How can investors unlock sustainable opportunities?

How to embrace the opportunities that change creates
November 2020

Sacha El Khoury

Director, Portfolio Manager, Global Equities

LEARN MORE ABOUT THE AUTHOR
Share
Subscribe to our Insights

Risk warnings

The value of investments and any income derived from them can go down as well as up and investors may not get back the original amount invested.

Screening out sectors or companies may result in less diversification and hence more volatility in investment values.

Views and opinions have been arrived at by BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any companies that may be mentioned.

The information, opinions, estimates or forecasts contained in this document were obtained from sources reasonably believed to be reliable and are subject to change at any time.

Human beings are hardwired to resist change. As creatures of habit, we find it difficult to accept or even acknowledge when things around us change.

In psychology, this is what is known as the status quo bias, a cognitive bias in which people exhibit a preference for the current state of affairs. Any ensuing change to the status quo is perceived as a loss or detriment. Such is the nature of the human condition that popular practices like meditation, mindfulness and yoga were developed to help us cope with change-induced anxiety.

A number of theories have been posited to explain why we feel this way, and include loss aversion, the fear of uncertainty, the paralysis induced by too many choices or too much information…better the devil you know, right?

This bias will seem all too familiar to the reader, and you will recognise instances of this manifesting itself in your own behaviour, those around you, and society as a whole. Just think about how resistant people were to the idea of working from home pre-Covid. While flexible working was (very) gradually making its way into corporate life, it was still perceived by employers and some employees as a sure-fire way to kill productivity, and on the whole unacceptable.

This urge to resist change is paradoxical because as much as we instinctively fight change, we as a species are particularly good at adapting and innovating.

 

Covid-19 forces change

In a way, Covid-19 has exemplified and embodied our fears of change, as well as our prowess in adapting. 

The urge to resist change is paradoxical because as much as we instinctively fight change, we as a species are particularly good at adapting and innovating.


Are we going to fear change, or are we going to embrace the plethora of opportunities it creates?

The perception of loss that people experience after a change is just that: a perception. The reality is that change brings about tremendous benefits.


 

Working from home went from zero to 100% virtually overnight, and its success has invalidated fears and vindicated advocates of flexible working, so much so that home working is now seen as a permanent fixture of our future working lives. The reality is, the world is in a state of permanent flux. And a number of facets of our world are currently unsustainable in their present state and will inevitably result in change – whether we like it or not, whether we recognise it or not.

The question is, are we going to live in denial and fear the change, or are we going to embrace the plethora of opportunities this creates? The perception of loss that people experience after a change is just that: a perception. The reality is that change brings about tremendous benefits.

Take opposition to onshore wind turbines in the UK as an example. Even though onshore wind is now the cheapest form of energy1 (cheaper than coal, oil, gas, and other renewable sources), rural landowners have significantly resisted it over the years and the government actually slashed subsidies in 2015, leading to a significant reduction in capacity. Both government and public support have increased since as climate change awareness rose among the public. And this has created bountiful opportunities for companies aligned with this trend.

The status quo is unsustainable…and ripe for disruption

The status quo bias is unhelpful when the status quo is unsustainable: a perfect example is our food system. Whether you look at it from a human health, environmental or climate perspective, our food system is currently unsustainable. Considering we are trying to feed 2 billion more people2 using the same resources by 2050, we are either going to need another planet, or something’s got to give.

Younger generations (think of millions of Greta Thunbergs) with wildly different views on life, however, have driven consumption patterns to shift as they become more significant consumers. This wave of change is being reinforced by the regulatory landscape, which is trying to stem the enormous human and economic costs of rising obesity. With this, food manufacturers have had to contend with enormous challenges and there is no sign of them abating: consumers are becoming more discerning and more demanding. They also have the luxury of choice as smaller and nimbler food producers proliferate due to lower barriers to entry, including easier and more accessible marketing. Just think how the Facebooks and YouTubes of this world have fundamentally changed the way brands communicate with their consumer base.

Specialty ingredient companies, such as Ireland-based Kerry Group, hold the solution to these problems in their hands. They provide their clients – the food manufacturers – with the tools necessary to clean up their labels, reduce fat, sugar, and salt content, while boosting nutrition and improving taste. They are becoming akin to Research & Development outsourcers, and elevating both growth and return profile by doing so. Not only that but Kerry Group is explicitly aligning its portfolio of solutions with sustainable nutrition solutions in order to grow its business. Consumers want food and beverages that are healthier and taste great while respecting the planet, and Kerry Group is able to provide the insight,  world-class innovation and application expertise. They are aligning themselves with a multi-decade secular growth trend and have positioned themselves to win.

Change, however, is not only occurring at consumption level, but also at production level. As global protein production still needs to grow to meet needs in developing markets, one of the worst contributors to greenhouse gas emissions (GHG) is now coming under scrutiny. Who knew that cows cause more GHG emissions than cars? This is because methane (which cows actually primarily belch contrary to common belief!) warms the planet far more quickly than CO2. And most of this is coming from livestock – dairy and beef cows. Enter DSM – a leader in the vitamin premix space. DSM has used its expertise in nutrition technologies to develop a ‘clean cow’ enzyme that essentially suppresses the production of methane in the gut, and allows for significant reduction of methane emission. Their product makes sense not only from a GHG emissions standpoint, but also from an economic standpoint: belching enormous amounts of methane is in fact a direct cost to the farmer. The energy contained in 500 liters of methane is the equivalent of c. 10% of the energy consumed by a dairy cow each day. This energy might otherwise be used in milk or meat production. DSM has aligned itself to a growing need arising from a sustainability challenge, and has in fact applied that philosophy across its entire portfolio of solutions, thereby carving itself marketleading positions in fast-growing end markets. 

Our approach is to fully recognise the risks, the disruption to the status quo and to identify the trailblazers – the companies that harness their intellectual property, technology, knowhow, scale and network in order to address the challenges head on.

 

There is no doubt in my mind that the status quo is unsustainable. Our multifaceted world is changing, and we can no longer afford to ignore the risks. If 2020 has taught us anything, it should be this.

Our approach is to fully recognise the risks, the disruption to the status quo and to identify the trailblazers – the companies that harness their intellectual property, technology, knowhow, scale and network in order to address these challenges head on, and become long-term compounders in the process.

 

Final thoughts

At the core of the yoga practice is to let go. As individuals, we need to let go of our fear of change and allow our perception and mindset to shift to recognise the immense potential benefits of change. As investors, we recognise that we must align values and investments, and allow our clients’ capital to be put to work in a positive way that reflects the immense opportunities ahead. Ultimately, we must effect positive change in the world around us.

Risk warnings

The value of investments and any income derived from them can go down as well as up and investors may not get back the original amount invested.

Screening out sectors or companies may result in less diversification and hence more volatility in investment values.

Views and opinions have been arrived at by BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any companies that may be mentioned.

The information, opinions, estimates or forecasts contained in this document were obtained from sources reasonably believed to be reliable and are subject to change at any time.

Use our handy terms to look up any technical terms you are unfamiliar with.

1 Reality Check Team, ‘reality check: Which Form of Renewable Energy is Cheapest? BBC News, 26 october 2018, https://www.bbc.com/news/business-45881551
2The world’s population is expected to increase by 2 billion persons in the next 30 years, from 7.7 billion currently to 9.7 billion in 2050, according to a new United Nations report (17 June 2019)

Related articles

No posts matching your criteria