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Living in a digital world

Covid-19 will likely result in changes to how society behaves and ultimately ease the transition to a more sustainable world. Crises often super-charge societal shifts that have been in action for years and this is currently happening across many areas, with decades of development squeezed into weeks.

Liontrust has developed  21 sustainable investment themes, which are all areas of structural growth contributing towards making the world cleaner, healthier and safer in the future. Over recent months, we have seen a particular acceleration in themes such as Connecting people and Enhancing digital security; a huge part of people’s lives is now lived online and the pandemic has driven an even greater need for expanded options in the fields of digital communication, entertainment and retail.

It has long been recognised that as we become more connected as a global society that companies like Cellnex, Helios Towers and American Tower will provide the physical infrastructure for increasing data consumption and communication. The move to greater digital communication and online life can only thrive, however, if people are confident their information is safe, and companies like Softcat provide outsourced IT services to small and medium-sized UK businesses. TeamViewer’s products allow its customers to control a range of devices remotely, which is clearly a growing necessity for business around the world with millions of people working at home for the foreseeable future.

As might be expected given the circumstances, many of these companies have been among the best-performing stocks in recent months but Liontrust now sees reasons to suggest new communication trends and working patterns will persist beyond Covid-19.

While increased communication is important for a more sustainable economy and global cohesion, the challenge is to decouple this growth from the environmental impacts. Even before Covid-19 supercharged these themes, we were considering the impact of the world’s growing digital footprint on the planet: figures from think tank The Shift Project show digital technologies account for 4% of greenhouse gas (GHG) emissions, more than civil aviation, and this could double by 2025.

As people cannot see the pollution from selfies and videos streams, there is a perception these services are boundless. In reality, however, the emissions profile suggests society may need to move towards greater ‘data sobriety’ and the fear is that this means greater regulation.

Traditionally, companies have tended to have on-site server rooms, often in regular offices, and while these have evolved over time, they were not purpose built, so cooling and ancillary power requirements make them inefficient. There are, therefore considerable resource benefits coming from the trend towards outsourced data storage and processing, focusing on data centre operators.

However, electricity used by data centres is expected to double approximately every five years and their emissions are already comparable to small countries. Investing in companies finding solutions to the world’s problems is central to our process, and we believe those enabling significant energy and carbon dioxide savings for these centres should benefit from a sustained increase in demand. The technology industry in the US now emits more carbon than ever before, so more efficient data centres are vital.

A further consideration around digital themes is that greater connectivity is not always a positive in social terms, as well as environmental, and this played out with our experience investing in Facebook in 2017. We initially  found it to be a well-managed, profitable company that (at least at that stage) looked undervalued, and bought the stock for our Global funds in the first quarter of 2017. Our external Advisory Committee flagged the stock as controversial, however, recommending we thought more carefully about how to assess large social network companies and their sustainability in light of a number of shortcomings in their business models.

After receiving a fairly underwhelming response from Facebook, we had a number of meetings with independent experts to help us understand the issues particular to large social networks, how to manage them and how we could judge whether the companies were dealing with these potentially material questions adequately. These meetings helped us design a framework to identify the issues and judge whether the response was suitably robust. In the meantime, several issues we had identified became prominent in the news:

  • Content: whether it can be moderated effectively (this includes illegal and fake content).
  • Data privacy: whether tightening regulation undermines these businesses’ profit margins.
  • Access to networks: whether it is too easy for vulnerable individuals to gain access .

In the second half of the year, we met Facebook again and concluded that while the company was taking steps to address these issues, the response was inadequate in light of the risk to its profitability from tightening regulation. We updated how we rated large social networks to be more stringent and downgraded and divested from Facebook as a result.

Digital technologies and the Internet have fundamentally changed the way many of us conduct our lives and Moore’s law on the rate of technical advance suggests far greater transitions to come. Providing broader access to these trends must be part of any sustainable world but it is vitally important, across the full digital spectrum, to ensure we are not compromising the future by meeting the needs of the present.

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Key Risks: Past performance is not a guide to future performance. Do remember that the value of an investment and the income generated from them can fall as well as rise and is not guaranteed, therefore, you may not get back the amount originally invested and potentially risk total loss of capital. The issue of units/shares in Liontrust Funds may be subject to an initial charge, which will have an impact on the realisable value of the investment, particularly in the short term. Investments should always be considered as long term. Some of the Funds managed by the Sustainable Future Equities team involve foreign currencies and may be subject to fluctuations in value due to movements in exchange rates.

Disclaimer: Issued by Liontrust Fund Partners LLP (2 Savoy Court, London WC2R 0EZ), authorised and regulated in the UK by the Financial Conduct Authority (FRN 518165) to undertake regulated investment business. This document should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Examples of stocks are provided for general information only to demonstrate our investment philosophy. It contains information and analysis that is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content of this document, no representation or warranty, express or implied, is made by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified. It should not be copied, faxed, reproduced, divulged or distributed, in whole or in part, without the express written consent of Liontrust. Always research your own investments and (if you are not a professional or a financial adviser) consult suitability with a regulated financial adviser before investing.

About the author

Harriet Parker, Investment manager, Liontrust Sustainable Investments

Harriet moved to Liontrust in April 2017 with the acquisition of ATI. She started her career in the investment industry in 2004 at Aviva Investors. Previously, she worked as a Research Assistant at the Department of Economics and Centre for Market and Public Organisation at the University of Bristol, where she researched regulatory opportunism and asset valuation.

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