Welcome to Soundbites – weekly insights on market trends, and investment strategies, brought to you by Investment Executive, and powered by Canada Life.

For today’s soundbites, we speak about environment, social, and governance principles — ESG — with Jack Manley, global market strategist with J.P. Morgan Asset Management. We asked him about ESG and young investors, ESG and technology, and we started by asking what the embracing of ESG principles by governments around the world portends for public policy.

JM: Democratic governments should at least in theory act on the will of their people. And this means that popular sentiment should help to drive government policy. From an ESG perspective, particularly as it relates to climate change, we know the Europeans have for some time been not just believers but also activists. The United States is just starting to come around, perhaps driven by the uptick in severe weather experienced recently. The U.S., Europe, Canada, all targeting net zero emissions by roughly 2050. China, the world’s largest greenhouse gas producer, targeting just a decade after that. The greatest struggle, I think, is going to be keeping China on target, while simultaneously pushing other major economies in the developing world, particularly India, towards similar goals.

Why ESG has been so embraced by young investors.

JM: One of the things that came up time after time in these conversations was this concept that ‘Wall Street cannot possibly work for me.’ You know, you come of age during the financial crisis. You enter the job market during the financial crisis. You now have a pandemic. And you have a lot of people that are completely disillusioned with the financial system, and they think that there’s no way I can align my personal values while at the same time building for retirement. And that’s what’s so exciting about the expansion of this ESG definition. More and more people are realizing that you can do both of those things simultaneously and not really sacrifice performance for one to achieve the other.

The role that technology plays.

JM: Tech is really everywhere. We live in a world of ‘smart’ everything. Your smart phone, obviously, is going to have a semiconductor in it. But so does your car, your washing machine, your refrigerator, your watch, maybe even your eyeglasses. The global semiconductor market was just under $350 billion in 2016. It’s going to close in on $600 billion by the end of 2023. As of right now, data processing and consumer electronics are the two largest markets for semiconductors. But if you look at electric vehicle sales – EV sales – we see enormous potential for growth in this space. We are on the cusp, I think, of a technological revolution with regard to energy production, mostly because we have to be. And what investor would not want to get in on the ground floor for the next big thing?

How being green can reduce business costs and meet ESG targets at the same time.

JM: The global investment in energy transition has increased pretty consistently over the last 20 years to $500 billion per year. And what’s critical here is that the investment has broadened out and now accounts for both renewable energy production and storage technology, carbon capture technology, etc. This massive investment is what has brought down costs so quickly and by so much. It has gotten to the point now where neither businesses nor households really have to make a moral or ethical judgment before going green. Now, as for the S and G costs, these are harder to measure, but in many ways, they are more or less free. Promoting board diversity or granting more generous parental leave benefits to employees don’t have obvious immediate costs. In fact, I’d say the opposite is probably true. The cost of not embracing S and G has probably increased particularly with social media as a tool to shine a light on unsavoury business practices.

And finally, what’s his takeaway message on ESG?

JM: Ten to 15 years from now we probably won’t even be having this conversation about ESG, because I think ultimately the end goal is for ESG to be completely integrated into all facets of investing, as we move towards renewable resources, as we continue to pursue diversity of representation, as we continue to run our companies more effectively, these parts of the market that are considered non-ESG are going to move from being the majority to the minority, and may eventually even disappear entirely. Give clients time to acclimate to this investment style and be there as a guide to steer them through the evolving landscape. That’s what I say.

Well, those are today’s Soundbites, brought to you by Investment Executive, and powered by Canada Life. Our thanks again to Jack Manley of J.P. Morgan Asset Management.

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