Six ESG megatrends that will have ‘profound’ implications for the global economy

Aegon AM's responsible investment team highlights six ESG megatrends most likely to affect investors’ portfolios

Aegon Asset Management’s responsible investment team has identified six ESG megatrends that are most likely to affect investors’ portfolios.

Responsible investment associate Simon Lambert and senior investment strategist Gertjan Medendorp said the Covid-19 crisis and social unrest seen across the world has highlighted how macro events can have deep impacts on the global economy and investors’ portfolios.

“We believe awareness and understanding of the long-term, global systemic risks of the ESG megatrends we have identified can help inform investment decision-making today and help mitigate risks in the future,” Aegon’s Medendorp said.

Here are the six megatrends identified by the team:

Environmental megatrends

  1. Climate change

Lambert commented: “The first and most significant environmental megatrend is climate change. Two types of risks typically arise from climate change; physical and transition risks. Long-term global warming trends pose a physical threat through changing the natural phenomena on which human life and the economy depend, and tipping points in the near future may exacerbate those long-term changes. Next to that, extreme weather events are an immediate consequence of climate change, which threaten infrastructure and could disrupt economic life. Finally, transition risks arise from the actions taken to mitigate climate change and the transition to a net-zero carbon economy.”

  1. Environmental pressures

“Environmental pressures other than climate change are also expected to increase. The pressure on biodiversity and ecosystems resulting from resource extraction and pollution, create risks for many sectors, such as agriculture and tourism. Increased urbanization also compounds pressures such as water stress and air pollution, concentrating them into rapidly growing cities with the associated health and economic risks.”

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Social megatrends

  1. The future of work

Medendorp commented: “Existing labour laws and economic systems are designed for a particular type of work but expected changes in the way people work may yet upend those frameworks. The rise of artificial intelligence (AI) and automation threatens jobs with an increasing level of required skill, with the potential to reshape the labour market. A greater focus on gender parity and diversity in the workplace can increase productivity and improve outcomes for all. Finally, the increase in independent workers in the platform economy means that job protection and labour laws may become partially obsolete, and existing firms will have to adapt.”

  1. People and values

“People are also changing, and so does their behavior in economies across the globe. Increased urbanisation may lead to more efficient public services and infrastructure, as well as a potential for more creativity and innovation, but also possible dangerous social implications through increased crime and health risks. Demographic trends will also affect the economy, as aging Western societies put a strain on public finance, tighten job markets and put downward pressure on interest rates. Increased interconnectedness and antibacterial resistance increase the risk of pandemics, as demonstrated by the Covid-19 outbreak. As young people with increasing purchasing power embed values into their consumption patterns, consumer activism may become a force to be reckoned with.”

Governance megatrends

  1. Democracy and politics

Lambert says: “The shift in the global balance of power and changes in domestic politics influence global trade as well as domestic industries. Increased polarization within countries creates uncertainty in the political process, which adds regulatory uncertainty to economic activities. Increased polarization between countries resulting from the shifting balance of powers adds to that uncertainty at the global level. Governance models are being re-thought to address modern issues, reconsidering the role of the nation state as a governance unit.”

  1. Privacy and cybersecurity

“Finally, in an increasingly digital world, data privacy and cybersecurity will be at the forefront of governments’ and firms’ agendas, with dramatic economic and security implications.”

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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...