Redefining resilience: What should we expect from public companies during the COVID crisis?

Top of the risk register

Aside from nuclear war, global pandemics rank at the top of the global risk register. Whilst this is obvious to everyone now, this has long been known by governments.

“Experts agree that there is a high probability of another influenza pandemic occurring, but it is impossible to forecast its exact timing or the precise nature of its impact. Based on historical information, scientific evidence and modelling, the following impacts are predicted: Many millions of people around the world will become infected causing global disruption and a potential humanitarian crisis. The World Health Organisation estimates that between 2 million and 7.4 million deaths may occur globally”   UK Government Cabinet Office, National Risk Register report.

Figure 1: An illustration of the high consequence risks facing the United Kingdom


*The use of some chemical, biological, radiological and nuclear (CBRN) materials has the potential to have very serious and widespread consequences. An example would be the use of a nuclear device. There is no historical precedent for this type of terrorist attack which is excluded from the non-conventional grouping on the diagram.

Countries around the world will learn from this crisis. When we get through it, governments will significantly improve the resilience of our systems in preparation, which it is clear (in hindsight) have lacked adequate funding and infrastructure. Voters will fully appreciate this risk now and demand better preparedness (at least for a generation or so anyway). But what about companies?  Where do pandemics fit in the strategic planning and operational preparedness spectrum for management teams?

Building a resilient business

I consider myself a long-term investor who is focused on sustainable companies that consider long-term structural risks such as climate change and healthcare system economics. Our process is designed to identify material long-term environmental, social and governance factors and analyses product impact beyond simple first order effects. Yet, in my twenty-year career (including the global financial crisis or “GFC”) I have never asked a management team what their operational plan would be in the event of a global pandemic or how quickly their debt covenants would be breached if revenues went to zero next month.

Whilst disaster planning will have been vital in the initial response, it is my view that the most resilient businesses will be those with strong leadership and culture combined with the strategic focus. This crisis will be a test on the culture of every business. Trust in leadership will be key. Decisions will be made which will reinforce or destroy the fortunes of the business for years to come.

Technology comes to the fore

When assessing business risks, it is common to “stress test” based on particularly bad times in the past. However, this crisis is different because of the scale and rapidity with which it has happened. Furthermore, it is not bad for all businesses. In short, it has accelerated demand for many companies that might traditionally be viewed as “risky” and destroyed demand for those who might normally be considered “defensive”.

The most obvious beneficiaries have been companies that were already winning. These include some of the largest organisations in the world like Microsoft and Amazon but also many smaller companies with disruptive new technologies and business models. These include companies providing medical diagnostics, biotech research and drug development, video conferencing, collaboration software, critical event management services, basic food supply or delivery, in-home entertainment and many more. Crucially, as demand has gone up, these companies have had to try and supply the products and services that were urgently needed. Not easy when global supply chains are shut down and orders were higher than normal. As demand has spiked, such businesses have had to demonstrate flexibility and dynamism. *A great example of what this means in reality can be found in a recent Twitter thread from Slack Founder and CEO Stewart Butterfield here.

Sustainable corporate heroes

We will all learn from this crisis and I suspect companies and investors will better understand what sustainability means as a result. Organisational culture is being called on and the essential nature of products are being assessed.  Governance structures are being tested and potential of many disruptive technologies and businesses to improve the lives of billions is being unlocked.

Whilst pandemic beneficiaries have emerged, there have been many more casualties. In my view, the corporate heroes of this crisis will be those that face significant demand and supply destruction and make the right decisions despite the unprecedented position they find themselves in. What do I mean by the “right” decisions? In one line, I mean decisions that protect the business for the long-term, even if that means sacrificing short-term profitability. This means doing the right thing by customers and employees first and foremost.

We have seen many examples of heroic behaviour so far, but we have also seen the opposite. My message to CEO’s of public companies is simple. Whilst your financial resources are being stretched to breaking point, please remember that this is an opportunity to fill the bank account of goodwill with your customers, employees and broader society. It might be incredibly hard and financially stressful to do so in the short-term but it will likely drive long-term value for all stakeholders.

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The fastest Bear market in history?

The US market bottomed (at least initially) on the 23rd of March 2020 following a 31.9% decline from its peak 5 weeks ago. Modern financial history only goes back about 120 years, so if we take that as our guide, the table below from William O’Neil & Co. shows that this was the quickest and most intense (-7.2% per day) bear market in history. Only 1929 (part 1 of the great depression) and 1987 come close in terms of velocity.

To read more download the full article The fastest Bear market in history

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Impact Calculators: Informative, exaggerated or mis-selling?

“Everything should be made as simple as possible, but not simpler” Albert Einstein

 You may have come across impact calculators in your search for a sustainable fund to invest in. These neat tools usually take the form of a simple text entry box on a website that turns your £/$/€ invested into a precisely quantified reduction of bad things… and increase in good things.

They usually look something like this:

So what happens when you enter the amount that you want to invest? There are usually nice infographics which accompany the “statistics” combined with an array of feel good outputs – not to mention a surprising lack of disclosure regarding the assumptions or error ranges around the calculations. For example, it might tell you that you will save thousands of tonnes of CO2 or millions of plastic bottles by investing. It might claim your investment is the equivalent of taking thousands of cars of the roads or planes out of the sky. I might suggest that your investment provides millions of litres of clean water or provides treatment for hundreds of sick people. What’s not to like?


But perhaps I’m being too cynical. Aren’t these claims broadly accurate? Surely encouraging investment in such funds should be encouraged? I mean, they might be over-reaching a bit, but the ends justifies the means in this case. Right?

No, no and no. These claims are not fact. They are unsubstantiated and unverified. In fact, they are unverifiable! They are, to a large extent, unmeasurable. The impacts that companies have on the world around us via their products and practices are complex, multi-faceted, nuanced, highly variable across sectors and range from source materials or labour through to the second and third order impact of the products in use. The inter-relationships between the companies within a portfolio can offset each other. I genuinely don’t know where to even begin to think about how to reduce that down to a few simple numbers.

“Not everything that counts can be counted. And not everything that can be counted, counts.” Albert Einstein

All of which begs many questions.

Why is this allowed?
Who is regulating it?
Who can we trust?
Oh no not again (head in hands emoji, exasperated emoji)… do we learn nothing in this industry?

Very good questions. We’re asking the same ones on a regular basis, with the same level of exasperation. This sort of behaviour sows the seeds of future consumer mistrust. It (quite rightly) leads to regulatory clamp down which restricts everyone, including the best actors. It starts small with genuinely good funds with positive impact trying to capture a bit of market share and ends with some large cynical corporation taking it to extremes. If you think I’m being alarmist about this particular slippery slope, we don’t have to look far to see how quickly the terms “greenwashing” and “rainbow-washing” have gained traction. And it’s hard to argue that our industry doesn’t have form in terms of colossal, commercially motivated F&*& ups.

From the perspective of the retail consumer and the rise of the collective consciousness regarding sustainability, positive impact is one of – if not themain reason retail investors will buy funds in the future. So the commercial motivation is clear… can we be sure that the organisational integrity is highly tuned? We should judge that on a company-by-company basis, but the general consumer perception of our industry is not good. Trust and goodwill are fragile. They take a long time to build and just one isolated scandal to destroy.

Source: PWC

To sum this rant up, I believe this is worse than the standard forms of “greenwashing” which are fairly transparent in their disregard for genuine sustainable investing. Or “rainbow-washing”, that involves randomly attaching UN SDG badges to every company in the fund to prove how wonderful it is. We have internally coined the phrase ‘woke-ulators’ for these impact calculators. This is dark humour to help us deal with the seriousness with which we take this. It’s not good. Positive impact fund managers need cut it out before it damages all of our reputations.

But perhaps this is finally coming to a head. The 2 Degrees Investing Initiative (2DII) is beginning to resist the currently loose definitions of impact and has quit the Science-Based Targets initiative (SBTi) over how companies set ambitious and meaningful GHG reduction targets. The definition of impact must be the one understood by the general public and retail investors.

See here: 2DII “Science Based Targets” for financial institutions

Yes. It’s complicated. Communicating what we do as impact managers to the public is tough. It can require patience. But no matter how commercially tempting it is and how important the end (you believe you are justifying) is, we need to resist the urge to compromise our integrity.

“Doubt is not a pleasant condition, but certainty is an absurd one.” Voltaire

For over 30 years we have ardently resisted green washing, rainbow washing and magic green buttons.… and for the last two years or so we have had to resist the “woke-ulator” too. We may have lost out on market share as a result. That’s not particularly pleasant to think about, but then the alternative is absurd.

Other soapboxes on closely related topics can be found below:
Positive (second-order) impacts
The carbon footprint of your investment
Supply Chains: Materially materialising
Everything is awesome
Why it can be good to look bad

 

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The dirty myth about clean vehicles

“There is at least one truth to every myth. And it takes one truth to create a lie. Lies can be created from truths, but truths cannot be created from lies.” Suzy Kassem

Can it be true that electric vehicles have higher emissions than their internal combustion engine equivalents? Let me put your mind at rest, the answer is no!

The source of nearly all such claims is an article by Buchal et al. and like any good meme it appeals to controversy, conflict and confusion and has been spread far and wide across conventional and social media. However, as much as I want to toss this into the dustbin of non-peer reviewed conspiracy theories, I feel the need to make my case because as a driver, investor and advocate of electric vehicles (EVs), such claims cast doubt on their significant environmental benefits and could slow adoption.

Why are Buchal et al. wrong?
There are many unrealistic assumptions in the Buchal et al. calculations. Primarily, they have used out of date information and suppressed evidence, appealing to a status quo bias in the reader. In contrast, peer reviewed expert researchers such as Hoekstra et. al. have come up with very different conclusions:

The past never changes
There are three technology trends that are developing quickly and each of these continue to reduce the costs and improve the emissions profile of EVs vs internal combustion engines (ICE). These trends are renewable energy, battery technology and EV powertrain efficiency. The year-on-year compounding improvements of these trends means the emissions footprint of EVs are not just better than ICE today, but will continue to improve. In contrast, Buchal et al. use old power generation data from Germany – a country historically highly dependent on coal – and then assume no improvement. Furthermore, Buchal et al. also use best-case-scenario emissions assumptions for diesel. It’s like the VW emissions scandal never happened!

Ignoring inconvenient truths
Roughly five percent of oil emissions occur before it is burned to power a vehicle (i.e. from well to pump). Yet despite the battery supply chain and fuel sources being the focus of EV emissions footprint, oil supply chain emissions are often ignored when calculating the ICE footprint. Buchal et al. also assumed that the total lifetime millage of an EV battery was half that of an ICE, something that is no longer credible given the range and charging cycles demonstrated by Tesla. Furthermore, the average 300k km assumption for diesels is very aggressive as explained here. Whilst both have improved over time, the more immature technology is improving at a much faster rate. Perhaps having only 20 moving parts in the drive-chain is a benefit too?

“Buchal et al. assume the battery becomes the new bottleneck and will be scrapped after 150k km while a diesel would last 300k km. But current batteries are estimated to last at least 1,500 to 3,000 cycles before they lose 20% of capacity, giving an electric car with 450 km of range a battery lifetime of 450k to 1,350k km.” Auke Hoekstra, Eindhoven University of Technology

Blind to the virtuous cycle
Battery material extraction and transportation are the most emission-intensive parts of an EV lifecycle. But why should we assume all batteries are made from 100% newly extracted material? They can be recycled! And what about extending a batteries lifecycle in functions such as home-energy storage? Furthermore, the supply chain is relatively nascent and will become less emissions-intensive over time as cumulative production efficiencies come through. A study by the Swedish Environmental Research Institute (which Buchal et al. used in their assumptions) initially claimed a high emissions footprint for LiOn battery production. This was disputed by many researchers and has recently been updated. The new emissions estimates have been meaningfully reduced.

“That emissions are lower now is mainly due to the fact that battery factories have been scaled up and are running at full capacity, which makes them more efficient per unit produced. We have also taken into account the possibility of using electricity that is virtually fossil-free in several of the production stages” Erik Emilsson, IVL Researcher

Summary
The tale of the long tailpipe belongs on the bookshelf alongside Pinocchio. Using conservative assumptions Hoekstra et al. estimated that EV’s produce approximately 60% less emissions than diesels today. Furthermore, EVs have the potential to be 96% cleaner than diesels in a 100% renewable energy world. I will leave the last word to Hoekstra:

“One could imagine a future in which not only the cars themselves but the entire automotive supply chain runs on renewable electricity. Batteries could run mining equipment that retrieves the ore from which batteries, solar panels, and windmills are made. Solar and wind produce hydrogen that (in combination with batteries) makes the production of steel and aluminium almost zero emission, which in turn makes the manufacturing of batteries, cars, solar panels, and wind turbines almost zero emission. Car batteries also absorb excessive solar and wind, stabilize the grid, and reduce the amount of stationary batteries that are needed. It is not an exaggeration to say that in such a scenario, the GHG emissions of batteries could be further reduced by a factor of ten or more.” Auke Hoekstra, Eindhoven University of Technology

 P.S – If you have also been confronted by the unlikely assertion that EV street level emissions are higher than ICE because of increased brake and tyre dust (yes I know… it’s desperate) Jon has already dealt with that meme in a previous soapbox, called A Perfectionist Fallacy

Sources
Hoekstra: The underestimated Potential of Battery Electric Vehicles to Reduce Emissions
Solar PV additions vs IEA predictions: https://twitter.com/AukeHoekstra
IVL study: https://www.ivl.se/english/startpage/top-menu/pressroom/press-releases/press-releases—arkiv/2019-12-04-new-report-on-climate-impact-of-electric-car-batteries.html
Top 6 EV Trash Talk Errors: https://innovationorigins.com/tomorrow-is-why-german-automobile-club-study-is-the-anti-electric-lobby-at-its-finest/
Video: How Does an EV work?
Stanford Study: https://news.stanford.edu/2018/08/30/measuring-crude-oils-carbon-footprint/
Clean Energy Wire: https://www.cleanenergywire.org/factsheets/germanys-energy-consumption-and-power-mix-charts

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2025 Lookback

When I wrote my 2019 investment outlook, we were in the middle of a “market correction” as it is now retrospectively known. Volatility was extreme and global recession fears dominated the market narrative. I didn’t know which direction the market was going (I still don’t), so I focused instead on disruptive technological trends and the sorts of companies we would be looking to invest in. I called it “inevitable intersections” and you can read what I wrote, then, here. [Note: there are no predictions about the market levels and no mention of interest rates, Donald Trump or Brexit]. 

This year I’ve decided to copy one of my favourite comedians, David Mitchell. Rather than writing an “outlook”, I have instead imagined myself in 2025, looking back at the important things that have happened over the last five years. It’s a “lookback”. The benefit of this is that it focuses minds on the important long-term issues and helps us break free from the status quo bias we are all anchored to.

2025 Sustainable Investment Lookback

Clean & Autonomous Transport
Here we are in 2025 and I still don’t have a car that can drive me from my home to work whilst I snooze in the passenger seat. It’s all very well Tesla* delivering an Electric Car that has 600 miles of range and can do 0-60 in 2.5 seconds for £45,000, but it’s supposed to be fully autonomous by now! Most of my neighbours and work colleagues think the same thing about their Tesla’s. On the plus side – thanks in no small part to Tesla – it looks like the worst climate change scenarios might be averted as oil demand peaked in 2022-23 and is now declining despite robust economic global growth. It’s amazing to see how the global car industry has been disrupted. There are only two genuine “old world” competitors to Tesla in the electric vehicle market (VW and Hyundai) and they are seeing all the growth. 36% of new car sales are electric today and annual demand for new combustion engine cars is less than half what it was just 7 years ago, so it doesn’t look good for most of the traditional car makers at this point.

Healthcare Innovation
Artificial Intelligence was certainly hyped up a few years back, but it’s interesting to see machine-learning being used in a variety of industries, particularly the healthcare sector. The US healthcare system is still over-priced, but some technology that is emerging there is inspiring (from an outcomes and cost saving perspective). Diagnostics is one such area where machine learning has enabled early identification of diseases. This has improved outcomes, reduced hospital admissions and taken cost out of the system. AI-enhanced breast cancer scans and nasal swabs for testing lung cancer are two clear examples.  It’s also great to see these new peptide-based drugs hitting the market and addressing unmet needs in a variety of illnesses. In genomics, research has proliferated and compounded, increasing our understanding of diseases like Cancer and Alzheimer’s.

Clean Electricity
We now have over 100 countries in the world mandating solar panels on all new built houses. Desert states are rapidly leveraging their position in this transition by becoming renewable energy exporters. The relatively simple task of covering their unused land in solar panels and building grid infrastructure around it is so economically compelling now it would be daft not to.** Combine that with 100 new 10-12MW wind turbines that are being built globally per day and we actually have a shot at being fossil fuel free within a decade or so.

The Sustainable Consumer
Sometimes it’s difficult to point to exactly how and when a cultural change occurs but a change certainly came in the early 2020s regarding the perception of human consumption and waste. I think Sir David Attenborough – still going strong at 98 – had something to do with it. However it happened, there has been a step change in how consumers perceive their consumption in terms of both its origin and disposal. Start-ups leveraging a variety of old and new technologies emerged to resolve this friction and large corporations were forced by these disruptors to re-design the environmental and social impact of their entire supply chains.  There’s a lot of work to do but glossy CSR reports produced by outsourced marketing agencies are now a thing of the past. Stakeholder monitoring and oversight of corporates has been taken to a new level. Integrated circular economies are becoming the standard of best practice. Digitally printed garments, which reduce resource use and pollution, compostable plastics, better recycling systems, a reduction in intensively farmed animal protein and less trees being cut down are some of the positive outcomes we’ve seen.

Summary: It could be worse
All said and done, we’ve made good progress this decade. Significant geopolitical uncertainty around the globe and the odd inflation scare haven’t managed to derail the important technological and societal trends that are driving us towards a more sustainable future.  Sure, we could still mess it all up, but the stock market seems to be pricing in a future where companies that are having a net positive impact will be the ones that continue to grow. The world is complex with many grey areas that require diligent analysis in order to get the right answer, but the sustainable wheat is being separated from the unsustainable chaff when attributing value to a share. It’s particularly interesting to see many of the unsustainable companies that were stalwarts of the twentieth century consumer and industrial complex slipping into obscurity and financial irrelevance.

** In 2025, scientific consensus that human emissions are causing climate change is 99.99999999999999%. One person on Twitter still believes in the “alternative facts”.

*Companies mentioned are held in some of the sustainable and ethical funds at Kames Capital.

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