European equities benefit from European Green Deal
By Luc Olivier, Fund Manager of Echiquier Positive Impact Europe1 at LFDE
A challenging year is coming to an end, marked by a high level of uncertainty and volatility on the markets in the wake of the worldwide pandemic. Following a sharp drop in the spring, the world equity markets were able to recover again and are set to enter the new year up slightly. However, the course of the year was not for investors with weak nerves. European companies with a positive impact and a clear ESG profile nevertheless showed themselves to be more resilient than other companies during the crisis. Echiquier Positive Impact Europe held up relatively well against the market slump and was quicker to make the most of the new upturn – and with lower volatility than the MSCI Europe. The reason for this was thanks to the Fund’s DNA, placing value on excellent ESG criteria and a positive impact within the meaning of the UN development goals. This had the positive allocation effect that industries and sectors that have been particularly hard hit are not included in the portfolio, such as transport and fossil fuels. This means a high level of exposure to sectors like healthcare and technology, which have benefited from the crisis. The current pandemic has brought the focus of attention back to the critical significance of the healthcare sector, which was not well prepared for such a challenge.
Large caps have the biggest systemic impact 2 worldwide
We firmly believe that SRI and Impact will remain two major performance drivers in the future. According to the United Nations’ calculations, the business potential for companies that contribute to attaining the 2030 development goals amounts to up to USD 12,000 billion. And some listed European companies are in a very good position for this. Our investment universe comprises around 100 companies that we analyse on a regular basis. Around 40 stocks are included in the portfolio in accordance with our exclusion, ESG3 and SDG impact criteria. As large caps have the biggest systemic impact worldwide, they make up two-thirds of our portfolio, with less than a third invested in second-tier stocks. As regards management style, our focus is on growth stocks (85 percent), with value stocks making up around 15 percent.
However, not all UN development goals are also directly investable. We focus our attention on two components: Firstly, we look at the direct contribution a company makes with its products or services to attaining the goals. Secondly, we consider all the contributions a company makes in total through its products and services. For example, no product can make a contribution to goal number 5, “Gender equality”, but significant supply chain guidelines within a company can go some way to achieving this goal.
Health, consumption and energy have a direct impact on development goals
The two sustainable development goals in which the most direct investment is made are goal 3 “Health and well-being” and goal 12 “Sustainable consumption and production”. The healthcare sector currently makes up 30 percent of our portfolio. Essentially, we see three attractive areas here: diagnostics, which has gained in significance considerably during the current pandemic, as well as pharma and medtech. As regards sustainable consumption, we are looking for companies that produce reusable materials or offer alternatives to plastic, for example. These companies currently make up around 20 percent of our portfolio. We are also interested in semiconductor manufacturers such as Germany’s Infineon, which produces relevant interfaces for renewable energies, as they contribute directly to goal number 7, “Affordable and clean energy”.
Three trends for European equities: Health, digitisation and European Green Deal
Political and economic uncertainties persist into the start of 2021 and we expect volatility to remain high. Due to the economic and structural challenges, we are cautious, but there are also some positive drivers. Investments in the healthcare sector will continue to rise in the short, medium and long term. Thanks to this year’s strong performance, we have reduced our position slightly in diagnostics stocks and shifted more towards value stocks. Overall, we hold a strong position in healthcare. In addition, climate change will remain a key concern of government and private measures. With the European Green Deal, Europe is pursuing a major climate policy with the aim of becoming the first climate-neutral region in 2050. A number of European companies, such as tyre manufacturer Michelin and materials manufacturer Covestro, are active in providing solutions in this area and should benefit. Around 30 percent of our portfolio is invested in this theme. We also believe that digitisation will continue to gain pace and are currently particularly interested in companies in the area of cloud computing.