Aegon AM: ESG Megatrends will transform the remainder of the 21st century
Aegon AM: ESG Megatrends will transform the remainder of the 21st century
Beyond the traditional economic trends, environmental, social, and governance (ESG) factors are increasingly gaining prominence across the globe. From social unrest to pandemics and lockdowns, to environmental degradation and climate change, to the adoption of AI.
In its latest Long-Term Outlook for 2023, Aegon Asset Management Investment Strategist, Gertjan Medendorp, argues that the current economic paradigm will be transformed during the remainder of the 21st century by a number of ESG megatrends:
AI & Automation
The term ‘automation’ now encompasses a wide range of technologies, including AI and robotics. Early adopters who effectively implement AI within their organization, could gain a competitive edge over their peers who are struggling or less willing to adapt.
If implementation, albeit with varying impact, leads to increased efficiency and the automation of laborious tasks, this is likely to have a positive impact on the Gross Domestic Product (GDP). However, as we expect that most companies are still exploring the potential of AI, this is likely to only produce incremental productivity gains and therefore minor GDP growth in the short term.
However, in a rapidly changing economy with increased focus on cost competitiveness, sustainability and mental well-being, we believe in the long term AI and advanced workplace automation may become an integral part of society.
Despite valid concerns surrounding AI safety, regulation, and risks, there is a general consensus that these technologies eventually have the ability to significantly impact productivity and the economy in a positive way. Organizations and economies that are able to adapt smoothly and effectively are likely best positioned to reap competitive advantage.
Climate change
To meet the goals in the Paris Agreement there is a need for immediate policy commitment, technological change, carbon removal, and a coordinated global approach. These are transition risks for the economy and financial markets too.
And all of this might not be enough to stop current trends in weather changes. The physical risks caused by climate change arise due to real-world environmental hazards, such as an increase in extreme weather events.
These physical risks have both real-world and financial implications, for example, due to supply chain disruptions, changes in commodity prices, and physical damage to assets. In addition to having a major impact on the global environment and economy, climate change has a direct or indirect relationship with many other ESG megatrends.
Water scarcity
Climate change and water scarcity are closely intertwined with one another and could create a self-reinforcing feedback loop, exacerbating both issues. Investors should perceive water management as a distinct and crucial component in a climate change mitigation and adaptation strategy.
Effective water management (preservation of water resources and more efficient use) can help to mitigate and adapt to the impacts of climate change and provide resilience against future water shortages. From an investors’ perspective, supporting technologies aimed at efficient water management can yield both financial returns and environmental and social benefits.
Demographics
Demographic changes have the potential to affect regions’ populations and consequently their economic environments in the upcoming years.
The focus of recent studies, and of policymakers’ attention, has been the population dynamics in the developed world, which has been undergoing a shift in population age distribution for quite some time.
However, it should be noted that many emerging markets have started their demographic transition, with various degrees of advancement. The sharp decline in fertility rates and the pressure from a changing age structure on investment rates possesses challenges for several emerging countries’ economies.
In turn, these dynamics could also lower expectations for bonds and equities in countries that will increasingly dominate the emerging markets landscape.