Four structural changes that will disrupt business models post Covid-19

Impax research has identified the implications in the transition to a more sustainable economy

Impax Asset Management has published a report looking at the implications of the pandemic for investing in a transition to a sustainable economy, in which it identifies four key changes to which businesses will have to adapt

The report, Covid-19 – Implications for the transition to a more sustainable economy, also considers how policymakers will rebuild economies post-lockdown, suggesting that there is likely to be a realisation that “simply returning to the old normal is not enough”, with more focus on the environment, biodiversity, healthcare initiatives and promoting equality of opportunity.

Finally, the report also looks at tangible investment opportunities in various sectors of the economy driven by the pandemic, as well as the risks that must be considered in the fundamental analysis across sectors.

Bruce Jenkyn-Jones, co-head of listed equities at Impax, said:“C19 has been an intense and high-stakes trial run for system driven management. The crisis has revealed complex interconnected consequences, arising from an unsustainable economy. In recognising this, C19 has given investors, policy makers, corporations and consumers a chance to avoid the same missteps when the next high impact crisis of this magnitude hits (for example, climate change).”

Structural changes

The four structural changes identified by Impax are a heightened awareness of systems-level risks; exposure of supply chain vulnerabilities; the social distancing measures changing behaviour; and an acceleration towards a digital economy.

“Material implications of C19 manifest at all levels of the system. Broadly speaking, they are likely to be observed through four overarching trends and applied at four key organisational levels,” Impax said.

“The permanence of the following implications is uncertain, yet the significance of their potential effects over the long-term make them important.”

One of the impacts of Covid-19, according to the report, is that it has “reaffirmed the link between physical health, environmental health and economic health”, meaning that risk management will have to be enhanced to better understand these system-level risks.

This includes the need for a greater focus on climate change risk and biodiversity risk, which could help avoid pandemics like this one in the future. Impax also believes the pandemic will lead to coordinated alignment of international economies and financial institutions in an effort to finance a transition to a more sustainable economy.

Additionally, according to the report, Covid-19 has “illuminated the dependence on key countries in terms of both supply and demand — notably China — and elevated the risks of supply chain complexity and rigidity”. “These risks will be of greater focus going forward — as will the management of workers throughout these chains,” it said.

Some of the implications of this could be product and price disruption for consumers, a redefinition of ‘essential’ workers for society as a whole, and more scrutiny for low tax jurisdictions within global policy.

From an economic standpoint, this is likely to highlight the importance of investment in workers, the need for supply chain transparency, and the need to re-shore manufacturing to make countries and sectors more independent and resilient.

Meanwhile, the fear of an invisible infection or threat is likely to make social distancing measures a longer-term trend, Impax said, which could particularly hit small- and medium-sized enterprises if they lack effective crisis management or are dependent on physical presence.

“A wave of new building codes to add spatial and hygiene features could trigger investment in infrastructure commensurate with the introduction of energy efficiency standards of recent years,” Impax predicts.

This trend could also lead to a shift towards automation and digitisation, as well as benefitting such areas as e-commerce and virtual technology.

Already, companies with the strongest digital capabilities have weathered the storm better than other peers. A further transition towards a more digital economy could mean greater sustainability, lower transport pollution and greater flexibility around working practices, Impax said.

However, the group added: “While many will embrace this acceleration, we are mindful that a labour force transformed towards more digitisation and automation risks leaving many behind. This underscores the necessity of policy and corporate consideration of how to enable a Just Transition.”

The winners and losers

As a result of these trends, Impax has identified a number of sectors and industries that will come out as winners, as well as others than are facing more risks.

The winners

Digitisation – e-commerce, education, cloud, Internet of Things (IoT), remote working, business continuity, data security

Industrial automation – supply chain technology, efficient manufacturing, building information technology

Health, safety and wellbeing – natural ingredients, nutrition, personal diagnostics, immunity

Bespoke medicine – personalised medicine & diagnostics, telemedicine, antiviral/anti-invective drugs

Solutions to high-impact environmental challenges – low carbon technologies, sustainable food & water

Personal transport – electric vehicles, charging infrastructure, eBikes

The losers

Travel and leisure – airlines, business travel, cruise liners, restaurants, entertainment

Polluting mobility-related fuels – diesel, petrol, jet fuel

Commercial real estate – office buildings, cement

Unsustainable and unhealthy food production – intensive farming, high-sugar products

Close-proximity labour production – meat and textiles

Plastics alternatives – multiple use solutions, biodegradable, fibre

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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...