10 key responsible investments in 2020

A list of ESG evolutions in line with UN development goals for the year ahead

Sustainalytics 25 February, 2020 | 1:59AM
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In Sustainalytics’ annual outlook report, 10 for 2020: Creating Impact Through Thematic Investing, Sustainalytics presents investors with 10 ESG investment themes for this year that can positively contribute to advancing the UN Sustainable Development Goals (SDGs). Here are the 10 themes highlighted in the report:

1: 5G
Much of the economic transformation in the 21st century has been driven by the seemingly infinite capacity to collect and process data wirelessly. However, to overcome limits of existing wireless technologies and enable capabilities required for scaling data-intensive enterprises, such as industrial automation and smart cities, the future will need a new digital backbone. The technology standard that is expected to meet society’s increasingly ubiquitous computing needs is 5G. 5G will create opportunities, from optimizing service delivery to enhancing the Internet of Things (IoT), unlocking US $13tn in economic value by 2035.

2: Digitization of mining
The digitization of the mining industry offers the twin promise of cost reductions and ESG value capture, particularly in worker health and safety. Mining firms’ capex budgets are where investors looking to reap the ESG and fiscal rewards from the digitization of mining should begin their search.

3. Industrial automation
While automation, combined with other technological advances, could enhance the profitability of industrial firms, it is also likely to fundamentally reshape the work environment for employees. We believe that companies in the industrial and machinery sectors that have greater institutional focus on human capital management will be better positioned to adapt to these challenges.  Organizational productivity will get a boost from the supply of industrial robots, which is forecast to reach 630,000 by 2021, up over 10x from 2009.

4. Connected medical devices
Today, one in 11 people globally is over 65 years old. By 2050, this ratio is expected to increase to one in six. Connected medical devices and the Internet of Things (IoT) offer the potential to improve elder care while lowering costs. Connected medical devices allow real-time monitoring of patient health outside hospital settings. Some of these devices can be implanted in the body (e.g. pacemakers, cardiac defibrillators), while others can be worn externally (e.g. insulin pumps, blood glucose monitors) or are stationary (e.g. monitoring, imaging and diagnostics devices). We see upside in 2020 for connected medical device producers as they form an integral part of the IoT healthcare market, which is projected to reach US $136bn by 2021.

5. Slow fashion
Beyond social and environmental risks, the fundamentals of the fast fashion model have also been called into question. Unlike fast fashion, which aims to meet current market trends and demand with mass and rapid production, often with less concern for environmental or social impacts, slow fashion puts sustainability and durability at its core. Slow fashion is not only about producing less, it is about producing in a way that is socially and environmentally conscious by addressing issues like fair living wages, safe working conditions and water pollution in the manufacturing process. Slow fashion can capitalize on sustainability; a recent study found over 30% of Generation Z say they are willing to pay more for sustainable products.

6. Shape up or ship out
Maritime transport is essential to the global economy because it accounts for more than 90% of international trade by volume. Although it is more environmentally efficient than other modes of transport (such as air or ground), the impacts of shipping cannot be ignored. Beyond carbon, maritime transport emits other pollutants, including oxides of nitrogen and sulphur, which are considerable sources of local pollution in some ports. These oxides can lead to severe illnesses, such as asthma and cancer. Significant environmental impacts effluents and waste from the shipping industry also have significant environmental impacts on marine life and seabirds. The regular evacuation of ballast and bilge water is a source of contamination and the discharge of solid waste in the sea can be fatal to marine organisms. The industry also has detrimental effects on marine mammals, through noise and vessel strikes, and on the environment through controversial shipbreaking practices.

7. Banking on biodiversity
Banks that are implementing biodiversity risk management protocols and generally improving their understanding of biodiversity loss may positively contribute in several ways. For instance, by integrating biodiversity risk assessments into their debt finance decision-making criteria, banks can encourage their clients to manage their biodiversity impacts, such as their impact on protecting and restoring ecosystems, sustainable forestry management, and protection of species at risk of extinction.

8. The battery revolution
Renewable energy growth has been strong in recent years, with wind averaging 17% global annual capacity growth since 2015, and solar over 30%. Such trends are widely expected to continue, or accelerate, driven not only by the climate imperative, but also by the improving economics of both technologies. Utilities may enjoy a market upside with battery storage, which is set to grow 13x over the next six years, reaching a 158 GWh market by 2024.

9. Big transitions from big oil
The growing concern that investors have over the viability of high-carbon business models in an increasingly carbon-constrained economy has prompted some of the largest oil and gas firms to question their long-term business strategy. Some oil and gas companies have been investing in alternative energy assets to enhance their overall revenues, with some doing so quite aggressively.

10. Insuring a volatile planet
Insurers may be in the business of pricing risk, but there is growing concern that industry models may be struggling to accurately predict the seemingly evergrowing frequency of wildfires, hurricanes and floods. For reinsurers, which provide insurance to primary insurers, failure to predict such events could result in improperly calculated risk exposures and increased losses. Reinsurers are addressing climate risk by readjusting premiums and using AI in climate models, with industry leaders exploring resilience bonds.

Morningstar holds a noncontrolling interest in Sustainalytics.

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