Environmental, social and governance themes tend to be very long-term, playing out over market cycles, decades or even generations. It is the exact opposite of the market’s push to extract opportunity from signals that exist for picoseconds on electronic exchanges, where quite literally the distance of your servers from the exchange could make the difference in performance outcomes. Even so, there are a number of nearer-term sub-themes that we believe will be material to markets and portfolio performance in 2021. To a greater or lesser degree, they are all either caused by the pandemic crisis, or were already present but laid bare by the crisis. We will cover them in brief here and more comprehensively in a soon-to-be-issued WCM piece on the year ahead in ESG.
- Setbacks to sustainable consumerism – Individual and institutional consumers have unavoidably veered away from best practices in everything from coffee cups to sterile wipes. The exploding use of personal protective equipment (PPE) in particular poses environmental challenges, as most of the material used is synthetic and, by the very nature of safety and health protocols, disposable. We are faced with a moment where making the conscientious consumption choice may not be the safest option, and this reversal will affect companies at all points in the supply chain from the component materials to end-of-life disposal.
- Re-examination of public transit – Public transit, a perennial ESG theme, had been enjoying something of a renaissance in usage and public sentiment, and in urban centers like New York City transit is not the sole province of the working poor. The pandemic exposed the public health risks of mass transit, as well as the usage risks when people stop commuting. Essential workers, among them the working poor, do not have transportation alternatives and can not “Zoom” in to their jobs, so ridership continues at some level. But usage has fallen and calls into question the stability and funding of mass transit systems certainly in the US but globally as well. When the demographics of ridership narrow, the interest in public support also narrows, which will have implications for transportation bonds, municipal financing for transit worker benefits and pensions, companies that supply and maintain equipment, etc.
- De-densification of population – Related to transit patterns, there has been a measurable flight from urban centers into the immediate suburbs to the exurbs and beyond. We believe to a certain degree this outward flow was already underway as Millennials, who were largely responsible for embracing urban living and driving the revitalization of city cores, began the inevitable transition to family life and the cherished qualities of open space, good schools, less expensive real estate, lower taxes, and greater mobility. Again, this is counter to the ESG theme of sustainable cities and dense and efficient living and working and may disrupt that investment thesis at least in the near term. The pandemic accelerated and amplified that movement, which has driven up real estate values outside of city centers, driven down real estate in the cities, and will cause a re-rating of the tax bases in both. We also expect this shift, combined with the move to virtualized office environments, to hollow out urban workspaces which will have implications for corporate office REITs and coworking companies.
- Shopping at home – Much like the acceleration of population flow out of urban centers, shopping at home has been a durable trend for some time now. It has also been a challenging trend from an ESG perspective because of the gained and lost efficiencies moving consumption online. The pandemic made these questions unavoidable as online shopping went from convenient to critical. There are tradeoffs in miles traveled for shoppers vs. miles traveled for delivery professionals. Packaging for shipment vs. packaging for shelved inventory poses another challenge. We have seen an ever-growing focus on the importance of logistics from warehouses to inventory management to GPS-driven transit to wring efficiencies out of the system, and now we expect that focus to shift more intensely to improving the sustainability of the business-to-consumer supply chain when the final mile is to the customer’s doorstep instead of a shopping mall shelf.
- Workplace safety – This is an ESG theme we have been focusing on in our publications since the beginning of the pandemic. Safety and health in the workplace took on entirely new parameters with COVID-19, redefining practices from offices to slaughterhouses and factory floors to grocery stores. We saw in the most graphic ways possible how workers in essential roles were not in a position to work remotely, and either had to face the risk of infection or the risk of unemployment. Safe and healthy workers are an ESG virtue, but they are also essential to resilient businesses and systems. Companies are being forced to rethink and invest in new environments, new resources and new processes in order to remain productive and economically viable under the strain of a public health emergency.