ESG critical mass: Three key themes that will accelerate sustainable investing this year

ESG investing surged in 2020 and is set to continue reaching record levels of investor interest this year, according to Malcolm McPartlin, co-manager of the Aegon Global Sustainable Equity Fund. McPartlin says that engagement with ESG hit a tipping point in 2020, powered by three key trends he predicts will continue to drive growth in the coming year and beyond. “ESG reached critical mass in terms of investor engagement last year and this is set to extend into 2021,” he says. “Within that are key themes that helped to manifest the explosion of interest in ESG that are going to continue to grow. “The work from home trend of 2020, for example, is not going to reverse itself any time soon. Most organisations were many years away, some a decade away from this level of flexibility before the coronavirus pandemic, but we do not believe there is any going back now.”

“Meanwhile the transition to renewable energy and the electrification of vehicles have been solidified by the pandemic – the transition has materially accelerated during 2020.” Many of these themes are set in for years to come because they are based on enormous sustainability challenges, the scope and complexity of which requires innovative solutions from businesses, McPartlin believes.

“There is an exciting decade ahead of us, one that could see us get to grips with some of the major sustainability challenges the world faces. This means it’s a great time to be investing in sustainable businesses.” With that in mind, McPartlin outlines three key themes the team are watching:

1. Business-enabling technologies

“Business-enabling technology companies have revolutionised remote working, ensuring that economies and employees are in a better place right now than they otherwise would have been. People have been kept in their jobs and, more importantly, kept safe.

“We like a number of sustainable growth companies providing technology solutions that are solving sustainability challenges, though this may not be immediately apparent from their primary activities. This is why it’s important to keep an open mind and analyse companies from the bottom up when investing with a sustainable mindset.

“Consider a company like Bandwidth, which we hold in the portfolio, which offers online-communication solutions. Through its core products, Bandwidth is actually making working from home more sustainable and businesses more resilient.”

2. Energy transition

“Another big theme for us has been the energy transition and the move away from the carbon economy. There is no silver bullet that completes this transition, and we are likely to see multi-pronged solutions in the years ahead, using a range of technologies.

“Many changes, however, were already taking place, such as improvements in green technology, which are leading to falling costs. In fact, in many applications renewable energy is now economically more attractive than fossil fuels.

“The demand is there and governments are doing the right thing by using much-needed stimulus packages to invest in the industry. This transition has also been powered by rapid innovation in green energy, through solar power, and hydrogen and fuel-cell technology.

“As a result, we have continued to build our understanding of the green hydrogen space, supporting our investments in the likes of Plug Power and ITM Power.”

3. Digitisation

“Digitisation and the ongoing penetration of technology in the economy will continue apace too. An area where digitisation is becoming more prominent is e-commerce. It’s easier than it has ever been to build an online presence and a brand identity.

“From an investment perspective, there are a number of exciting opportunities in the companies that are enabling the growth of e-commerce. But with these opportunities come challenges, such as cyber-crime and security.

“Throughout last year, we looked at both companies that enable the e-commerce space and companies that protect those that operate within it. This issue is undoubtedly only going to grow in prominence and importance throughout 2021.”

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