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Generating alpha for planet, people and profit

Sustainability is at the core of the debate among policy makers and asset managers now, thanks to mounting environmental risks and a sharp focus on social issues, amid the crippling coronavirus pandemic. Abbie Llewellyn-Waters explains that doing good for the planet and for people need not be at the cost of profit and expands on her team’s forward-looking investment approach in allocating capital for transitioning to a better future.

For a second year running, environment concerns top the list of global economic risks cited by the World Economic Forum.

In 2020, extreme weather, policy inertia, biodiversity loss, natural disaster and human-made damage were identified as the top five risks. This year infectious diseases moved to the fourth spot and social issues are also flagged as key concerns.

Devastating Australian bushfires, Arctic Circle wildfires and the Texas big freeze showed the threat of global warming is not a distant concern. Drought in subtropical Taiwan had a big impact on global semiconductor supply, which underpins many economic sectors.

These unexpected climate events underline the fact that sustainability as a concern has moved well beyond philosophical, populist, political or ideological debates. They are pure economic risks. Understanding how capital is allocated in this transformed landscape is more important now than ever.

The spread of coronavirus since early 2020 showed how the most marginalised are the most vulnerable both in terms of economic impact and fatalities. Lack of access to computers for home learning is also a future systemic risk in exacerbating the attainment gap.

There is increased recognition that the world cannot kick the can down the road as far as the climate emergency is concerned. And the deal sealed in April between Biden’s climate emissary John Kerry and China is particularly important because if the two largest emitters align, we should anticipate accelerated policy. Cutting net CO2 emissions has fast become a business-critical strategy since the world’s largest nations signed a legally binding agreement in 2015 to cut global warming.

Cement could be an apt illustration of how carbon may become an internalised cost to business. If the cement sector were a country, it would be the third largest emitter of carbon. Cement has been a cornerstone of civilization since the Roman empire, and we need it for building hospitals, roads, and housing. Even renewable energy projects are dependent to a degree on the sector. Currently, there is no scalable alternative to cement.

But we anticipate all industries will be subjected to carbon pricing mechanisms in the future, which can have an impact on cash flows and profitability. Pricing in these risks at the early stage of fundamental analysis is absolutely core to delivering returns on a consistent basis over the long run.

The shift towards decarbonization is not just about mitigation through divestment. It is also about how we price assets.

That bring us to the core questions. Do you need to sacrifice performance to look at sustainable investing? Do you need to take on too much risk for a leading sustainable strategy?

Our own experience shows you can deliver attractive returns if you use broader stakeholder analysis to enhance your conviction about your investments. By prioritising materiality and relevance, it is possible to select a diversified low volatility portfolio. It is also important to consider economic sustainability, strong balance sheets, resilient cash flow, and how well prepared companies are for the long-term in making an investment choice.

The heart of this approach is to deliver a positive impact across planet, people and profit for a more sustainable world.

About the author

Abbie Llewellyn-Waters, Head of Sustainable Investments, Jupiter Asset Management

Since joining Jupiter Asset Management in 2006, she has dedicated her investment career to sustainable investing, with her team building and designing a rigorous investment framework that embeds all stakeholders into fundamental stock analysis.

Multi-award winning, Abbie has received recognition for her investment performance, her approach to ESG integration and her contribution to address the structural hurdles that women in investment face. She also collaborates on several industry initiatives including as an author for the CFA Institute on Climate and Investing certificate. She is an Ambassador for the Diversity Project and is a member of the 30% Club Investor Group. She also has a degree in Classics.

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