These challenges can come in the form of the transition to net-zero, the resilience of supply chains during a global pandemic or the need to evolve to a leaner, more circular industry and a greater focus on nature and biodiversity.
In 2020, we have not seen the crisis putting a dampener on country or company ambitions towards net-zero. In fact, there has been a big push towards tougher net-zero goals across Asia in recent months, with China, Japan and South Korea all announcing increased targets. The European Union’s (EU) Green Deal is highly focused on strategies that are synonymous with CLIC™, such as the circular economy, decarbonisation and nature and, in 2021, we expect to hear more detail on the direction many of these elements will take, including the Carbon Border Adjustment mechanism.
We expect transitioning industries to be in focus globally in 2021, including green buildings, sustainable mobility, green energy and leaner production models. We expect to see the US also re-enter the Paris Agreement, thus setting a large proportion of the global economy on a net-zero trajectory and with COP 26 in Glasgow we will likely see new targets coming out globally, increased investment into green industry and further discussions on how to price carbon effectively.
We also expect 2021 to be about nature. We expect to see a regulatory focus on disclosures relating to biodiversity with the Convention on Biological Diversity (CBD) COP15 taking place in Kunming, China in May, further discussion on the framework for the Taskforce for Nature-related Financial Disclosures (TNFD) and a new tax on plastics in the EU. We also expect deforestation and zero-pollution (for water, air and soil) to be high on the agenda and, therefore, attract investor attention and strong growth for many companies aligned with our Natural Capital theme.
In our view, the acceleration in regulation focused on a green recovery presents multiple, exciting investment opportunities in the sustainability space.
The acceleration in regulation focused on a green recovery presents multiple, exciting investment opportunities.
What will a post-coronavirus world look like?
We are expecting a new normal to emerge in 2021 as countries begin to emerge from tougher lockdowns. We think the pandemic has highlighted a close link between air pollution and air-borne zoonotic viruses, as well as a link between the spread of viruses and the destruction of natural habitats. In our view, this could lead to a strong shift in focus to bring the broader topic of sustainability back onto corporate and investor agendas. We expect to see a shift towards more resilient supply chains and the preparedness of company business models to future shocks. Those companies that proved most nimble and adaptable in the current crisis are likely to be viewed as those most likely to react earliest to future transitions.
We expect some behaviours to revert to normal in 2021, but believe there will be more flexibility in working patterns, driving lower peak demand for transport and potentially lowering urban footfall. This could have a dramatic long-term impact not only on transport networks, but also on retail, leisure and real estate in many regions globally. But with change also comes opportunity.
We believe our strong focus on analysing business models and company exposure to the CLIC™ economy, sets us in good stead to identify those companies best able to grow and adapt to these future trends. It is vital to understand transition risk for many sectors which are facing existential change, not only as a result of the pandemic, but also as a result of carbon-constraints, climate-damage and the need to protect nature’s regenerative capabilities.
We are focusing on behavioural shifts as lockdowns ease and the use of technology as a key enabler of a greener return to a “new normal”. Technology advances allow greater connectivity for remote working, more seamlessly integrated transport systems and help monitor any future spread of the virus. We believe that our focus on sustainability as a core conviction, along with a preference for high quality businesses with superior financials, can help identify multiple opportunities across sectors ranging from clean energy, micro-mobility and electric mobility, green infrastructure, green buildings, the circular-bio economy and e-health. We also believe our focus on adaptability and the resilience of business models to key sustainability challenges will stand us in good stead to identify the industries and companies which stand to outperform over the coming months, as well as to identify those companies which are failing to transition and face “stranded asset risk”.
What are the likely consequences of a Biden Presidency?
We see Joe Biden’s election as another promising tailwind for the CLIC™ agenda. We expect Biden will seek to create a regulatory environment that is supportive of sustainable investing, given the strong environmental and social themes in his election platform. We expect to see an increase in investment towards green technologies and infrastructure from the US. Biden announced his climate crisis plan back in July 2020. This plan targets green energy (including renewable hydrogen), transport and infrastructure as part of his “Build Back Better” agenda and pledges US$ 2 trillion over four years. His plan is focused on industries that our Climate Transition strategy specifically targets in the “transitioning sectors” bucket and we believe the strategy is positioned to gain ground significantly as a direct result of future regulations globally and the extra power the full weight the US will put behind market forces.
While the “Blue Wave” of Democratic success may not have materialised in Congress, Biden has already begun to emphasise climate policy by reaffirming his commitment to the US re-joining the Paris Agreement on climate change on his first day in office and adding a "climate tzar" to his cabinet. Having only formally left the Paris Agreement on 4 November 2020, the US can re-join the Agreement without Congressional approval and would see its membership reinstated 30 days later (in February 2021). We believe this would send a strong signal internationally and domestically that the governance of the US has changed. Additionally, the Federal Reserve has recently spoken about the importance of assessing the financial risks from climate change, in its financial stability report, which implies that regulation is likely to step up in this area.
Biden’s Clean Energy Plan says that it will “put the United States on an irreversible path to achieving net-zero emissions, economy-wide, by no later than 2050”. Whether Biden is able to stick to the full extent of his ambitious energy plan, laid out over the summer, is yet to be seen, given the divided Congress. However, we do expect a strong focus on the power sector and an increase in renewable energy supply, as well as a tougher stance on emissions from fossil fuel generation, a push for greater electric vehicle penetration, higher fuel emission standards and a push to green buildings and agriculture. Biden’s climate pledge over the summer is in addition to the US$3 trillion he previously committed to spend on infrastructure and clean energy, as well as the US$700 billion in new spending to spur manufacturing and innovation that he laid out earlier this year. We certainly expect to see an acceleration towards net-zero technologies as a result of the new presidency in the US. This, in our view, increases the upside potential of many of the investment opportunities that we have identified in our Climate Transition strategy.
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