Summary

Francois Boutin-Dufresne focused his talk on the importance of ESG, and how different means of governance have allowed certain countries to emerge from COVID almost unscathed, compared to other parts of the world which have seen both crippled economies and social ruin. Sustainable Market Strategies’ (SMS) true benefit comes from their knowledge of ESG megatrends, and how these trends can be useful for making investment calls and better understanding the markets. Recent SMS research has provided ‘next-generation’ ESG investment ideas, with the first looking into the “G”… governance of Sweden. Sweden was able to manage their COVID crisis effectively through the social fabric of its citizens, with the government trusting people to take it upon themselves to ensure the necessary measures of wearing a mask and socially distancing were fulfilled. High levels of social capital meant Sweden never had to shut schools, offices, restaurants etc. and their economy maintained low levels of Fiscal deficit (as % of GDP), with only 2.5%, compared to that of Canada which had 20% Fiscal deficit (as % of GDP). The value of sovereign governance transferring into actionable investment strategy can be seen as the Swedish Krona remains strong compared to the Euro or the CAD, and so a long play on the Swedish Krona or a long play on Swedish domestic equities would be beneficial while shorting Russell 300 equities, for instance. Secondly, SMS discussed the divestment of oil. From an ESG standpoint, many companies are either shorting oil or will try not to be invested in oil to reflect their ESG values. Francois predicts divestment in big oil companies to be equivalent 10-15% of the market cap of MSCI World Energy global assets, with oil being surpassed by more relevant technologies, such as wind, solar and EVs. Another smart play that has been alpha generating in the past months and has allowed companies to show their ESG agenda has been to short American based oil companies who have been lagging behind the transition to Net Zero, and going long on European companies who have invested heavily into a carbon neutral future. Furthermore, a change in the White House could bring significant benefits for the renewable sector, as Biden has pledged a $2 trillion green stimulus package which will accelerate the whole trend further. From both a social and environmental aspect, more people are changing their food preferences to veganism, promising a healthier and cheaper lifestyle. The trend of Plant-Based Meat has grown massively since the start of the new year, and investments have poured into the sector, making it an area of high growth and potential. For an ESG investor, this is an area of significant interest for people wanting to reduce the carbon footprint of their food plate and a smart play from an economic standpoint. Francois goes on to discuss the ESG issues in the workplace that JBS, one of the world’s largest meat producers, has faced during the COVID crisis, with employees forced to come into work and a COVID infection rate of 50% turned the situation into a disaster. Making a long/short trade based on this information over the next 3 to 5 years will be an interesting source of generating alpha. Another example of Social and Governance thematic investing comes from a long-termism theme. Francois used the example of French companies who reward their long-term investors with higher dividend yields (or bonuses) for those who hold shares in those companies for 5 years or longer. This encourages the management of those companies to take a longer-term view on their own financial planning and can be profitable for an investor in the long run. Francois talked on the gold play, a seemingly safe bet in today’s fluctuating market and the possibility of significant inflation. Investing in gold has been trending on google since the first quarter of 2020, however for an ESG investor, putting gold in ones’ portfolio is challenging considering the extremely environmentally damaging way it is mined - and that only 10% of the gold usage is for productive means, with the large majority used for central bank functions and bars and coins; contributing little to society. An ESG mindset encourages SMS to look at companies which will go through IT junk and recycle the gold for the good of society, for example the gold medals for the Tokyo 2021 Olympics will be made from domestically-recycled IT junk. Looking through an ESG lens, this is a smart play to include gold in one’s portfolio through a somewhat uncrowded market, and yet remain protected against ESG critique.

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