• 2020 has presented the global community with one of the harshest ever wake-up calls, pushing ESG issues to the fore of the investment world.
  • Here are the four trends Luke Barrs, who is head of fundamental equity client portfolio management in EMEA and Asia (ex-Japan) for Goldman Sachs Asset Management, is watching.
  • “The push we have now for greater social equality, for better income equality, and gender and ethnic diversity is an important conversation and one that should have happened a lot longer ago,” he said.

2020 has presented the global community with one of the harshest ever wake up calls.

The year started with the wildfires in Australia and pro-democracy demonstrations in Hong Kong, followed by the coronavirus crisis, interspersed by protests over racial inequality across the United States after the police killing of George Floyd – an unarmed Black man. For many, it has been a year of reflection, a time to consider how our actions impact the world, and investors are no exception.

This has accelerated the growing interest in businesses that meet strict environmental, social and governance criteria, making ESG a mainstream part of the financial landscape. 

“The last six to nine months has elevated the awareness of some of those issues across older demographics as well. I think that the push we have now for greater social equality, for better income equality, and gender and ethnic diversity is an important conversation and one that should have happened a lot longer ago,” Goldman Sachs Asset Management’s Luke Barrs said.  

Barrs, who is head of fundamental equity client portfolio management in EMEA and Asia (excluding Japan), believes companies that can provide solutions to some of those issues will prosper in the long term due to the "increased societal demand to solve the problems," he said. Moreover, failure to adapt and demonstrate a sustainable business model "in tune with good ESG practices" are a red flag to long term investors, he added. 

Here are the four big trends that Barrs believes will drive flows into this asset class:

Healthcare provision is a "national security issue"

The onset of the coronavirus crisis has made the adequate provision of healthcare a national security issue, Barrs said.

"At some point in time, over the last six to nine months, the potential risk for domestic instability has been born out of lack of provision of healthcare in many different countries," he added, noting that although a nationalized healthcare system in the US was very unlikely, there would likely be "some continuation of at least the tenets of Obamacare in some capacity."

As a result, the healthcare industry is "at a real inflection point in terms of the underlying drivers of the healthcare sector over the coming couple of decades," he said, using genome technology as an example.

"You have seen the rise of genomic technology over the last 10 or so years, but it's just got to the point where it's broadly accessible in a way that can actually start to transform how healthcare solutions are delivered to individuals," he explained, and as efficiency increases and costs plummet, this technology will save more lives.

This means that - by mapping a patient's individual genome - you can start to understand the nuances of any disease. "Both in terms how it attacks the human genetic structure, but also how it affects the individual's human genetic structure," he said.

Oncology treatment - for example - would benefit, creating attainable, affordable and gives clear insights that could save lives, he said, shifting medical care from a "one size fits all solution to a much more targeted solution," he explained.

Millennial habits and values are here and clear

One topic that a number of investment managers are focussing on intently right now is the growing force of millennials in the financial world. This generation is gradually inheriting the wealth of their baby-boomer parents and they are a lot more militant about ESG issues when it comes to investing that money. 

"Millennials have been very vocal on their beliefs and values, and are also moving the dial," Barrs said, adding that the "change in values and principles that we see across the millennial and even younger demographics now are pretty stark."

Millennials and younger generations are forcibly shifting spending and investment habits - be that through pressure on older generations or through their own cash.

"Something in the range of two-thirds or three-quarters of millennials would say that they're going to invest their capital in a way that's aligned to their principles," Barrs said. "We see people voting with their wallets towards ESG principles."

Clean-energy tailwinds

Democrat Joe Biden's win in the US presidential election should push "America back towards the pro-environmental sustainability, pro-solving climate change agenda that we saw previously," Barrs said.

Biden has committed to reimposing tough restrictions on pollution from the oil and gas industry, as well as tightening standards for vehicle emissions among other things, in order to achieve economy-wide net-zero emissions no later than 2050. 

But, regardless of regulatory or political pressures, the "major impact of shifting away from fossil fuels - especially in terms of power generation - are already in flux because of market dynamics," Barrs said.

Obviously government action can fast-track the transition to a greener energy network. But the push is coming more from the corporate side, particularly as companies aim to improve their low-carbon credentials to appeal to ESG-conscious investors and the general public. 

"The reality is, as large corporates move to fully renewable sourcing and you see them put in place their own commitments around carbon neutrality, you are already getting that pickup in demand for renewables," Barrs said.

From obvious shifts like oil and gas companies channeling more capital into wind power or hydrogen fuel projects, right down to supermarkets cutting the use of plastic bags - the quest to go low-carbon goes beyond corporate sectors or even individual corporations. 

One example Barrs was keen to highlight is the growing trend towards biofuels which can offer a sustainable option for fuel-intensive industries like airlines.

"There's a company that we've invested in for a long period of time that is one of the world leaders in bio-renewable diesel. They're actually the world's largest buyer of waste and residues, so vegetable or animal fats, and they have a process where they refine that down into a diesel equivalent," he said.

"That is still a fuel, so that when burnt it still releases greenhouse gas emissions," he admitted, but it has "roughly a 90% reduction in greenhouse gas emissions per gallon versus traditional diesel."

However, with a core market in airlines, an industry which "has received a lot of negative attention for its climate impact," biofuels offer a cleaner solution placing it in the "crosshairs of secular demand tailwinds. We think airlines will continue to pay a premium for that sort of product, because it helps them deal with the impact of using legacy carbon fuels," he added.

Supply chain winners

Similar to Louis Florentin-Lee, who runs Lazard Asset Management's main ESG fund, Barrs argues there are many different ways to invest in the electrification of vehicles, beyond just owning the stock of big-name car manufacturers like Tesla, particularly as you look up the supply chain. 

"Who is producing the batteries for those cars, who is it that produces the micro motors that are needed to help those cars drive in and drive the power chain?" he said. "Those are things that are slightly under the radar, but equally relevant in the conversation," he added, pointing to smart grid infrastructure developments as an example.

To create an effective EV network that will wean humanity of fossil fuels we will need a smart grid infrastructure, where you have "two-way infrastructure that can take and receive renewable power as it's demanded and required," he said. But, also ensures consumers have sufficient access charger, he added.