WHEB Commentary

Seb Beloe

Globalisation and sustainable investing


One of the stranger moments in the London Olympics Opening Ceremony was the sight of Sir Tim Berners-Lee – originator of the Internet – waving awkwardly from his computer before being swamped by a troupe of pirouetting teenagers celebrating the advent of social media. But of all the impacts the UK has had on the ‘global village’ shown during the ceremony, his invention of the World Wide Web may well prove to be the greatest.

The profound shift in global culture and identity that the internet has helped drive over the last three decades is one aspect of ‘globalisation’, a much-contested term judging by the 5000 definitions available on the internet. For us, globalisation is ‘the freer movement of goods, services, ideas and people around the world.’1 International trade is seen as the centrepiece of a more globalised world. Containerised trade, for example, has increased markedly in recent decades from 13.5m TEUs2 in 1980 to 138.9m in 2010. But the fact that a five minute walk from our London office can lead you to food from every corner of the globe is perhaps a more visible and popular manifestation of the phenomenon.

New risks and global trade
In the 1990s, Shell Corporation used to talk about ‘TINA’ – There Is No Alternative – in reference to globalisation. While their analysis served to inflame anti-globalisation protestors; so far, at least, the Shell boffins appear to have been right. We believe that the next few decades will be defined by significant shifts in the direction and reach of global trade. Slow economic growth in much of the developed world and the systemic risks created by a more interconnected world will serve to encourage some politicians to adopt more protectionist policies.

We are in fact already seeing some of these new systemic risks emerging. The financial crisis fomented by the hyper-connectivity in financial markets was clearly one, but the 2009 ‘Swine Flu’ pandemic was another. Starting in Mexico and the US, the virus eventually found its way into 213 countries via the routine passage of millions of people through airports and across borders every day. Ultimately the virus caused at least 16,931 deaths worldwide.

The global supply-chains behind everyday products that we use are also highly vulnerable to disruption and are now so complex that a supplier of any given component is unlikely to know who supplies their own suppliers. The result is unforeseen vulnerability. Whether it is melamine in milk, lead paint in children’s toys or contaminated pet foods, several companies have come unstuck as a result of a loss of control of their supply-chains.

This vulnerability is particularly acute in industries that have eliminated costs by adopting just-in-time philosophies and have rationalised their supply-base. These issues were laid bare during both the Tohoku earthquake and tsunami in Japan in 2011 and separately by the devastating floods that affected Thailand in the same year. In Japan, damage to just one facility making microcontrollers for the automotive industry meant delayed supply to some of the world’s largest car makers impacting 2011 global car production by 5% (and 20% of Japanese production). Similar impacts were felt when floods in Thailand affected the production of key suppliers in both the automotive and hard-disk drive industries.

Evolution not revolution
The degree and depth of the connectivity between markets, cultures and people will clearly be affected by these challenges. The global nature of many supply-chains has been enabled in part by the cost of transport, which has steadily fallen over the past thirty years. But this has changed over the last four years with the sustained high oil price. Several companies including the sports apparel manufacturer Nike have blamed increasing transportation costs for missed profit targets in recent quarters. As a consequence, we anticipate that regional trade is likely to be more of a focus in the future. Intra-Asian trade is in fact already bigger than trade between Asia and either the EU or the US, and regional sourcing from low cost centres: Mexico for North America, and Eastern Europe – and even Greece – for the EU may become favoured options if transport gets incrementally more expensive, as we believe it will.

We also believe that companies will focus more on supply-chain risks and developing more resilient, secure supply-chains. This may involve more regionalisation as above, a greater awareness of bottle-necks in supply chains and consequent vulnerabilities as well as a clearer focus on assurance and qualification of suppliers. We believe too that climate change will play an increasingly important role in sharpening the risks in these areas. Companies that fail to mitigate these risks by remaining too dependent on one supplier, or one geography will be increasingly vulnerable to disruption and loss of competitiveness.

Finding solution providers
So how do these views frame a wise investment approach? Our underlying focus is on identifying companies that are providing solutions to critical social and environmental challenges. Clearly the process of globalisation both resolves but also reinforces some of these challenges.

The increasing stretch and complexity of supply-chains creates considerable opportunity for companies to reduce costs and increase efficiency but it also creates risks. Intertek, a UK-based services company, helps clients to manage this risk by providing product testing and certification services to assure product quality and safety, and by mapping and analysing their supply-chains more effectively. The health risks that a hyper-connected world creates such as the swine flu or SARS viruses also need to be mitigated. Companies involved in health diagnostics and testing like Cepheid and Laboratory Corporation help health authorities to respond rapidly to any new outbreak.

More regional trade, another trend which we think will accelerate, will drive reductions in the distance that products travel, creating an opportunity to reduce the overall carbon footprint of trade. In part this is anticipated to be met through an increase in short-sea shipping, but also through greater use of rail. We invest in Kansas City Southern, a US rail company that is set to benefit from greater regional sourcing in North America.

It is almost unthinkable that the world would retreat wholesale from the freer movement of goods, services, people and ideas that have characterised the last few decades. But it is also clear that the next few decades will be far more actively shaped by the constraints and risks that this process has created.

 

1 John Milckethwait and Adrian Wooldridge (2003) A Future Perfect: The Challenge and Promise of Globalization, Random House
2 The twenty-foot equivalent unit (often TEU or teu) is a unit of cargo capacity often used to describe the capacity of container ships and container terminals.

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