This is part of a series of articles in association with Liontrust highlighting the companies that are contributing to a cleaner, healthier and safer world, while aiming to generate strong, long-term profits for investors.
We believe the Covid-19 pandemic will result in changes to how society behaves and ultimately ease the transition to a more sustainable world. Crises often super-charge societal shifts that have been in action for years and this is currently happening across many areas, with decades of development squeezed into weeks.
At Liontrust, we look at the world through the lens of 20 sustainable investment themes, all areas of structural growth contributing towards making the world cleaner, healthier and safer in the future. Over recent months, we have seen a particular acceleration in themes such as ‘Connecting people’ and ‘Enhancing digital security,’ for example, with our favoured holdings in these areas including Helios Towers, American Tower, Cellnex, TeamViewer and Softcat.
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Covid-19 drives digital forward
A huge part of people’s lives is now lived online and Covid-19 has driven an even greater need for expanded options in the fields of digital communication, entertainment and retail. As an anecdotal example, Netflix added 10 million subscribers in a lockdown-dominated second quarter of 2020.
We have long recognised this growing demand as we become more connected as a global society and companies like Cellnex, Helios Towers and American Tower provide the physical infrastructure for increasing data consumption and communication. The move to greater digital communication and online life can only thrive, however, if people are confident their information is safe, and companies like Softcat provide outsourced IT services to small and medium-sized UK businesses. TeamViewer’s products allow its customers to control a range of devices remotely, which is clearly a growing necessity for business around the world with millions of people working at home for the foreseeable future.
As might be expected given the circumstances, many of these companies have been among our best-performing stocks in recent months but we see strong reasons to suggest new communication trends and working patterns will persist beyond Covid-19.
While increased communication is important for a more sustainable economy and global cohesion, the challenge is to decouple this growth from the environmental impacts. Even before Covid-19 supercharged these themes, we were considering the impact of the world’s growing digital footprint on the planet: figures from think tank The Shift Project show digital technologies account for 4% of greenhouse gas (GHG) emissions, more than civil aviation, and this could double by 2025.
As people cannot see the pollution from selfies and videos streams, there is a perception these services are boundless. In reality, however, the emissions profile suggests we may need to move towards greater ‘data sobriety’ and the fear is that this means greater regulation.
Rising data = more energy
This issue of rising data usage, and the amount of energy it requires, is one we have been tracking for several years. Traditionally, companies have 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 inefficient. We therefore see considerable resource benefits coming from the trend towards outsourced data storage and processing, focusing on data centre operators.
We believe these co-location centres are vital for the digital economy and will increasingly underpin the infrastructure necessary for a more sustainable world. However, electricity used by data centres is expected to double approximately every five years and their emissions are already comparable to small countries. Investing in companies finding solutions to the world’s problems is central to our investment process, and we believe those enabling significant energy and carbon dioxide savings for these centres should benefit from a sustained increase in demand. The technology industry in the US now emits more carbon than ever before, so more efficient data centres are vital.
The digital economy
Held in our funds since 2011, US company Equinix runs co-location data centres, providing a gateway into important digital infrastructure such as public cloud computing networks. Equinix stands out as the only genuinely global player in this market and its centres have become an integral part of the plumbing for the digital economy.
A further consideration around digital themes is that greater connectivity is not always a positive in social terms, as well as environmental, and this played out with our experience investing in Facebook in 2017. We initially found it to be a well-managed, profitable company that (at least at that stage) looked undervalued, and bought the stock for our Global funds in the first quarter of 2017. Our external Advisory Committee flagged the stock as controversial, however, recommending we thought more carefully about how to assess large social network companies and their sustainability in light of a number of shortcomings in their business models.
The shortfalls of social networks
After receiving a fairly underwhelming response from Facebook, we had a number of meetings with independent experts to help us understand the issues particular to large social networks, how to manage them and how we could judge whether the companies were dealing with these potentially material issues adequately. These meetings helped us design a framework to identify the issues and judge whether the response was suitably robust. In the meantime, several issues we had identified became prominent in the news:
- Content: whether it can be moderated effectively (this includes illegal and fake content).
- Data privacy: whether tightening regulation undermines these businesses’ profit margins.
- Access to networks: whether it is too easy for vulnerable individuals to gain access.
In the second half of the year, we met Facebook again and concluded that while the company (and all of the listed social networks) was taking steps to address these issues, the response was inadequate in light of the risk to its profitability from tightening regulation. We updated how we rated large social networks to be more stringent and downgraded and divested from Facebook as a result.
Digital technologies and the internet have fundamentally changed the way many of us conduct our lives and Moore’s law on the rate of technical advance suggests far greater transitions to come. Providing broader access to these trends must be part of any sustainable world but it is vitally important, across the full digital spectrum, to ensure we are not compromising the future by meeting the needs of the present. For a comprehensive list of common financial words and terms, see our glossary.
Key Risks: Past performance is not a guide to future performance. Do remember that the value of an investment and the income generated from them can fall as well as rise and is not guaranteed, therefore, you may not get back the amount originally invested and potentially risk total loss of capital. The issue of units/shares in Liontrust Funds may be subject to an initial charge, which will have an impact on the realisable value of the investment, particularly in the short term. Investments should always be considered as long term.
Some of the Funds managed by the Sustainable Future Equities team involve foreign currencies and may be subject to fluctuations in value due to movements in exchange rates.
Disclaimer: Issued by Liontrust Fund Partners LLP (2 Savoy Court, London WC2R 0EZ), authorised and regulated in the UK by the Financial Conduct Authority (FRN 518165) to undertake regulated investment business. This document should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Examples of stocks are provided for general information only to demonstrate our investment philosophy. It contains information and analysis that is believed to be accurate