Need and Opportunity: What COVID-19 Revealed About Social Infrastructure
July 27th, 2021 | John G. Levy
March 11, 2020, marks the day which the World Health Organization declared the novel Coronavirus (Covid-19) a global pandemic. It was a storm no one saw coming and one that continues to have us wonder when it will come to an end.
We will eventually overcome Covid-19, but will the normal we return to be the normal we once knew? At Waratah, we believe Covid-19 has presented itself as a significant catalyst for change in the world of Environmental Social Governance (“ESG”). When we began our ESG journey 3 years ago, we never expected a pandemic like Covid-19 would be the call-to-action event leading us to quickly adapt how we viewed ESG risks and opportunities in the Alternative ESG (“AESG”) strategy. With each passing month of pandemic-living, themes and trends have emerged, with some very likely to remain permanent.
Being Toronto-based, we experienced among the most restrictive lockdowns in North America (remember when Golf was illegal?). Thankfully, life appears to be slowly normalizing but many of the patterns we’ve developed as consumers in the Covid-era are persisting beyond initial predictions. This piece aims to highlight some of the Covid trends which have likely become permanent shifts, and how important it is for investors to recognize these shifts as opportunities to capture ESG alpha.
Remote Work and Productivity
Workers quickly pivoted to “work-from-home” and Zoom and other video-conferencing providers led the way in facilitating communication, allowing many industries to continue business as usual during the Pandemic. While Zoom fatigue is real, what consumers forget is what it has provided us, a commodity so valuable and finite – our time. We are all spending far less time in transit, enabling us to enjoy more meaningful activities, such as spending time outdoors, having quality time with our immediate families or focusing on our own personal goals. With the vast majority of companies exceeding quarterly estimates, it is evident that Covid has not stalled productivity output, dispelling the myth that home is a detractor of efficiency. Flexibility, once a privilege reserved for freelancers, has made its way into corporate work policies.
Last year Microsoft like many others, announced a hybrid work policy allowing employees to work from home permanently, embracing the fact there is a “no one-size-fits-all” strategy for its staff. From a conventional view, this would be not newsworthy, but from an ESG perspective, this is a significant social highlight, as we believe employee satisfaction is an important metric to measure productivity, human capital retention and talent recruitment. With the threat of the “Great Resignation” looming, Waratah believes companies embracing flexibility and a better work-life-balance will fare better than companies with less accommodating policies and cultures.
Consumer Spending Habits
With travel still largely on pause, another effect of Covid was spending the last year and half at home. This gave rise to the Waratah thematic of “home as a sanctuary” which led to the inevitable, the home improvement capex cycle. This emerging thematic contributed to several great alpha-generating opportunities. With pent up consumer demand and few places to go, it was evident that consumer spending would be geared towards people’s homes as they became our offices, restaurants, bars, and entertainment centres. With the rise in takeout dining and the increased environmentally conscious consumer, greener solutions were in demand, reinforced by polices banning single use plastics. Companies that embraced these changes early-on became top contributors to our portfolio. One example is a package manufacturer, who produces paper takeout boxes as an alternative to the typical non-recyclable black plastic. Other Covid beneficiaries such as Disney’s streaming and video on demand service created tremendous value given the idea of attending a packed movie theater seems even now, a risky proposition. As consumers ourselves, our team focused on unique and atypical areas of the market where we saw opportunity. An example is this past Summer, on the heels of several initial public offerings, our team was able to get behind a trend we were all enjoying and extract return from various IPOs under this theme over the summer. Even with the return to school and the office, it’s hard to argue with Dorothy: “there’s no place like home.”
Safe and Healthy Environments
The last Covid trend to highlight is Heating, Ventilation and Air Conditioning (HVAC), one we see as a long run-way opportunity. HVAC accounts for 15% of the world’s Greenhouse Gas emissions (GHG) generated by commercial buildings[1] from schools, offices, and hospitals. While consciousness around GHG emissions is not a new awareness, what has been amplified because of Covid-19 is consumer demand for improved air quality and the reduction of circulated allergens, chemicals, and bacteria. We all know someone who ran out to buy HEPA air filters or voiced concerns over recirculated plane air. In the United States alone, 70% of all schools reportedly failed indoor air quality tests,[2] a stat which is likely applicable to most commercial buildings as well. As such, we see HVAC as a massive 10–20-year infrastructure ESG tailwind that will long outlive Covid. Governing policies like “Build Back Better” have ear-marked $193 billion to improving school infrastructure moving forward[2] in hopes that other ESG risks, such as another pandemic or environmental disaster doesn’t hold us hostage yet again.
The effects and impact of Covid on both ESG and consumers is undeniable. While many of us would like to forget the last year and half, we are all forever changed by it. As we move on from this pandemic, consumer demand has shifted, and they will continue to expect and strive for cleaner, healthier, and happier lives. Through our ESG lens, a differentiated approach and ability to recognize these changes in consumer behaviour early allows investors to take advantage of less-obvious ESG opportunities as sources of alpha.
Sources:
[1] Source: Credit Suisse Trane Technologies Equity Research Report (March 2020)
[2] Source: JCI CFO at the MS Laguna conference on Sep 13
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The views and opinions expressed in this article are solely those of the authors and do not necessarily reflect the view or position of the Responsible Investment Association (RIA). The RIA does not endorse, recommend, or guarantee any of the claims made by the authors. This article is intended as general information and not investment advice. We recommend consulting with a qualified advisor or investment professional prior to making any investment or investment-related decision.
Author
Jason Landau
Executive Vice President, Portfolio Manager, and Investment Team Lead
Waratah Capital Advisors
