There are major challenges that could impinge upon the quality of future human development as well as social development. By 2050 – that’s less than two generations down the line – an additional 2.3 billion people will, like the existing 7.2 billion of us, need food, water, sanitation, a home, an income, healthcare and education. Over 70% of people will live in towns and cities. One in five will be over 60. Just in the US, spending on healthcare looks set to balloon to USD 6 trillion – about one-third of its current total GDP.
Clearly, such human development challenges apply not only to the developed world, but also to the emerging markets, which will likely see proportionately the biggest growth of urbanisation and its attendant potential problems, as well as arguably having a proportionately greater need for access to education, better living conditions and affordable healthcare and medicine.
Capturing robust growth potential
Companies whose main business it is to overcome these challenges look set to grow robustly over the coming decades. As a sustainable and responsible investment (SRI) theme, human development offers the potential not only to capture the benefits of such growth, but to contribute to sustainable social development and better quality living standards.
We see human development as primarily comprising two components. First, the fulfilment of basic human needs. This means giving the greatest number of people access to a good-quality, reasonably-priced diet; to clean drinking water; to minimum standards of hygiene; to basic health care at acceptable prices; and to education and training. Secondly, it means participating in solving mankind’s societal problems – seeking new solutions to issues such as the ageing population; developing and putting new generation medicine on the market; and pursuing economic and infrastructural growth in a responsible and sustainable manner.
In developing this strategy we have identified an investment universe in the developed market global equities asset class of 293 companies, which we then filter according to strict SRI criteria and on the basis that the companies selected generate at least 20% of their turnover from seeking appropriate solutions to the human development theme.
Human development: a broad spectrum
These are well-managed, responsibly-minded companies that are already helping to fulfil basic human needs and to solve social problems. They operate in a broad spectrum of sectors, for example food, water and waste management, health care and pharmaceuticals, education, housing and the development of sustainable urbanisation, infrastructure and transport.
Only companies respecting environmental, social and governance (ESG) criteria and safety values are considered. For example in the health care sector, in the context of social criteria, we pay great attention to the issues of availability, accessibility (flexible price mechanisms) and product safety (transparency of clinical trials, labelling). As to governance issues we look in particular at bribery and corruption issues, which have been widespread within the industry in the not too distant past; at competitive practices (antitrust, patent infringements) and at public health lobbying. Most important is our engagement with the companies, through which we can try to influence their behaviour through open discussion.
We believe that companies applying above average environmental protection, labour relations and governance, are usually good at successfully dealing with crises, adapting to regulatory changes and taking advantage of developments that are emerging from new technologies.
A source of diversification: human development
The potential returns from this thematic investment approach are far from being saturated. The challenges we humans face are all illustrative of long-term trends that are highly likely to provide enormous sources of growth for the companies that operate in these fields. From a portfolio theory point of view, the trend towards separating sources of beta (market exposure) and sources of alpha (stock picking) is very supportive for thematic investment. Indeed, this management style provides, on top of attractive potential returns, a source of diversification for investment portfolios, which helps to reduce the overall risk and increase the risk-adjusted expected return.
This is an extract from a contributed article in our annual investment outlook.