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Client Update - 9th April 2021

As there has not been a huge amount of news in markets and COVID vaccines since the bank holiday, I thought I would take a detour from the normal commentary and return to a previous topic of conversation - that of Environmental, Social and Governance (ESG) focussed investing.

There certainly seems to be a bifurcation in global outlooks currently that represents something of a feast or famine across markets today. On the one hand, we have the promise of further fiscal largesse from the US government, with the Biden Administration unveiling another stimulus bill, this one encompassing $2tn to rebuild America’s roads, bridges and railways. Joe Biden’s fiscal stimulus is likely to trigger some envy in the rest of the world and particularly in Europe, especially when its impact will combine with the faster reopening of the US economy to deliver what could be a very strong mid-year 2021. We think the chances of the EU emulating the US and rapidly upgrading the Recovery and Resilience Fund are slim.

Meanwhile, in emerging markets, the list of countries forced into monetary tightening is getting longer, with Brazil and Russia joining Turkey. Their contribution to world demand in 2021 may be dampened as their capacity to spur domestic spending is being hampered. True, China continues to do well, but Beijing is cautious not to engage in “over-stimulus”. Between the Euro area’s difficulties with the pandemic and policy constraints becoming more apparent in EM, the US looks like quite isolated as a lone candidate for overheating this year.

On the other hand, investors are becoming increasingly interested in sustainable diets, as many people cut back on meat or are turning away from animal products altogether. According to Veganuary, half a million people went vegan in January this year, twice as many as in 2019, and we have become used to cafes and supermarkets tempting us with their plant-based offerings, most famously with Greggs and its vegan sausage roll.

Campaigns like Veganuary target people who want to lead a more sustainable life, with issues such as climate change having risen rapidly up the agenda in recent years. There are still a lot of myths about what sustainable investing means though. Consumer interest in clean and sustainable diets continues to focus on a broad range of issues including food waste, air miles, clean labels, meat free, lab grown meat and organic, amongst others. Veganism can also tie in with governments’ plans to reduce carbon emissions, with less meat consumption meaning lower emissions at a national level.

However, while it is a growing trend for consumers, investing in it is far from straightforward. One of the main problems is a lack of pure play companies in the space. For example, there are only a few vegan-only, direct-to-consumer companies entering the market, and mainstream supermarkets are gaining traction in the sector at the point of sale with their own-brand vegan meals. While supermarkets offer exposure to vegan products, the impact of vegan food sales on supermarkets’ bottom lines is currently so small that to class them as vegan stocks would be an exaggeration. Nonetheless, there are other options that play a part in Chetwood Investment Management ESG portfolios. Although there are few pure-play vegan names in listed global equity markets, there are other ways to eat more sustainably and many companies are busy making a positive difference to the outlook for not only food stocks, but also the environment.

One such example is DSM, which operates in the food ingredients market. DSM is working to produce alternative food sources for fish farms, which currently rely on a type of protein called fry to feed them. DSM uses algae instead of fry to provide better nutrient delivery for their stocks of fish, and this is helping to make fish farms more sustainable going forward.

Precision agriculture is another area to look to for companies aiming to make a real difference in the delivery of food, and one name here is John Deere, the farming machinery business. The US company has developed its business extensively in the last decade, and we believe its use of technology and data analysis potentially stands to make a real difference to food production going forward.

Deere is using an open architecture platform to allow its customers to analyse, to a very granular level, how their fields are performing, what methods (and chemicals) are being used across different fields, and then share this data with customers so they can say with increasing certainty exactly what is in the food they produce. Another business of interest to our ESG managers is Genus, which is helping create more efficient breeding programmes for farmers. Again, this has the knock-on effect of lowering the environmental impact of meat production, and this is important because, while a greater number of people are making the choice to go meat-free, many will opt to keep eating meat.

More and more governments and corporates are placing lower emissions at the heart of their policies and company charters, and this decade is shaping up to be a pivotal one for action on climate change. The food we consume has a huge, long-term impact on this. According to one report, meat and dairy production are on track to overtake the fossil fuel industry as the biggest contributor to global warming in the coming years. Non-profit organisations the Institute for Agriculture and Trade Policy and GRAIN claim it will account for 80% of the allowable global greenhouse gas budget by 2050.

With this kind of dynamic, this is a global problem which requires global solutions, and companies which can deliver them may enjoy greater popularity. The key is to be discerning. Not all sustainably focused businesses will deliver the desired returns over the long-term - stock selection is key. What is not in dispute is the need for solutions to these very real problems, and we expect this theme to potentially become more prevalent in investors’ portfolios over the coming years.

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