ESG Outlook 2019
Head of ESG and Stewardship David Sheasby outlines the key sustainability issues for investors in 2019.
5 December 2018
What’s on your radar for 2019?
The issue of plastic waste has generated significant attention in the past year and is therefore likely to feature even more prominently in our thinking in 2019. It’s now estimated that eight million tonnes of plastic enter the marine environment each year*. The World Economic Forum estimates that after a short, single use, 95% of plastic packaging material value, or US$80–120 billion is lost to the global economy annually**.
As global awareness of this problem rapidly increases, the phasing out of single-use plastic will move higher up the agenda for both consumers and investors alike. This is already having significant implications for some consumer goods companies, as well as those within the plastics value chain, so we will be spending considerable time understanding how business models (and ultimately long-term margins) will be changed by a drastic reduction in plastics use.
The phasing out of single-use plastic will move higher up the agenda for both consumers and investors alike
Elsewhere, we are going to see an enhanced level of focus on climate-change reporting in 2019 and beyond. Both investors and companies will need to think more about how they manage and report on systemic issues such as the recommendations from the Task Force on Climate-related Financial Disclosures (TFCD) and the UN Sustainable Development Goals (SDGs), specifically goal number 13 – Climate Action. For companies, this is a matter of strategy and sustainable value creation. For investors, particularly like ourselves with longer-term time horizons, these (climate-related) systemic risks will be increasingly reflected in valuation models and incorporated into engagement with company executives and board members.
Water risk also remains on firmly our radar, as it has the potential to impact on operating costs through higher input costs; constrain growth where competing with other stakeholders for scarce resources; or necessitate higher capex to address the challenges. As part of our focus we are continuing the ongoing PRI-led collaborative engagement on this topic.
What are the risks in 2019?
For some companies, increasing focus from investors on transparency certainly poses a risk. As we move into 2019, the World Benchmarking Alliance, a body set up with the aim to fill the accountability gap in measuring corporate performance in relation to the SDGs, will start to publish publicly available benchmarks. These will rank companies on their performance and incentivise business action towards achieving the SDGs. Clearly, not all companies come out well in these rankings, as we have seen recently with the release of the Corporate Human Rights Benchmark rankings for 2018.
Bolsonaro has indicated he will take a very different approach to the Amazon, two-thirds of which is in Brazil, with an emphasis on exploitation of the resources availability rather than preservation.
Another potential risk we will be monitoring is whether Brazil will pull back from its climate commitments. At the end of October, far-right candidate Jair Bolsonaro was elected as president. Although in theory he remains committed to the Paris Climate Agreement, he has also indicated he will take a very different approach to the Amazon, two-thirds of which is in Brazil, with an emphasis on exploitation of the resources availability rather than preservation. Often described as ‘the lungs of the planet’, any material change to Amazon’s status could have serious long-term consequences.
What is the market missing?
Following on from the rapid rise in awareness and reaction to the issue of plastic pollution, will it be the turn of the ‘fast fashion’ industry next? The Ellen MacArthur Foundation produced a fascinating report highlighting some of the challenges in the US$1.3 trillion clothing industry, which employs more than 300 million people.
The number of times a garment is worn before it ceases to be used has fallen by more than 30% … the pressure this puts on the environment is enormous.
This industry has seen huge growth – production volumes have doubled over the last 15 years, driven mainly by ‘fast fashion’ (in which ever-changing trends are designed and manufactured quickly and often sold at a price that does not account for external costs such as pollution). As such, utilisation, or the number of times a garment is worn before it ceases to be used has fallen by more than 30% over the same period and the pressure this puts on the environment is enormous. Textiles production, including cotton farming, uses around 93 billion cubic metres of water a year and the greenhouse gas emissions from textiles production are greater than all the international flights and maritime shipping combined.***
Essentially what has been created is an unsustainable linear process with only 13% of clothing being recycled and more than 73% ending up in landfill***. Public awareness is certainly starting to rise – there have been notable documentaries produced exploring the global impact of fast fashion and, in the UK the Environmental Audit Committee has sent out questions to a number of fast-fashion retailers looking for a response on some of these concerns – watch this space.
* Source: NRDC.
** Source: World Economic Forum, ‘The New Plastics Economy - Rethinking the future of plastics’, January 2016.
*** Source: The Ellen McArthur Foundation. A new textiles economy: redesigning fashion’s future.
The opinions contained in this document are those of the named manager(s). They may not necessarily represent the
views of other Martin Currie managers, strategies or funds.
The Outlook for 2019
Our portfolio managers look at what 2019 has in store for investors, the Good, the Bad and the Surprising.