Hamish Chamberlayne, Portfolio Manager and Head of Global Sustainable Equities, highlights key sustainable news stories for the third quarter of 2020.
During the lockdown it has been hard at times to comprehend the monumental effect COVID-19 has had on the global economy by driving us indoors and online at a rate never before seen. While digitalisation has been a major investment trend for us for several years, the pandemic has undeniably accelerated it and we believe digitalisation will be one of the dominant drivers of investment returns over the next decade. Closely linked to digitalisation is the transition towards low carbon energy. This trend has also been supported this year with political commitment towards investment in renewable energy, electrification of transport, energy efficient technologies and sustainable infrastructure. We have been encouraged to see governmental fiscal stimulus targeted towards green projects that align with our investment philosophy of sustainable development, innovation and long-term compounding growth.
Political steps towards a low carbon world
The European Union (EU) has earmarked 30% of its €750 billion COVID-19 recovery package to go towards sustainable projects including renewable energy and storage, sustainable buildings and public transport. There was further positive momentum from the incoming EU President who outlined ambitions to reduce emissions by at least 55% by 2030 instead of the 40% previously targeted. In other welcome news, China committed to peaking its carbon emissions by 2030 and achieving carbon neutrality by 2060. China is the world’s second largest economy and the largest emitter of CO2 so the announcement is a huge step towards a sustainable global economy and we hope these goals can be quickly met and surpassed. We have also seen more than 20 countries implement end dates for the sale of internal combustion engines. There is a broad trend to bring forward decarbonisation goals from a vague mid-century point towards a highly visible 2030 target date which sets us up for a decade of innovation.
The third quarter saw economic activity around the world begin to thaw as governments were required to balance the need to reopen countries with the COVID-19 pandemic. Against this backdrop, global equity markets ended the quarter higher; the MSCI World Index delivered a total return of 7.9% in US dollar terms. The best performing sectors were information technology (IT), consumer discretionary and industrials, whereas the energy, financial and real estate sectors underperformed, with the energy sector falling by more than 15%.
Alignment to low carbon energy transition driving outperformance
While our sector positioning was beneficial to performance – having an overweight stance towards IT and an underweight position to energy – our stock selection was the most important factor contributing to outperformance of the strategy over the quarter. Of particular note was the fact that in the list of our top ten contributors there was only one technology stock, which demonstrates the diversity and breadth of our portfolio. We saw strong performance from our investments that are exposed to the low carbon energy transition, including renewable energy developers Boralex and Innergex, efficient electric motor company Nidec, low carbon building material manufacturer Kingspan, and water technology and infrastructure company Xylem.