COVID-19 and climate change: Implications for thematic investing

Karsten Junius November 30, 2020 06:00

Long-term thematic investors assess investments based not only on developments over quarters, but also on fundamental and structural changes that occur over the span of decades. Indeed, many long-term trends have already been in place for some time, but the onset of the COVID-19 pandemic has certainly amplified the magnitude and accelerated the pace of change in many cases. Nearly a year following its outbreak, clear implications the pandemic is having on thematic investing can be seen.

COVID-19 and climate change will change our world in permanent ways

In some respects, the risks and challenges posed by COVID-19 and climate change share many similarities. COVID-19 will have lasting implications, not unlike climate change, and the notion that the pandemic will not have permanent effects on society and the economy is extremely far-fetched. Already, the market has seen a huge amount of “stranded” capital with high debt loads from the bankruptcies of many firms. In this regard, there is a substantial similarity to climate change and its ultimate impact if carbon emission levels are not reduced significantly. COVID-19 has shown us what a global threat looks like, and it did so at breakneck speed.

Sustainable and thematic investing in the low-growth environment

In today’s low growth environment, many investors are struggling to find returns. This new normal means they are often no longer choosing between more or less growth, but rather, growth versus decline. This is compounded by COVID-19, which has hastened many structural changes. Where growth rates of economies are low and likely to remain so, finding thematic or structural growth becomes even more important. Applying a thematic approach allows investors to harness long-term structural growth opportunities to identify and invest in businesses that provide the right solutions for the future, while avoiding companies that fail to address challenges. At the same time, integrating sustainability into an investment framework helps to gain valuable insights, making a more holistic investment case.

Sustainability will be a crucial performance driver in future

Yet going forward, it is clear to us why sustainability will be a key performance driver. One of the largest capital needs in the future will be fueled by the necessity to address climate change. In our view, climate change is among the few externalities that has not been appropriately priced in by the markets yet. However, that time will certainly come, perhaps even faster than expected, and investors will not want to be caught out when that happens.

For Bank J. Safra Sarasin, it is obvious that climate change has huge implications for the world and for the industry. In May, it launched a Climate Pledge with the aim of achieving a carbon-neutral outcome from its assets under management by 2035. This means developing its sustainable investment processes further with the goal of achieving net-zero carbon emissions from its portfolios. There are three levers that are used: First, by investing in companies that enable emission reductions and take into account the progression of climate change in their operations and strategy. Second, by engaging with companies that foster collaboration in promoting climate change mitigation and adaptation. And third, by analyzing, mitigating and reporting financial risks associated with climate change that are pertinent to the bank’s investment strategies.

Having a long-term thematic investment approach with sustainability at its core, is key to being well-positioned for the transition into a greener and more sustainable future. COVID-19 has given us a glimpse not only into the possible impacts of ignoring climate and sustainability-related risks, but also the investment opportunities that can come with harnessing long-term trends and picking out the right winners.

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Karsten Junius

Chief Economist, Head Economic Research at Bank J Safra Sarasin