2021: The Year of Sustainability

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This is a sponsored article from Wellington Management.

 

Wendy Cromwell, CFA
Vice Chair and Director of Sustainable Investment 

The defining issues of 2020 were a stark reminder of the inextricable links between capital markets and real-world events. Sustainable investing presents innumerable opportunities to drive capital toward solving the world’s most pressing problems, while delivering attractive results for clients.

COVID-19 highlighted the need for market-based solutions that help society prepare for and manage a public-health crisis. Records set for heat, hurricanes, and wildfires displayed in real time the advancing risks and high costs of climate change. And increasing calls for companies to take a leading role in advancing social justice and racial equity have permeated industry discourse.

Looking to 2021, these challenges affirm the need for us to continue to engage with companies and issuers on their responsiveness, preparedness, and disclosures. We believe both engagement and market-pricing signals can prompt issuers to adapt, and build resilience to real-world risks. We will expand our offerings that invest in sustainable solutions, and deepen our climate research agenda to more fully understand and value the impact of physical and transition risks. And we will engage on social justice, diversity, and inclusion, and other material ESG issues. As always, our primary objective is to deliver competitive total returns for clients across our investment platform. We believe sustainability-driven initiatives will help us do so.

Impact investing

Digital connectivity
When COVID hit, reliable digital connections became social and economic lifelines almost overnight. As schools and universities struggle to adapt and expand online teaching, the need for technologies that enable communication has exploded. We hope improved digital access will translate to better outcomes for more students, particularly in underserved populations. We will continue to try and identify innovative technologies and constructive debt instruments with a positive impact.

Healthcare
The pandemic has revealed a widespread lack of access to affordable, quality healthcare and chronic underinvestment in healthcare infrastructure. In 2021, our research will include biopharmaceutical companies developing novel treatments for diseases, including COVID-19. We also expect to focus on molecular diagnostics capabilities, as the crisis has highlighted the need for real-time testing and diagnostics. And we will look at businesses whose tools help healthcare professionals capture and analyse data, save time, and treat more patients safely and efficiently.

Small business support
As some sectors of the global economy came to a halt, small businesses scrambled for liquidity to stay afloat. We will continue to seek opportunities to invest in platforms that enable small businesses to scale up their online business and become proficient and competitive.

Clean water
The social and economic challenges of clean-water access will garner increasing attention from markets and policymakers, and 2021 could be a tipping point. As governments focus on infrastructure spending to ensure economic resiliency in the wake of the pandemic, updating aging water infrastructure is a likely goal. We look for impact companies along the water value chain, including delivery of clean water and water reuse.

Climate research

We will expand our research into the physical risks of climate change and the direct application into our investment processes. We will share our findings with issuers and encourage them to develop climate-resiliency planning and set their own carbon-reduction targets. Finally, we will explore practical ways to include the effects of physical climate change in the portfolio-construction process.

We aim to identify opportunities to invest in companies that deliver products and services that support decarbonisation as well. Government-sponsored recovery incentives, emerging carbon regulations, and sustained demand should allow such companies to benefit from a lower cost of capital and revenue tailwinds. We will also engage with our clients to develop, evaluate, and implement methods for approaching carbon neutrality in the portfolios we manage on their behalf.

ESG and stewardship

Transparency
The pandemic’s black-swan nature has crystallised a realisation that company leaders cannot predict everything, yet they must be prepared for anything. We find that companies are now acknowledging that long-range topics such as climate change, scenario planning, and crisis management are not outside their planning horizon. We will engage to improve transparency and disclosure.

Executive compensation
We have seen greater scrutiny of the size and structure of executive compensation plans. In 2021, we will seek opportunities to provide feedback, get ahead of detrimental behaviour, and support pay/performance alignment in our clients’ best interests. We will consider how companies plan to rebuild their balance sheets while encouraging growth and ask how boards are gauging executives’ engagement with employees, now that so many are working from home.

Diversity and inclusion
In 2020, we heightened our focus in this area following multiple instances of racial inequity and injustice across the US. In 2021, we plan to redouble our engagement efforts to better understand our portfolio companies’ response to social justice, diversity, equity, and inclusion at all levels of their organisation.

Private-sector ESG
We find that private companies increasingly realise that enhancing ESG practices can translate into better potential financial returns, broader investor appeal, stronger brands with wider competitive moats, and reduced risk of shareholder activism once they go public. We plan to deepen and broaden our work in this area.

To learn more, please see our complete 2021 ESG and Sustainability Outlook , part of our broader 2021 Investment Outlook.

This is a sponsored article from Wellington Management.

Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may make different investment decisions for different clients. FOR PROFESSIONAL OR INSTITUTIONAL INVESTORS ONLY.

 

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