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Health crisis adds urgency to sustainable investing agenda
ESG-focused portfolios can deliver results in a wide range of market conditions
28 Dec 2020 | Daniel Roarty
Daniel Roarty
Daniel Roarty

Challenges created by the coronavirus crisis are a wake-up call for global sustainability. Just as governments cannot conquer the virus without the private sector, the world’s largest environmental and social challenges cannot be solved by public policy alone.

Governments can create accommodative policy and legal backdrops, but ultimately require the innovative and financial capacity of the private sector to drive meaningful change.

With the private sector playing a key role in efforts to stop the virus and accommodate evolving consumer trends, investors should look for companies with strong environmental, social and governance (ESG) credentials for the dramatic changes unfolding around the world.

Sustainable stocks fell much less than the broader market during the historic market crash in the first quarter. But a sustainable investing agenda provides much more than downside mitigation. We believe that ESG-focused portfolios can deliver results in a wide range of market conditions and can provide several benefits to investors through the Covid-19 crisis and an eventual recovery.

Sustainable investing is actually a competitive advantage. Companies that are tied to the sustainable investing challenges are actually attached to some very big financial opportunities, and that creates opportunities for investors.

Three key themes

We see three broad buckets of opportunity, and those buckets are climate, health and empowerment. So, within each of those there are a number of sub-themes that we think are very interesting, and they're very investable. We go beyond just monitoring companies' behaviour. We invest exclusively in companies whose products and services are somehow enabling a more sustainable future.

But it’s not always easy for investors to identify companies that can benefit from these sustainable trends. In our view, the UN Sustainable Development Goals (SDGs) are a good investment guide to sustainable companies because they point the way to long-term structural changes that will drive growth. Accomplishing the UN’s ambitious agenda will require more than US$90 trillion in capital over a 15-year period, with the bulk of that being supplied by the private sector.

The UN Sustainable Development Goals are series of 17 goals, representing an aspirational view of what the world can look like by 2030. There are actually 169 targets that sit underneath those 17 goals.

So, our process, the first step, is to actually look at all 169 and to try to understand which of those deal mostly with pure policy initiatives, in which case they're very interesting to us, but they're not really investable.

And which of those do we see some role for private capital, because if there's a role for private capital, that's interesting to us as investors. And, as it turns out, we found a little bit more than half of those 169 targets actually include some role for private capital. 

Sustainable stocks

Sustainable development is really about making the world a better place. It's about generating economic growth in a way that doesn't destroy the natural environment, and in a way where the benefits of that growth are shared more broadly throughout society rather than just by a few. By 2050, we're going to have 10 billion people on the planet, and so these issues of sustainable development, they've really never been more urgent. It's never been more important to get this right.

Sustainable companies have long-term staying power, in our view. They have clearly proven their resilience in weaker markets. And even if a recovery might at least temporarily favour deeper-value stocks that underperformed the most in the sell-off, we believe the longer-term prospects for sustainable stocks are very promising.

The crisis is adding new catalysts for companies that can provide innovative solutions to our largest environmental and social challenges, in our view. With a renewed focus on the SDGs as the world emerges from the coronavirus shock, investors can identify companies that help improve the resilience and long-term health of society and equity portfolios.

Daniel Roarty is chief investment officer, thematic and sustainable equities, at AllianceBernstein