While America led the “decade of tech” over the last 10 years, we believe the 2020s are shaping up to be “the decade of sustainability”.
Europe is perfectly placed to seize the mantle, driven by a combination of investor and business appetite, as well as the support of environmentally aware governments.
In recent years there has been a significant increase in the proportion of investors who are conscious of ESG issues and who are analysing how companies approach our societal and environmental challenges. This is certainly a positive development and as these concerns move from being important to a minority of investors to being mainstream, we could well be entering the foothills of a significant re-rating for those companies who are aligned with the most important ESG issues. We see this environment as one in which Europe can lead the charge.
When we examine the key performance indicators that companies are using to track sustainability, for example, how their Long Term Incentive Plans (LTIPS) are rewarded and how governments are thinking about sustainability, we see Europe as being some way ahead of most other regions, in particular the US. There is some recent evidence of this in the shape of the proposed ‘Next Generation EU’ funding program which looks set to focus on ‘Green infrastructure’ amongst other things.
Additionally, there looks to be buy-in across the whole EU (Franco-German support in particular is key) and if these efforts receive the necessary buy-in from Brussels, the policy will be adopted EU wide. As a result of Covid-19 there has been a renewed push from top firms and investors for the global recovery to prioritise environmentally friendly companies and technologies going forward.
We are seeing the theme of sustainability become firmly embedded in a variety of ways and across all types of sectors and companies. But from an investing perspective, we are focused on two areas; companies that are already conducting their business activities in a sustainable way, but also those companies who are in the process of shifting gear, intrinsically embedding more sustainable practices and policies into their business model. By looking at these companies that may not yet have a strong track record of sustainability, attractive investment opportunities can sometimes be found.
There are many specific areas to focus attention on, in our portfolio, we are currently focused on four key areas:
Green mobility: There is a real focus on the electrification of travel in Europe. In the recent bailout of Air France, the French government insisted that the airline can no longer fly on certain routes where there is a rail equivalent. This highlights a very proactive stance on encouraging green travel and this means that those companies which provide fundamental support to the rail industry, whether it be rolling stock or signalling equipment, offer interesting potential for investment.
Green nutrition: Europe has a very well-developed chemicals sector. We are noticing a growing trend of companies repurposing and refocusing their expertise, for example shifting from a business model targeting on chemical manufacturing to one focused on developing nutritional solutions that encourage and support environmental food production. This is another interesting area for potential investment.
Green energy: Europe continues to lead the charge when it comes to the diversification of energy sources away from the carbon intensive. As well as innovative new entrants to the market, we are also seeing businesses that have historically been ‘heavy polluters’ look to instigate a transformative sustainability strategy. Such a move can result in a more sustainable outlook and a significant re-rating.
Green packaging: Consumers and manufacturers are increasingly aware of the perils of plastic packaging. Some of the most innovative companies focusing on this theme are European based, developing full or nearly fully recyclable packaging. Not only do such products support an end user demand, but they can play a key role in the developing world, facilitating complex food chains where availability of refrigeration can sometimes be a problem.
Those companies that don’t back or are slow to back sustainable practises in their businesses will most likely be heavily punished by investors, risking becoming unappealing to younger investors as they seek to marry acceptable returns with a more robust and transparent ESG strategy. But those that do shift and/or enhance their focus on sustainability will likely reap the rewards by attracting investment and being well positioned to take advantage of consumer led demand to drive growth.
As the world grapples with a new identity as it emerges from the Covid-19 lockdown, the determination to ‘build back better’ will see the passion for sustainability become even more fervent. The fact that Europe is already ahead of the pack stands the region in good stead for the next decade.