19 Feb 2021 3 min read

Sustainability is a marathon without a finish line

By Matthew Courtnell

If 2020 represented a year of recognition for the importance of environmental, social, and governance (ESG) principles, then 2021 is widely expected to be a year of corporate action.

 

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Building a better tomorrow will require ambitious sustainability targets, partnerships and collaboration, and capital allocation aligned not only to long-term growth prospects but a vision for individual business transformation that leads to industry-wide change.

Looking back over the past year, we’ve seen a noteworthy stride forward in corporate progress. Nevertheless, we believe the trend towards sustainability will only increase from here due to regulation and government incentives, so we expect further improvement in 2021.

The likely impact will be a redefining of strategic goals that look to address a number of industry challenges which need to be navigated over the coming years. Realising change responsibly should be at the core of how companies advance their corporate purpose and maintain a strong culture of continuous improvement. Importantly, how this can be attained with minimal impact on the environment whilst making a positive contribution towards society and people should be core to boardroom and stakeholder discussions.

On this point, it is worth emphasising that the journeys towards decarbonisation and social responsibility are not mutually exclusive; nor should one be prioritised over the other. Intellectual property, human capital management and social value are intangible assets which ultimately create long-term value. The top 11 impacts recently cited by the World Economic Forum during the Davos Agenda comprise a mix of social and environmental issues, from fostering a multi-generational inclusive workforce to the better application of technology to combat plastic pollution and closing the digital gap across economies.

ESG – ensuring sustainable growth

Equally, when we talk about ESG, growth and sustainability should not be in conflict either. As investors, it would be a mistake to underestimate the potential positive contribution from impact commitments, and how this might influence financial materiality and terminal growth rates.

Future capital projects and capex allocations are likely to require an increasingly green tilt or sustainability consideration, which has been true of activity in recent months, as demonstrated recently by Aveva Group* and Schneider Electric*.

As part of the rise in disruptive growth drivers across many industries, we expect a ramp-up of capital deployed in key areas of technology and innovation to help companies strengthen business models and adapt to change – from increased organic R&D and vertical integration, to early-stage venture capital investment, and faster, more scalable green solutions that enable the transition to a more sustainable future.

There is much for C-suite management and company boards to ponder. Yet, we maintain belief that such industry transformations will drive outcomes that benefit all. Every company can do better in the way they do their business. Even for those deemed best in class (in our view, companies like Croda*, Coca-Cola HBC*, or Burberry Group*), it is worth remembering that sustainability is a marathon without a finish line.

This ideal sits at the heart of a megatrend that will define the global economy for decades to come; we believe it represents a multi-year equity opportunity as change comes to fruition. However, not all companies are equal. These forces should lead to further bifurcation at the stock level between the winners and losers. We expect enablers of change, offering new and improved solutions, to be favoured for their exposure to strong thematic growth and ESG impact credentials.

Momentum and sentiment could shape markets in the short term, but we remain focused on assessing future industry growth opportunities and the quality of returns.

 

*For illustrative purposes only. Reference to a particular security is on a historic basis and does not mean that the security is currently held or will be held within an LGIM portfolio. The above information does not constitute a recommendation to buy or sell any security.

Matthew Courtnell

Responsible Investment Analyst - Active Strategies

As an responsible investment analyst, Matthew is focused on sustainability and is always looking for interesting thematic talking points alongside qualitative research to inform discussions with corporates and NGOs. Matthew joined LGIM in 2011 from boutique wealth management business Psigma Investments, where he worked as an equity analyst for four years. When not focused on equities, Matthew spends his time indulging in what he considers the finer things in life; as a man of contradiction, this sees him combine his love for Italian wine with a passion for listening to heavy metal music.

Matthew Courtnell