The next economic revolution is here

Article published in Finanz und Wirtschaft, September 15, 2018

The next economic revolution is already underway, which we believe could be the biggest driver of investment returns in the next three years and beyond.

This revolution is born of an urgent need to adopt a more sustainable operating model. Change is required and it is no longer a question of whether we are ready for it. Our current economic, social and governance models are, in our view, unsustainable in light of a number of significant long-term structural trends.

Chief among these are changing demographics, environmental, and technological changes, and growing disparities in our social structures. Our natural resources are being depleted at an alarming rate, yet our global population grows larger by the day. People are living longer in an economic environment that is increasingly defined by inequality.

We have to fundamentally rethink our approach to many established norms, such as transport, food systems, healthcare, education, data management, and infrastructure. No country, sector, company, or asset class will be untouched.

Given this unsustainable backdrop, we believe the transition to a more sustainable economic model will only gain in importance as a global priority. We are already seeing significant pressure from regulators across the world, driven in no small part by an increasingly informed and increasingly formidable social consciousness. We believe change is not just coming, it is accelerating, and with that change comes great opportunity.
 

Investors have already demonstrated a willingness to facilitate a transition to a more sustainable model. A recent study by McKinsey & Co found roughly 26% of global assets are now invested according to environmental, social and governance (ESG) principles. Switzerland set a record in terms of sustainable activity in 2017, with CHF390.6 billion (€338.3 billion) allocated to sustainable investment, according to a recent report from Swiss Sustainable Finance (SSF).¹

In order to identify the companies that are could benefit from the significant opportunities presented by the Sustainability Revolution, we have adopted a three-pillar approach to our investment analysis.

The starting point for any investment is the financial viability of the company. This is our first pillar – the sustainability of a company’s financial model. Companies must be capital efficient, cash generative and able to balance their books independently. We also analyse the quality of debt when considering credit.

Our second pillar is concerned with the sustainability of a company’s business practices. We believe, for a company to deliver long-term value, it has to focus on its broad ecosystem of stakeholders. That includes, but is in no way limited to its shareholders. Regulators, employees, clients, suppliers, the physical environment and the communities a company operates within are also important stakeholders, all of which can have a meaningful impact on the long-term viability of a company. As such, we believe how a company is run in the context of this wider ecosystem can have a direct impact on a company’s financial performance.

Finally, we consider the sustainability of a company’s business model. This is a measure of a company’s ability to take advantage of the opportunities the transition presents. It starts with the identification of the ‘mega trends’ that will shape economic and social outcomes, namely: Demographics, Climate Change, Natural Resources, Digital Revolution and Inequality. Within each of these mega trends, we can map out the likely path of future development to better understand which sectors will be impacted, and how. This forward-looking analysis allows us to identify how well companies are positioned to navigate the opportunities and challenges the transition to a more sustainable world will create. In doing so, we are better able to  translate  those structural drivers into investable themes.
 

We believe sustainability will be the single largest engine of the global economy in the years to come. Just as we expect companies to adapt in the face of this revolution, we believe it is our role as asset managers to rethink our approach to investment and provide innovative solutions for our clients that allow them to capture the opportunities within their portfolios

¹ http://www.sustainablefinance.ch/upload/cms/user/2018_05_30_SSF_Press_release_Market_study_Sustainable_Investments_english_final.pdf