Neil Dwane is the former equity CIO and global strategist for Allianz Global Investors. Writing exclusively for Citywire, he is drawing on his years of experience to analyse the rise of thematic investing and the fundamental trends that lie behind it. For his other columns please click here.
Themes seem to have to have ‘tech’ inside them in order to capture the investors’ attention and enthusiasm. Tech within the business model justifies high valuations and growth expectations, whether it was a labour arbitrage model like Uber or a capital arbitrage one like WeWork.
Also important was the hype around the product which the consumer would want rather than would actually need and value. I think it is time that we realise that leveraging Big Data, social media, the internet and AI by companies is now standard and akin to the prior disruptions of electricity, trains, cars and telecommunications.
Some of the most powerful themes are ones which are going to be driven by real fundamental needs and societal choices, which will direct and harness political and economic policies. These themes are all centred around Planet Earth with a clear focus on climate change, decarbonisation and rising sustainability of food and water for nearly eight billion inhabitants.
Inevitably, such broad global themes will gain exposure to new areas of innovation which will include many aspects of so-called “tech”. Investing in efforts to mitigate ecology and climate change may well find opportunities in cleaner energy sources, like wind, solar and hydrogen alongside new battery technologies and transmission networks.
It is also important to recognise the sheer scale and size of the existing global infrastructure which we have built over the past century and which we mostly take for granted. Much will need to be renewed or rebuilt, with the American Society of Civil Engineers estimating that the US alone needs to spend over $5tn to modernise itself.
Taking on climate change and all its complexities, will necessitate global commitments and solutions. Occasional conferences like Paris in 2016, and Glasgow this year, must deliver tangible progress and structures for implementation.
Expectations of how quickly these solutions can take effect will also need to be carefully managed as progress is likely to be slow and incremental. Companies and investors too will only commit serious investment and capital to well defined rules and obligations.
It is easy to set headline goals for these important challenges yet, as ever, the devil will be in the detail and the carrots and sticks which are used. Most, I think, would prefer to see consumer and market forces used to change behaviours, such as market pricing of carbon credits rather than prescribed political policies.
Investors should thus expect a smorgasbord of systems and approaches from each country for the next few years, which may lessen actual global progress, as we have seen in the multifarious responses to Covid in 2020-21.
Politicians too have the unenviable task of prioritising the Earth’s challenges, be that in ecology, agriculture, water or clean energy. This Gordian-type knot of issues is then made doubly more complex by the domestic problems which each politician faces and the need to be re-elected.
Indeed, local policy has then a clear path of causation for regional or global challenges. Ethiopia, for instance, wishes to dam more of its Nile waters, in the Grand Ethiopian Renaissance project.
This will lessen water flow to Sudan and Egypt, with dramatic consequences for their agricultural, power and social needs. Ethiopians will achieve greater power and agricultural opportunity, but at what cost to others?
Moreover, many of these Earth-central themes are going to require huge efforts from within the construction industry. Aggregates mining can be very destructive and disruptive to local communities, as you cannot transport heavy stones long distances, and where the cement industry consumes huge amounts of fossil fuel power.
With each local project affecting the balance between ecology and economy globally, it will be hard for anyone to know if we are actually making real progress. It will be just as hard for investors to track the performance of their investments too, as disclosure by companies remains inadequate, unstandardised and opaque.
Indeed, the recent ‘Seaspiracy’ on Netflix highlights many of the issues which investors are going to have to navigate on marine food consumption. It challenges not only the actual behaviours and methods used by fishing and fish-farming companies but also the poor oversight from many NGOs and governments, empowered to represent the interests of consumers.
It will be just as hard for investors to track the performance. It also highlights the current difficulties in managing the seas and oceans and the different attitudes to sustainability.
With the popularity of ESG investing growing rapidly around the world, this documentary makes it very clear that there is a huge journey ahead to change business practices and inform consumers over the credibility of the product.
Just as in the asset management industry today where many are now rushing to greenwash their funds, so, many companies are airbrushing their activities with little sincere change as yet.
Central banks too are entering this area with a bizarre enthusiasm to promote the creation of green bond markets for both sovereigns and corporates. I say bizarre because I do not believe that it is the role of central banks to solve inequality or climate change.
By underwriting certain types of bond issuance through their quantitative easing policies, central banks may be interfering with the markets’ allocation of risk and capital and, unknowingly, promoting yet more wasteful investment and bad behaviour.
Consumer power at play
I believe that consumers, representing over 50% of the economy, now have a chance to affect dramatic changes in corporate behaviours by preferring more sustainable local products and forcing significant product change through information disclosure, supported by food retail and other shops.
Manufacturers are already confronting the rising costs of using green energy and diminishing opportunity for offshoring production. Finance companies are now being pressured to align their loans and investments away from fossil fuels towards more sustainable power sources.
Many of these changes will be supported by the emergence over the next decade of the Millennial generation as the key voter, consumer and tax-payer.
The complexity and inter-connectedness of these issues and solutions should thus necessitate modest expectations of the pace of change but not underestimate the huge increase in investment and time which will be needed to make the change.
When market valuations and investor expectations are taken into account, it could be that that the most vital and relevant themes become those which do not provide yet more unnecessary technological ubiquity but seek to address the availability of water and healthcare, less plastic and fossil fuels and more chips to feed the world.