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Asset Management | ESG Edge

Factoring ESG in investing decisions: From tipping to turning point

September 2020

2020 has truly been an annus horribilis, marked by massively disruptive events ranging from the devastative impact of the Covid pandemic to severe climate change events such as the worst wildfires in California, raging hurricanes in the Atlantic and deluges in tropical countries because of severe rainfall.

Crises tend to spark a collective demand for change. Consequent to the pandemic, and with the rising consciousness on the need to mitigate climate change, we will see a transformative shift, which will take the world towards newer practices and an almost 360 degree shift in how we transact, live and work. Solutions include the need to allow labor to work remotely and allow the consumer, the benefit of an extensive online retail experience, among other factors. The rising consciousness to mitigate climate change will force governments to direct economic policies and monetary incentives/disincentives, to enhance the transition towards green energy and decarbonization.

As investors, we cannot afford to ignore these massive transformations that are occurring in our daily lives. Ignoring these tectonic shifts would not only mean missing out on gains from new age businesses which are beneficiaries of these shifts, but equally importantly, risk capital erosion in existing businesses which will face near extinction as the world transforms.

In our view, many of the transformative shifts we are witnessing can be captured by the ESG theme. Business resilience is at the core of sustainable ESG practices. A common objective of integrating ESG is to assess how risks - Environmental, Social and Governance - can be identified and mitigated as the world transforms towards a multi decade change. This approach, through its ‘beyond the traditional lens' view, has the invaluable ability to identify future winners. As investors, who are living the change, we cannot afford to ignore a hugely transforming world, and not identifying the companies which will be taking us to where the change is headed. Although, the ESG tide has been rising for a decade, ESG investing has now reached a critical inflection point.

An example of what lies ahead, the massive risk to investment portfolios which ignore the transformative shifts, can be seen in the below chart. Since the beginning of the year, we have seen a big shift in capital allocation towards the new age sectors - those that promise to be the new normal - such as renewable energy, innovative technologies which reshape our daily work lives, and also the disruptive technologies that have far-reaching potential to dramatically change an existing industry, product or service, and/or create an entirely new one. The pace of technological advancement has been accelerating and we are now making leaps in a matter of months and years that would have previously taken us decades to complete.

The figures speak for themselves - oil and gas has seen a massive erosion in shareholder value while renewable energy is up, handsomely. The conclusion is clear - the world is shifting, and we need to identify sectors and companies, which will take us to where the world wants to go. An ESG approach seems to be an optimal approach to identify these shifts. ESG investing is truly at a turning point.

Authored by: Abhay Laijawala, MD and Fund Manager, Avendus Capital Public Markets Alternate Strategies LLP

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