The Outlook for Sustainable Investing

ClearBridge Investments: The outlook for economic growth in 2021 is positive as society has learned important lessons in mitigating the spread of COVID-19 while operating businesses under relatively safe conditions.

    Derek Deutsch, CFAManaging Director, Portfolio Manager

    Author

    Mary Jane McQuillen Managing Director, Head of ESG Investment, Portfolio Manager

    Key Takeaways

    • We expect many of the drivers of strong returns for stocks with strong sustainability characteristics to continue in 2021, including efforts to fight climate change by lowering carbon emissions.
    • Companies overcoming resource scarcity through the use of recycled materials and waste reduction will continue to provide value, as will companies innovating in sustainable packaging and healthier, more humanely raised food products.
    • Another area of continued focus for investors will be corporate diversity, not only at the board level, but also through the ranks of the workforce and middle management.

    Renewable Energy Innovation and Transparency Are ESG Priorities

    We expect many of the drivers of strong returns for stocks with strong sustainability characteristics to continue in 2021. These include efforts to fight climate change by lowering carbon emissions. There is some expectation a Biden administration will be supportive of renewable energy within the federal scope; this appears likely although it is not an essential part of our investment case there, which rests mainly on much larger state and corporate commitments. We believe renewable energy will enjoy long-term secular growth as the world transitions to a less carbon-intensive economy and as solar and wind power has become more cost-competitive with fossil fuels.

    The push to lower emissions and increase energy efficiency will continue to support the growth of electric vehicles and their evolving supply chains. Electric vehicles contain more and more electronic content, for example, and will continue to grow demand for makers of electrical connectors. We are also watching technologies such as green hydrogen, lithium-ion batteries and carbon capture and storage as they develop and potentially change the renewable energy landscape.

    Companies overcoming resource scarcity through the use of recycled materials and waste reduction will continue to provide value.

    While the economy will continue to open and spending will partially migrate away from staples-focused purchases during the pandemic, companies innovating in sustainable packaging and healthier, more humanely raised food products will continue to see demand growth and have a long runway.

    The COVID-19 pandemic has also served as a reminder of the value of drug innovation, and those health care companies that can drive this, or help address unmet medical needs or ensure patient safety and health care coverage, should continue to thrive. Another area of continued focus for investors will be corporate diversity, not only at the board level, but also through the ranks of the workforce and middle management. ClearBridge has added Diversity & Inclusion among the major engagement themes for 2020–21. This will be a multiyear endeavor by both corporates for recruitment, training and promotion, as well as investors for more disclosure and engagements.

    Transparency is increasingly a competitive necessity. Shareholders are having success pushing for more transparency and changing the landscape of what are considered industry norms. While proxy voting topics continue to focus on climate and gender, we expect a renewed focus on social equality, in particular racial equality, to feature more prominently in shareholder engagements and 2021 proxy proposals.

    One proxy topic that continues to gain a lot of attention is disclosure of annual political spending, and most investors are voting for more disclosure (Exhibit 1). This is notable because in some senses the pendulum has swung toward valuing fair business practices and transparency. In the past, a common reason given for not disclosing was potential damage to competitiveness, something shareholders would not want. Now, the wave is gaining force, and the more companies disclose, the more it is a competitive disadvantage to not disclose.

    Exhibit 1: Leading ESG Issues 2018–2020 by Number of Shareholder Proposals Filed

    Source: US SIF Foundation, ISS ESG and Sustainable Investments Institute. From the US SIF Foundation’s Report on US Sustainable and Impact Investing Trends 2020.

    Overall, we are positive on the outlook for economic growth in 2021, as society has learned important lessons in mitigating the spread of COVID-19 while operating businesses under relatively safe conditions, if at less than optimal output levels. Hopes for a broad vaccine deployment by midyear 2021 seem reasonable, and while that may not mark the immediate end of the virus, economic activity should pick up, supporting more cyclical areas of the market.


    Definitions

    ESG (environmental, social and governance) refers to an investment philosophy which takes into account the impact of policies in these three areas by the issuer of an investment.

    COVID-19 is the World Health Organization's official designation of the current novel coronavirus disease. The virus causing the novel coronavirus disease is known as SARSCoV-2.

    A global pandemic is the worldwide spread of a new disease. The World Health Organization declared COVID-19 to be a pandemic when it became clear that the illness was severe and that it was spreading quickly over a wide area.

    The US SIF Foundation is the membership association for professionals, firms, institutions, and organizations engaged in sustainable and responsible investing.


    What are the Risks?

    Past performance is no guarantee of future results. Please note that an investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.

    Equity securities are subject to price fluctuation and possible loss of principal. Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls. International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets. Commodities and currencies contain heightened risk that include market, political, regulatory, and natural conditions and may not be suitable for all investors.

    U.S. Treasuries are direct debt obligations issued and backed by the “full faith and credit” of the U.S. government. The U.S. government guarantees the principal and interest payments on U.S. Treasuries when the securities are held to maturity. Unlike U.S. Treasuries, debt securities issued by the federal agencies and instrumentalities and related investments may or may not be backed by the full faith and credit of the U.S. government. Even when the U.S. government guarantees principal and interest payments on securities, this guarantee does not apply to losses resulting from declines in the market value of these securities.