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Welcome to the new world - Fund manager's letter

Welcome to the New World

21 April 2021

Michael Topley

By Michael Topley

Head of Sustainable Portfolio Management, Barclays Private Bank

A notable shift in mindset has been seen in both the investor community and across the corporate landscape towards sustainability, over the past year. When we listen to the quarterly earnings calls of our investee companies, CEOs are increasingly talking about their ESG and sustainability credentials, such as how they are keeping their staff safe during the pandemic, or their net-zero emissions targets, or how they are steering capital into technologies that are helping with societal challenges. Meanwhile, a growing number of the conversations I have with our clients are about sustainable investing.

Just a few years ago, interest was almost exclusively from the charity sector. It’s now broadened out right across our client base. We’re still in the early stages, but it’s exciting to see this change in thought.

While the pandemic has been tragic with immense human cost, I believe it is the catalyst for this change. It’s allowed us, as a society, to pause and reflect on the type of world we wish to live in – marking the end of the old world, and the start of a new and more sustainable world.

Corporate actions that speak louder than words

It has been the collective benevolence of people that has helped humanity get through our shared challenge of the pandemic. We’ve seen many acts of altruism across our portfolio.

One of our UK industrial technology companies saw its leadership team take a 20% pay cut to help protect its workforce against redundancy pressure. Our financial services firms provided billions of dollars in repayment holidays to relieve pressure on people whose fortunes quickly changed. Our technology companies provided free at-home classroom platforms to allow millions of children to continue with their education, while our healthcare companies did whatever they could to help alleviate the burden on the global health system.

One of our US medical technology companies donated the blueprints of one of their ventilators to the world to quickly address the global shortage of this critical technology. Meanwhile, one of our pharmaceutical names has perhaps carried out the most benevolent act in corporate history by developing a highly effective single-shot vaccine, with the aim of providing one billion doses this year on a not-for-profit basis. This collective human response, catalysed by the pandemic, may be beginning to change the shape of capitalism.

Increasingly, we can see companies using their cultures and purpose to advance sustainable change. Linking purpose to sustainability is driving advantages to both revenue generation and in capital markets. Examples of this can be seen in our holdings in a UK specialty chemicals company, and a global consumer staples business. Both have embedded sustainability into their cultures, using it to shape the small decisions made every day across their businesses. This is critically supported by strong governance that incentivises management based on their ESG performance.

This collective human response, catalysed by the pandemic, may be beginning to change the shape of capitalism

The greatest commercial opportunity of our age

I’m excited by our guest article in this year’s report from Steve Kenzie, Executive Director of the UN Global Compact UK, who discusses the role CFOs can play in ushering in a new era for corporate sustainability performance. Former Bank of England Governor, Mark Carney, describes the transition to net-zero as the "greatest commercial opportunity of our age", with businesses needing to provide the vast majority of the required investment. Companies that are recognising this are positioning themselves well to thrive in the years ahead.

One of the most truly remarkable achievements of the pandemic has been the collaborative effort and human ingenuity to produce an effective vaccine. The previous record for developing a vaccine was four years for mumps back in the 1960s1. The usual timeline is around ten years. However, thanks to new technologies, government underwriting of risk and global co-operation, we now have several vaccines being put into people’s arms.

This is the dawn of a new era for vaccine development underpinned by advanced technologies such as genomic sequencing, cloud computing and artificial intelligence. We wouldn’t be here without these advancements and it positions us well for tackling future pandemics.

Within the portfolio, we have held many companies that have helped with the development of vaccines. Whether this is the large technology names providing machine learning tools and platforms to help us understand the shape and mutations of the virus, to our industrials who are creating equipment for manufacturing vaccine components, to our healthcare conglomerates bringing expertise in scaling up production. The collective effort has been spectacular and a true testament to humankind.

Re-focusing on climate change

As the urgency of the pandemic recedes, climate change will return as our principal focus. Innovation is key to us succeeding on this mission, and we need a lot of it. Rather than depending on a single silver bullet, it’s broad innovation across our global economy and the sum of marginal gains that offers our best hope of getting there.

The pandemic showed us that when we put our minds to it, humanity can pull together and produce great innovation quickly and decisively – as evidenced by the rapid development of new vaccine technology. Much of the success of the vaccines was thanks to the underwriting of risk by central government, which will again be key for this challenge.

Many of the advanced technologies we enjoy today were borne from the underwriting of risk by government during periods of global challenge – these include the internet, WiFi, solar photovoltaic cells, GPS, AI, desktop computing and efficient turbines.

We’re beginning to see the green shoots of this again through the formation of green banks and the wave of green and social bond issuance by government-backed supranationals.

The cheapest energy in history

In Bill Gates’ latest book2, he talks about how we need to focus on reducing green premiums – the difference in cost between a product that uses carbon and its carbon-free alternative. Government will play a critical role in this, such as through the formation of carbon markets.

The EU, which boasts the largest and most mature carbon market, has seen the price to pollute through its permit scheme increase by over +700% over the last five years3. This is helping to reduce green premiums by pushing up the operating costs of carbon-intensive businesses. Advances in technology and manufacturing capabilities have also been key in bringing down the cost curves of renewable energy. Last year, 67% of new energy capacity, globally, was renewable with solar becoming the ‘cheapest energy in history’ in many countries, according to the International Energy Agency4.

On the other side of the equation, we need innovation to reduce our demand for carbon. Across our portfolio, many of our businesses are helping by providing technology or through advances in their own operational efficiency. At the heart of the green revolution in California, large technology companies are aggressively competing with each other to become the greenest. This is being driven by the power of their employee base, which creates the intangible value on which these companies depend.

Every generation has a financial product that defines it. Passive investing shaped the last decade, while derivatives shaped the decade before. Ours is sustainable investing.

The geographical barriers to employment that have been broken down by technology and the pandemic means competition is high for top talent. As a way of attracting talent, these companies are pursuing ambitious carbon targets and developing moonshot technologies to address climate change that simply didn’t exist until recently. We have a lot to do to fix our climate, but the endless frontier of science provides our best hope.

In this year’s report, we explore the power of corporate culture and how it’s being used to drive change. We also take a deep dive into the advanced technologies that produced the new breed of vaccines and how they will transform our response to future pandemics. We will look at the growing issuance of social bonds and how their proceeds are being used to provide societal resilience to the pandemic. Then we look at how innovation across our portfolio is helping to bring the carbon era to an end.

To the many clients who have already joined us on this journey, I would like to thank you for entrusting us with your capital. Every generation has a financial product that defines it. Passive investing shaped the last decade, while derivatives shaped the decade before. Ours is sustainable investing. It’s through the allocation of capital that we can drive change, encourage innovation and return the world to a sustainable footing.

ESG investing