The US administration faces daunting challenges. Beneath the surface of the 2020 upheavals, there are tectonic shifts at play in demographics, technology, and climate patterns that are changing the relative prices of labor, energy, goods and services, and destabilizing the social construct under which we have operated since the Industrial Revolution. And this is not only a developed world phenomenon.
These powerful global trends are eroding legacy business models imperceptibly – until they become crystal clear. For companies that are not prepared or agile enough to adapt, valuations will be impacted. Consider the example of Exxon. After briefly becoming the most valuable company in the world in the second quarter of 2013, Exxon was booted out of the S&P 500® in 2020.
Even before the pandemic, trends such as cloud computing, artificial intelligence, clean technology, new consumption, and evolving work habits were already reshaping conversations in boardrooms. Driven in part by environmentally and socially conscious Millennials and an aging population, these changes have jolted industries as diverse as healthcare, telecommunications, car manufacturing, electricity generation, real estate and infrastructure. Under the new construct, where all stakeholders are considered, the corporate license to operate is being reevaluated. As economies and societies transition, investors need to prepare for the inevitable policy responses, as we see in Europe, Asia and now in the US, and adapt to the reshaping of finance and repricing of assets.
The pandemic has highlighted the importance of resilient business models to weather short-term market dislocation. In addition to discerning the impact of tectonic shifts, successful investors will benefit from identifying long-term macroeconomic trends and upcoming government policies related to social inequality and climate change. Specifically, as the US reenters the Paris Agreement with the determination to regain leadership on combatting climate change, investors should be factoring in:
- The decarbonization of the US power sector by 2035.
- The installation of 500,000 electric vehicle charging stations nationwide by 2030 as well as growing incentives for the purchase of electric vehicles.
- The prohibition of fossil fuel subsidies domestically and prohibiting US public institutions from investing in international coal plants and high-carbon fossil fuel energy projects.
- The building of a resilient infrastructure with the Rural Energy for America Program.
- Reducing by 50% the carbon footprint of the building stock by 2035, while establishing strict efficiency standards for new construction.
- Establishing a working group that determines the “social cost of carbon” and other greenhouse gas emissions.
New tools and frameworks are needed to assess the impact of carbon emission pricing, be it through cap-and-trade mechanisms or voluntary carbon emission markets as envisioned by Mark Carney, ex-governor of the Bank of England. Techniques will also need to be developed to estimate the physical risks of climate change on flood-prone properties and manufacturing capacities, desertification of farm lands, or fire-prone urban development. Investors should assess their risks of holding potentially stranded assets – whether it be an oil field or an internal combustion engine – at a time when the world is transitioning to a lower-carbon economy.
As McKinsey & Company recently pointed out, all corporations should be seizing “the moment to decarbonize, in particular by prioritizing the retirement of economically marginal, carbon-intensive assets.”1 Equally, countries and companies that put innovative strategies in place to transition to a clean energy economy will be amply rewarded, which is why we are already seeing a global race to the top. Investors will increasingly benefit from positioning their portfolios towards the companies that contribute to and are aligned with a changing world.
Mirova is operated in the US through Mirova US LLC. Mirova was previously a division of Ostrum AM and benefits from around 30 years of experience in Environmental, Social and Governance (ESG) investing through Ostrum AM.
Investing involves risk, including the risk of loss. Sustainable investing focuses on investments in companies that relate to certain sustainable development themes and demonstrate adherence to environmental, social and governance (ESG) practices; therefore the universe of investments may be limited and investors may not be able to take advantage of the same opportunities or market trends as investors that do not use such criteria. This could have a negative impact on an investor's overall performance depending on whether such investments are in or out of favor.
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