Speeding up the transition
Sustainability has long been a well-used term among companies and portfolio managers, politicians and authorities. The international community has put climate at the top of the agenda through the Paris Agreement and the UN’s global sustainability goals. For the financial industry, the concept is our daily bread, and flows into sustainable investments have been expanding for many years.
More recently, the greater understanding of the issue among analysts as a whole has been an important factor in shifting the focus from risks and exclusion to opportunities and inclusion. An increasingly clear agenda for change that creates a market and growth has also begun to show in the growth and profitability of companies, which attracts investors regardless of whether or not sustainability is an emotive issue.
There is a return to be made. The fact that the pandemic has placed a spotlight on our global challenges has not exactly weakened the arguments for why the focus on E, S and G is important in investment decisions.
Climate change is a fact, and the global climate transition is in full swing. When the world shut down in the spring of 2020, we were offered a large-scale study into how people and industry affect air pollution. Satellite images of heavy industrial areas and large cities clearly showed us how the air was clean and smog-free when factories and transport were halted.
This was temporary, of course, but the effect was striking and provides support for the ongoing large-scale transition of energy systems to renewables, increased demand for green buildings, and new transport solutions. But we need to increase the pace in order to achieve the targets. According to the IEA, carbon dioxide emissions decreased by just over 8 percent during the year and these are likely to increase again when the world returns to normal.
In recent years, globalisation and the free flow of goods and services took a back seat in the wake of Brexit, Trump’s years in the White House, the trade war with China, and the questioning of a number of the international community’s fundamental collaborations and agreements.
Supply chains have been global for a long time, and the just-in-time culture that we have become increasingly accustomed to has created an inherent vulnerability to disruptions in the system. This became most noticeable in the spring of 2020 when country after country introduced export bans on hospital supplies such as protective equipment and life-sustaining machinery, and also semiconductors and raw materials.
Shocks and inefficiencies in the system are expensive for a small country like Sweden. Countries, industries and companies are likely to plan for an increased share of local supplies and a larger inventory of critical components in the future. We think this is both sustainable and rational.
A clear trend that reached its peak during the year was the development of a regulatory framework for sustainability that takes the issue from qualitative and general visions to quantitative and concrete goals. An important driver of this is the EU, which has launched a comprehensive regulation for sustainable finances, SFDR.
This regulation, together with other regulations and policies, will use the assistance of the financial markets to speed up the transition. By directing capital to measurably sustainable activities, it wishes to create a virtuous circle of capital flows and investments into sustainable infrastructure and processes. An important cornerstone of SFDR is the creation of the so-called taxonomy, which defines the concept of sustainability through a series of activities with strict quantitative thresholds.
In this way, the regulation has hopefully reduced the risk of arbitrariness and carelessness. The first part of the taxonomy focuses on climate, but will in future be expanded with activities such as circularity, the environment and more. As a participant in the financial markets, this framework will be adopted into our investment decisions, which is likely to make the issue even more relevant and fundamental for investors.
It was quickly obvious in March 2020, when Covid-19 reached beyond China, that this would be expensive and would create a great need for support packages. Governments were not slow to react. Not since World War II have such large emergency measures been hammered through. The designs are different of course, but with a few of recurring themes – they are large, multi-year and green.
The expression “never waste a good crisis” can rightly be used to describe how governments want to use emergency packages to support, steer and increase the pace of the transition to renewable energy, the renovation of old properties, infrastructure and electrification. All other things being equal, this will improve the prospects for sustainable solutions in both the short and long term, which we can benefit from in our company choices.
Interest in sustainable investments continued throughout 2020. ESG funds had inflows in both passive and active strategies through the year. Many sustainability-related activities were classified as essential at an early stage and were thus able to maintain their operations. Furthermore, the uncertainty surrounding the economy created an appetite for more structural growth, which raised the values of everything related to ESG and IT.
The market’s favourite stocks will, as always, shift in the short term. However, the conditions remain good for companies that provide sustainable solutions for the transition to renewable energy, electrification and green alternatives. The outlook improved in 2020 due to greater awareness, a new administration in the United States, green global rescue packages and clearer policies and regulations for change.