Sustainable Portfolio Management – Annual Report 2022

When S-curves align: An exciting future for tech

22 April 2022

By Maya Tabaqchali, Portfolio Manager

Unless otherwise stated, companies referenced in this report were companies held by the Sustainable Total Return Strategy as of 31 December 2021 and may no longer form part of our portfolios. Reference to specific companies in this report is not an opinion as to their present or future value and should not be considered investment advice or a personal recommendation.

Technological revolutions drive rapid societal change. They are usually brought about by new multi-purpose technologies combining with a new infrastructure and a cheap input.

In the 1950s, the combination of the internal combustion engine and mass production techniques, with cheap petrol and road networks, created suburbanisation, cheap housing, and a consumer culture as people filled their houses with electrical goods. The combination of railroads, cheap coal, and steam-driven machinery in the late 19th century, meanwhile, saw economies rapidly industrialise, with an ability to move goods over long distances.

The evolution of revolution

Technological revolutions follow somewhat predictable paths of adoption, known as S-curves:

  1. The ‘Initiation’ phase sees the emergence of a new technology being used by early adopters
  2. A ‘Mania’ phase then pulls capital and people into the space, to develop the infrastructure without sight of profit. This was the case with the early construction of railroads, or the internet during the dot-com years, and likely with the current crypto frenzy
  3. Often these then correct, but from the ashes a ‘Golden Age’ phase is built upon the freshly laid infrastructure. This was the case with Apple (one of our North American equity holdings at the time of writing, April 2022), which brought mobile internet to the masses, or the internet giants who created fortunes by building on the capital investment into infrastructure made by telecommunication companies
  4. Finally, a ‘Maturity’ phase sees technologies mature and the market becomes saturated

When several technologies emerge at once, they can often accelerate one another, to drive more significant periods of change. For instance, the invention of the shipping container, along with cheap microchips and plastic technologies, drove mass global adoption of the many appliances we now use every day.

Exponential transformation

When compared with previous revolutions, the Fourth is evolving at an exponential, rather than linear pace, and is underpinned by several powerful emerging technologies. Thanks to rapidly decreasing cost curves over the past decade, the commercialisation of a number of technologies – the seeds of which were planted during the 1990s tech bubble – has finally reached an inflection point, making them viable for the first time. These technologies include the internet of things, artificial intelligence, genomic sequencing/editing, electric autonomous vehicles, and robotics.

While each of these transformational technologies is exciting in its own right, what makes this period truly extraordinary is the way they are converging and overlapping, accelerating one another multiplicatively. The commercial impact of this revolution will inevitably be profound, but crucially, we believe it has the potential to expedite progress towards achieving the United Nations (UN) Sustainable Development Goals – and so turn the tide on some of humanity’s greatest challenges once and for all.

Solving biology’s grand challenges

Artificial intelligence – something we have explored in previous reports – is a powerful general purpose technology that can accelerate the adoption and performance of many others. This may be through combining with the internet of things to optimise power grids, factories, or farming practices, to name just a few examples. It is also being used to advance healthcare.

In 2020, the Alphafold 2 neural net from Alphabet (another of our North American equity holdings at the time of writing, April 2022) solved one of biology’s grand challenges1 – to predict the shape of a protein from its DNA sequence. As the building blocks for life, understanding protein structures provides the opportunity to better understand and treat disease. The difficulty of this feat should not be downplayed, however. In 1969, Cyrus Levinthal estimated that there are 10300 possible ways a single DNA chain could fold into a single protein. Calculating this manually would take longer than the age of the known universe, but with Alphafold’s discovery, it can be done in just a few days2. Alphabet has now predicted the entire human proteome and made it freely available to scientists, opening up exciting new avenues for biological discovery.

This technological advancement was only made possible because of previous advances in computational power, combined with the rapidly declining cost of genomic sequencing which, in turn, has only been made possible through advances in artificial intelligence.

Oxford Nanopore Technologies (a UK equity holding at the time of writing, April 2022) has capitalised on these trends, developing a powerful genomic sequencing platform that offers advantages over incumbents in terms of speed, cost, and portability. The firm’s technology, which uses artificial intelligence algorithms to read long genomic sequences in real time, provides an affordable solution that can produce answers quickly, and in the field.

Advancing beyond genomic sequencing

Gene editing is another area revolutionising the pace of modern medicine, and builds on the developments in artificial intelligence and genomic sequencing. While genomic sequencing allows us to read DNA data, gene editing goes further and makes the data actionable, through the interrogation of gene function and the modification of sequences. This has vast implications for advancing the global sustainability agenda, from the production of curative treatments to increasing global food supply.

Australia-based CSL (an Australian holding at the time of writing, April 2022) is developing a stem-cell gene therapy, which has the potential to offer a significant advantage to patients suffering from currently incurable genetic diseases. Haemophilia B is one such example, where a mutation in one gene leaves patients without enough Factor IX – a key blood clotting protein. CSL’s AAV5 (adeno-associated virus) gene therapy, which is currently in trials, could prove to be a significant medical advance, offering patients a one-time treatment that permanently alters their genetic makeup to produce Factor IX – removing the need for regular injections.

A new energy paradigm

Overlapping technological S-curves are also helping the world to decarbonise, by increasing the generation of renewable energy, and by reducing the amount we need through optimisation.

Schneider Electric (a European equity holding, as at April 2022) is building the foundations to facilitate a new energy paradigm. The company’s Square D Energy Centre is a “grid-to-plug” solution for battery storage and back-up power in the home. It enables electric vehicle charging, the inversion of solar power, and whole-home surge protection, preparing residential homes for deriving their power from multiple sources.

The firm’s EcoStruxure platform also optimises energy usage within facilities such as hospitals, combining internet-of-things technologies with renewable energy, battery storage and artificial intelligence to steer uninterruptible power through the building to precisely where it is needed. This has been shown to reduce the energy usage of a building by up to 40%3.

Innovation through disruption

Joseph Schumpeter is famed for having coined the term Creative Disruption, describing it as the “process of industrial mutation that incessantly revolutionises the economic structure from within, incessantly destroying the old one, incessantly creating a new one”4. While we have seen this manifested in technological progress to date, the speed of adoption and discoveries that we are seeing now is happening at a much faster rate of change than we’ve seen historically. If harnessed correctly, the tools that emerge could have the potential to tick off the UN’s Sustainable Development Goals one by one.

Key investment risks

ESG data risk: Some positions within the strategy may not have an ESG rating due to the nature of their asset class (e.g. government bonds, gold, hedging derivatives). Should a position not be covered by MSCI (or an equivalent provider) due to lack of coverage, the Portfolio Manager will determine the position’s equivalent rating.

Market risk: The possibility for an investor to experience losses due to factors that affect the overall performance of the financial markets. Market risk, also called “systematic risk”, cannot be eliminated through diversification, though it can be hedged against. Sources of market risk include major natural disasters, recessions, political turmoil and geopolitical tension.

Liquidity risk: The risk stemming from the lack of marketability of an investment that cannot be bought or sold quickly enough to prevent or minimise a loss.

Derivatives exposure: The use of these instruments can, under certain circumstances, increase the volatility and risk profile of the strategy beyond that expected of a strategy that only invests in equities. The strategy may also be exposed to the risk that the company issuing the derivative may not honour their obligations which could lead to losses arising.

Currency risk: An investor will be exposed to currency fluctuations between their domestic currency, a fund’s holding currency, and the local currency of an investment.

Interest rate risk: An investor will be exposed to interest rate risk. Changes in interest rates will impact the performance and/or value of instruments. Interest rates tend to change suddenly and unpredictably.

Inflation: Inflation will reduce the real value of your investments in the future.

Taxation and tax relief: Levels of taxation and tax relief are subject to change.

Returns are not guaranteed: Past performance is not an indication of future performance. The value of investments, and any income, can fall as well as rise, so you could get back less than you invested. Neither capital nor income is guaranteed.

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Sustainable Portfolio Management

In this year’s report, we focus on some of the exciting new technologies that could meaningfully improve sustainability outcomes, from precision manufacturing and measurement, to genomic sequencing, to digital infrastructure. And we’re delighted to feature an article from Sir David King on the strategies urgently needed to ensure climate repair.

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