In the UK, vaccination rates were rising and pandemic restrictions easing as we moved into the
summer. As this becomes something increasingly seen around the world, it gives us an
opportunity to reflect on the existing trends the Covid-19 pandemic has accelerated, including a
focus on environmental, social and governance (ESG) analysis and sustainable investing
Greater company awareness of ESG factors, particularly the social factors as they pertain to
employee health and safety, and the investment community’s desire to become more
responsible custodians has shifted the narrative of what the true goal of investing should be.
Tailwinds for sustainable investing
Since 2015, the United Nations’ 17 Sustainable Development Goals (SDGs) have represented a
catalyst for change.1 The past 20 months of the pandemic have been a watershed moment for
governments globally – with structural trends supporting achievement of the goals:
Decarbonisation There has been an acceleration of net zero
targets from governments around the world, including China by
20602 and the US by 2050.3 In November 2021 the UK will be the
focus of the world when Glasgow hosts the 26th United Nations
Climate Change conference, where the focus will be on increasing
the pace of global decarbonisation, with implications for all sectors. We expect decarbonisation
targets to become more ambitious.
Sustainable infrastructure Forthcoming infrastructure spending is
material: the EU will invest more than €600 billion in the next five
years4 and President Biden’s $1 trillion infrastructure bill is making
its way through the Capitol. In the UK, public sector investment is at its highest level in 65 years.5 With the built environment contributing around 40% of the UK’s
total carbon footprint6, sustainability will form a key part of budgeting decisions.
Social equality and inclusion People in lower-income
communities have been disproportionately affected by the
pandemic. The increase in focus on the S in ESG means
addressing social inequality is a key part of economic recovery
programmes through, for example, improving access to education,
financial services and technology.
Healthcare The importance of innovative healthcare companies
and strong systems has been highlighted by the pandemic, as has
the need for encouraging healthier habits and lifestyles, across all
age groups. Governments worldwide will increasingly focus on
public health programmes such as around mental health and
wellbeing, in addition to obesity reduction strategies, including healthier eating and encouraging
exercise.
Figure 1: The UK provides a rich set of opportunities to invest in global sustainable leaders7
Source: Columbia Threadneedle Investment, August 2021
Around 75% of companies in the FTSE All Share earn their profits from outside the UK8, and so
offer global exposure to under-the-radar sustainable leaders backed up by the market’s solid
corporate governance practices. Yet there is a large valuation disparity between both the index
and some of those global sustainable leaders (Figure 2)
Figure 2: UK versus US and Europe
UK shares at record low relative to US
Price-to-book valuation of UK versus US3
Source: Bloomberg, as at July 2021. The mention of stocks is not a recommendation to deal. All intellectual property
rights in the brands and logos set out in this slide are reserved by respective owners
We see value in the UK market which continues to trade at too wide a discount relative to
international indices. The certainty around Brexit and success around the vaccine roll out should
put the UK market in a strong position to perform. In the first half of 2021 the FTSE All Share has
rallied but continues to remain a laggard versus some global indices. The opportunity for
valuation arbitrage remains and, as a result, merger and acquisition activity in the UK is at record
levels, with John Laing Group, Vectura and RSA among many UK companies bid for.
The UK Sustainable Equity fund
The Threadneedle UK Sustainable Equity strategy has a dual objective to generate long-term
performance that exceeds the FTSE All-Share index and invest in companies with positive
sustainable outcomes. The aim is to identify businesses whose products and services have a
demonstrable positive impact on the environment or society, measured through revenue
alignment with the SDGs alongside strong or improving ESG characteristics, fundamentals and
an attractive valuation (Figure 3).
Figure 3: Breaking the fund down
Source: Columbia Threadneedle Investments, July 2021
Engagement is a key part of the UK Equity team’s investment process, which often utilises non-standard ESG and sustainability data. We meet CEOs and CFOs during results roadshows, as
well as chairmen, other board members and heads of sustainability, to thoroughly assess
companies’ fundamentals, financials, ESG risk management, targets and, crucially,
sustainability. Essentially, we are interested in how these companies are mapping their
strategies with a global shift to sustainable investment.
Our robust and fully integrated process – focusing on ESG, sustainability and strong
fundamentals in an undervalued market – means we are well positioned to benefit from the UK’s
broad opportunity set of global investment, megatrends and the rise of ESG analysis and
sustainable investing.
