Renewable Energy, Greater Transparency Highlight ESG Priorities

ClearBridge Investments examines drivers for stocks with strong sustainability characteristics.

    Mary Jane McQuillen

    Mary Jane McQuillenHead of Environmental, Social and Governance Investment, ClearBridge Investments

    We expect many of the drivers of strong returns for stocks with strong sustainability characteristics to continue in 2021. These include efforts to fight climate change by lowering carbon emissions. There is some expectation a Biden administration will be supportive of renewable energy within the federal scope; this appears likely although it is not an essential part of our investment case there, which rests mainly on much larger state and corporate commitments. We believe renewable energy will enjoy long-term secular growth as the world transitions to a less carbon-intensive economy and as solar and wind power has become more cost-competitive with fossil fuels. We are constructive on this growth in both residential applications and utilities.

    The push to lower emissions and increase energy efficiency will continue to support the growth of electric vehicles (EVs) and their evolving supply chains. EVs contain more and more electronic content, for example, and should continue to grow demand for makers of electrical connectors. We are also watching newer technologies, such as green hydrogen, lithium-ion batteries and carbon capture and storage, as they develop and potentially change the renewable energy landscape.

    We believe companies overcoming resource scarcity through the use of recycled materials and waste reduction should continue to provide value. As the economy gradually reopens and spending partially migrates away from staples-focused purchases during the pandemic, companies innovating in sustainable packaging and healthier, more humanely raised food products should continue to see demand growth and have a long runway.

    Another area of ongoing investor focus is corporate diversity, not only at the board level, but also through the ranks of the workforce and middle management. ClearBridge has added Diversity & Inclusion among our major engagement themes for 2020–21. This will be a multi-year endeavor by both corporates for recruitment, training and promotion, as well as investors for more disclosure and engagements.

    Transparency is increasingly a competitive necessity. Shareholders are having success pushing for more transparency and changing the landscape of what are considered industry norms. While proxy voting topics continue to focus on climate and gender, we expect a renewed focus on social equality, in particular racial equality, to feature more prominently in shareholder engagements and 2021 proxy proposals. Another proxy topic that continues to gain a lot of attention is disclosure of annual political spending, and most investors are voting for more disclosure. This is notable because in some sense the pendulum has swung toward valuing fair business practices and transparency. In the past, a common reason given for not disclosing was potential damage to competitiveness, something shareholders would not want. Now, the opposite wave is gaining force, and the more companies disclose, the more it is a competitive disadvantage to not disclose.

    The COVID-19 pandemic has served as a reminder of the value of drug innovation, and those health care companies that can drive this, or help address unmet medical needs or ensure patient safety and health care coverage, should continue to thrive.

    Overall, we are positive on the outlook for economic growth in 2021, as society has learned important lessons in mitigating the spread of COVID-19 while operating businesses under relatively safe conditions, if at less than optimal output levels. Hopes for a broad vaccine deployment by midyear 2021 seem reasonable, and while that may not mark the immediate end of the virus, economic activity should pick up, supporting more cyclical areas of the market. The large technology platforms that dominated returns in 2020 by supporting a stay-at-home environment, however, should see continued strength both as this environment remains with us and as their solutions offered to society remain innovative and valuable. In our view, a diversified portfolio favoring companies with strong sustainability characteristics is best aligned with our long-term investment approach.

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