Five ESG themes for 2021 and funds to capture them

CGWM's Patrick Thomas says ESG investing attracts some very talented fund managers

Well, what a year that was. You can say what you like about Covid-19 – markets turned upside down, economies floored, sectors and businesses decimated and jobs lost at a rate that hadn’t been seen since the 1980s – but one silver lining is that it shone a light on ESG investing.

One reason ESG funds prevailed in the gloom, is that they tend to be underweight in airlines, oil and ‘dirty’ cyclicals and we all know what happened to the oil price and travel in the early stages of 2020, which would have affected the performance of many ‘ordinary’ funds.

But ESG funds are overweight in so-called ‘quality’ companies – those that have strong cash flows, are consistently profitable and not over-leveraged. ESG factors tend to be less of a concern to poor quality companies. ESG funds also tend to be overweight in healthcare and technology and there is often a focus on growth companies, which have long-term durability. Plus ESG investing attracts some very talented fund managers, who would seem to have good stock picking capabilities.

See also: –Four ESG themes to watch amid global disruption

Whatever the reason behind ESG’s success this year, if there were any ESG investing doubters at the start of 2020, there are far less of them now. In the context of the coronavirus crisis and with – hopefully – a more positive, vaccine-fuelled outlook for 2021, what might be the big ESG trends for 2021?

Cyber security 

As the Covid-19 pandemic took hold, we all emptied our desks and went home, office blocks the world over switched off the lights, and 2020 will be the year that is remembered for WFH (working from home). More so than ever before, we are living our lives online and we think this will accelerate in 2021. It’s not just working – socialising, purchasing and paying for things too. And all these create personal data risks and vulnerabilities, which a massive criminal fraternity is just waiting to exploit. Cyber security is becoming more and more of a pressing issue, one that we need to harness to protect ourselves, and businesses need to embrace to protect themselves. ETFs like Rize and L&G capture this theme. 

See also: – Our Working from Home series

Cloud 

This is another big tech theme. The uptake of the cloud has been significant in the last five years particularly. As we spend more of our lives online and create larger and larger digital footprints – leaving swathes of data in our wake – we need somewhere to store it. The cloud is where it is at. Individuals and organisations alike are harnessing the cloud for data storage and also to access applications and other software. It’s essentially where we stream our favourite box sets on Netflix from – or where our kids play each other on Fortnite. A way to access this theme is through the First Trust Cloud Computing ETF, or through a fund such as Polar Capital Technology Trust, run by fund manager, Ben Rogoff.

See also: – Through crises to a sustainable future – hope shines bright

Clean energy 

Some of the resounding lockdown images were of smog-free aerial footage of China, New York and London from space. Or cleaner, less polluted lagoons in Venice. Not to mention, aeroplane-trail free skies. En-masse, governments have decided to try and make the drive for a carbon-free world, and Biden’s recent win of the US election has bolstered that ambition. This means  we are likely to see more focus on wind and solar power, where costs are declining. It also means that we could see energy companies that had not previously prioritised sustainability, start to improve and become more environmentally friendly. And newer technologies, like hydrogen fuel cells, are being explored and developed. This theme can be accessed through iShares Global Clean Energy ETF (which focuses on solar) or the Lyxor New Energy ETF (which is more diversified and focuses on a number of different clean energy areas). Impax Environmental Markets also has exposure to clean energy markets.

See also: – A Sustainable Christmas with Patrick Thomas: Staycations, veggie diet and panic buying

Electric vehicles 

2020 was certainly Elon Musk’s year. He became the world’s second richest man and saw Tesla quadruple in value. But this theme goes beyond charismatic, maverick manufacturers of electronic vehicles (EVs). It encompasses robotics, artificial intelligence and energy storage. Governments everywhere agree electric vehicles will play a big role in the future of decarbonisation. Exposure to this theme can be gained through the L&G Battery Value Chain ETF or Scottish Mortgage Investment Trust, which has decarbonisation as a major theme and holds Tesla and Nio, the Chinese version.

Biotechs 

One lesson from 2020 is the idea that if humans keep preying on the planet, they will continue to be susceptible to zoonotic diseases. Coronavirus caught the world sleeping, but governments globally are determined this won’t happen the next time – unfortunately, Covid-19 won’t be the world’s last brush with a pandemic. This makes both pharmaceutical and biotech companies important areas of investment over the coming years. Aside from viruses, we are also seeing huge innovation in areas like gene sequencing and proteins and ultimately, the companies that use these techniques are going to solve some of the world’s most pressing health challenges. This important theme can be accessed through iShares Innovative Healthcare ETF, as well as funds like BBH Healthcare.

See also: – Can ESG awakening end the biodiversity crisis?

ESG investing has officially become part of the establishment. And this focus means that more and more ESG trends will emerge as companies try and solve the environmental problems we have caused or social issues that have proliferated. But as always with investing, remember that diversification is important and pick funds that will help you achieve your own financial goals. Along with the funds with good intentions, there are the funds that will try and capitalise on investors who have good intentions.  After 2020, we will wait with bated breath to see what 2021 brings.

Patrick Thomas is investment director and head of ESG investing at Canaccord Genuity Wealth Management and editorial panellist for ESG Clarity

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Natalie Kenway

Natalie is global head of ESG insight for ESG Clarity and has been an investment journalist for 16 years. She won Editor of the Year at the Aviva Investors Sustainability Media Awards 2021, and was Winner...