Liontrust Sustainable Future Funds - Annual Review 2019 - Page 19

Developing themes
There are numerous benefits to this shift: digital payments are more
convenient as people no longer need to carry cash and contactless
transactions are quicker, easier and more hygienic.
Looking beyond meat (Delivering healthier foods, Enabling
healthier lifestyles)
Until recently, obesity and health concerns were the main drivers
behind moving better diets up the global agenda but we are now
seeing growing awareness of the environmental damage caused
by meat production. Food and farming are responsible for 25% of
total global emissions, and the livestock industry, primarily meat and
dairy, makes up a significant share of this.
Given these factors, a recent report from independent think tank
RethinkX has claimed we are on the cusp of the deepest, fastest and
most consequential disruption of food and agricultural production since
the first domestication of plants and animals 10,000 years ago – and
the driving force behind this is what is known as protein disruption.
Alternatives to meat-derived protein currently fall into two camps –
plant and insect. Figures from Mordor Intelligence predict the global
market for these will hit $8.2 billion and $1.1 billion respectively by
2023, so we are clearly in the early days of growth for both.
There is nothing like as much in the news about the impact of meat
and dairy production as there is about renewable energy or transport
emissions but we feel addressing this situation can have a similar
impact on climate change. We expect the same contribution from
innovative companies working in livestock, meat and dairy as we
have seen in sustainable energy.
While there are hurdles to overcome, the direction of travel on meat
production looks as clear today as it is on fossil fuels – and we will
continue to invest in companies exposed to such structural trends
shaping the economy of the future.
Living in a digital world (Connecting people, Improving the
efficiency of energy use)
As more of us adapt our behaviour with climate change in mind,
most activity has understandably been around how we heat and
power our homes and travel around the world. But it is becoming
increasingly clear that we also need to take a hard look at how we
communicate and consume media.
New figures from think tank The Shift Project reveal digital technologies
now account for 4% of greenhouse gas (GHG) emissions, which is
more than civil aviation, and this could double by 2025 as the
energy required is increasing by 9% a year.
As people cannot see the pollution from selfies and videos streams,
there is a perception these services are boundless. In reality, however,
they suggest we need to move towards greater ‘data sobriety’ and
the fear is that this means greater regulation.
This issue of rising data usage, and the amount of energy it requires,
is one we have been tracking for several years. Traditionally,
companies tended to have on-site server rooms, often in regular
offices, and while these have evolved over time, they were not
purpose built, so cooling and ancillary power requirements make
them highly inefficient.
We therefore see considerable resource benefits coming from the
trend towards outsourced storage and processing, focusing on data
centre operators that have low power usage effectiveness (PUE) and
also use electricity from renewable sources. We believe these colocation centres are vital for the digital economy and will increasingly
underpin the infrastructure necessary for a more sustainable world.
The technology industry in the US now emits more carbon than ever
before, so more efficient data centres are vital.
For the centres themselves, power is their biggest
cost, giving further incentives to design and run them
more efficiently.
Will a cashless society pay off?
(Increasing financial resilience)
Anyone who has suffered bemused looks when trying to pay with
cash in a shop or pub will be aware how rapidly we are moving
towards a cashless society. Increasing financial resilience remains a
key theme across our portfolios and, as part of this, we believe the shift
18 - Liontrust Sustainable Investment: Annual Review 2019
from cash to digital payments provides overall net benefits to society.
Technology has transformed the use of money over recent years, with
the rise of online shopping and the often discussed ‘death of the high
street’ highlighting a growing shift from physical to digital payments.
Beyond that, we would also highlight the potential to reduce or
resolve the tax gap and expose the so-called shadow economy.
There have been many efforts to quantify the cost of such illegal
activity globally: in the UK, for example, the Bank of England
revealed in 2015 that no more than 50% of notes in circulation are
used for domestic transactions and hoarding, with the balance either
overseas or used in the shadow economy.
A cashless society remains an emotive issue that elicits strong
reactions: in 2016, Deutsche Bank CEO John Cryan said cash was
both costly and inefficient and would no longer exist in 10 years
and yet the amount of cash in circulation has actually grown rather
than shrunk. However people feel about these underlying questions,
we would point out one simple fact: despite the rapid digital shift
in the developed world, 85% of payments globally are still made
in cash, which creates a huge growth opportunity as technology
continues to improve and any lingering aversion to it erodes.
In the wake of recent events, we have added to two of our holdings
held under this theme, PayPal And Visa. In our view, one of the
outcomes of the Coronavirus pandemic will be that people who have
rarely engaged with e-commerce before will be encouraged to do
so. While 2020 will prove difficult for all businesses, we believe
PayPal will continue to grow earnings in excess of 20% for the 2021
to 2024 period. We added to Visa for similar reasons, expecting
use of cards to accelerate during this time of crisis.
Insuring the future
(Insuring a sustainable economy)
In our bond funds, we favour insurance companies for several reasons
– they have robust balance sheets, strong credit ratings and are highly
cash generative (in the main). Capital positions are also strong and
have generally been improving over time.
We see a two-fold positive impact from these companies. First, they
allow people and businesses to insure their assets, making them more
secure and facilitating economic development and investment, which
in turn benefits society through job creation and growth. Second, they
give people the ability to secure their future, through savings, pensions
and life insurance products.
From a sustainability perspective, we believe insurance companies to
be among the market leaders. It is the role of an insurance company
to understand, analyse and price risk, and many of the leading
global insurance companies have their own research funds looking
specifically into areas such as climate change.
By researching climate change, they can understand its effects and
price it more efficiently, thereby reducing exposure to downside risks
through improved underwriting. These companies then use the output
of this research in other areas: feeding this knowledge into their
investment portfolios for example and advising their clients on these
growing risks.
Insurance companies have been among the first movers in trying to
understand the impact their businesses and investment portfolios are
having in relation to climate change. Many have analysed carbon
emissions for example and devised strategies to mitigate these.
Unbottling the gene genie (Enabling innovation
within healthcare)
No longer the preserve of science fiction, gene therapy is set to
become an increasingly important part of medical treatment. This
therapy involves the introduction of normal genes into cells in
place of missing or defective ones to correct a genetic disorder.
With between 4,000 and 6,000 diagnosed genetic disorders in
existence, we see an approaching tipping point where gene therapy
becomes commonplace, just as happened with antibody drugs in the
early 1980s.
Pure-play gene therapy companies had sales of around $3 billion in
2018 and consensus has this increasing to $6 billion by next year.
And yet this would still only make up 1% of the overall prescription
drugs market.
A range of pharma and biotechnology companies continue to make
progress in the mainstream space, with several trials started and
products launched. From our perspective, the concept of a one-and-
done treatment paradigm goes well with our focus on sustainable
areas within healthcare, in terms of both innovation and affordability.
The premise of gene therapy is that it works at the source and provides
a one-time cure, with patient and payment providers both benefiting
from clear and hopefully definitive results.
As gene therapies can cure diseases, they can potentially be approved
on a specially designated pathway – much faster than traditional
treatments. This means the company involved will potentially have to
jump straight from small-scale production to large-scale manufacture,
suggesting that when outsourcing, it is sensible to link up early with a
partner who can be trusted to work at scale.
Given these dynamics, we are looking to find companies that can fill
an essential part of the supply chain, on the assumption such stocks
will grow with the industry regardless of which specific therapies are
most successful.
Liontrust Sustainable Investment: Annual Review 2019 - 19


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