We’ve seen some amazing developments in terms of the pace of innovation, the remarkable vaccine development, and the resilience of people who have adapted to a new way of living and working.
Q: It’s been a turbulent year. What do you think the economic impact of COVID-19 will be?
A: It is too early to tell, particularly if you combine the impact of COVID-19 and Brexit, but I ended this year with a much stronger faith in human ingenuity than I started with. If you look back, we’ve seen some amazing developments in terms of the pace of innovation, the remarkable vaccine development, and the resilience of people who have adapted to a new way of living and working.
I’m reassured about the capacity and adaptability of humans, but I also see an uncertain economic and social environment.
Q: How has L1 come out of the year? What’s surprised you?
A: I think L1 has come out of this stronger. L1, like every other company, has been tested by the events of the past year. Was our investment philosophy fit for purpose? Were our systems able
to accommodate remote working? Yes, L1 responded well to these challenges. Holland & Barrett and DIA Group, an international distributor of food and household items operating in Spain, Portugal, Brazil and Argentina, continued trading throughout the pandemic. Wintershall Dea, despite low oil prices and the challenges of producing gas during a pandemic, continued to drive efficiencies. The challenge for big corporates is how to tap into innovation whilst running normal businesses day-to-day. That’s what L1 has been successful at this year.
Q: Many are saying COVID-19 accelerated paradigm shifts. Do you think it did?
A: The pandemic accelerated some structural shifts that have been happening for some time in e-commerce and remote working. The importance of Environmental, Social and Governance (ESG) was reinforced, which I had not expected. It is clear that the continued depletion of our planet’s natural resources has health consequences. Diseases like COVID-19 and MERS are driven by biodiversity crises caused by things like deforestation.
COVID-19 has also made the health inequalities that exist between the poorest and richest communities worse in the UK. During the pandemic, the wealthiest in society have become richer while the most vulnerable have become poorer. On the positive side, we are more conscious and vocal about these inequalities. There is a growing sense that this is unacceptable and must be addressed. I believe business has a role to play in this by creating prosperity for all stakeholders and society as a whole.
Q: How did we miss seeing these inequalities?
A: The pandemic has taught business leaders that the prevailing measures of economic success are inadequate and counterproductive.
Take the leading index of economic growth, the Gross Domestic Product or GDP. That straightforward measure of output by country is useful, but only to a point. It misses the full, interrelated ecosystem of commercial and social activities that comprise the real productive capacity and welfare of nations. What good is a GDP measure if it misses ill-health, racial inequities, and climate change impacts?
For this reason, L1 is sponsoring research at the University of Cambridge’s Bennett Institute of Public Policy to develop a more 360-degree gauge of economic wellbeing that measures what we call the “wealth economy”. Businesses
live and die by the balance sheet, but nations don’t compile them. I believe that wealth economics will help countries understand the full suite of assets available to them and how they are being managed over time.
Q: How has L1 responded in terms of ESG?
A: Many people imagined that ESG would take a back seat in the face of the pandemic. But 2020 saw an increasing focus on ESG issues, especially climate and social issues.
While it remains to be seen how substantive the UK’s green initiatives turn out to be, the fact that the country is hosting the COP26 conference in November guarantees that climate change will remain a high priority.
I am pleased to tell you that in December the Board approved our ESG policy. As a long-term investor, L1 identifies and assesses relevant ESG impacts as part of its investment process. In this way, L1 helps create more successful and sustainable businesses over the long term.
As I said last year, capitalism is changing and businesses that don’t change will be left behind. Retaining top talent will also depend on our adhering to these new realities.
Q: Do you think being a long-term investor is an advantage in times
A: In any crisis, short-termism is an engrained response, but L1 has looked through that – at how the crisis informed its longer-term strategy and what opportunities have arisen as a result
of the pandemic.
As the FT reported recently, the McKinsey Global Institute has found that companies that took a long-term approach had 47% stronger cumulative revenue growth with less volatility than other groups. Yet 70% of executives surveyed by McKinsey in 2020 believed that their CEOs would sacrifice long-term growth for short-term financial objectives. We have worked to avoid that mistake.
Q: What’s your view on the investment climate going forward?
A: I see an uncertain economic and social environment. Structural shifts that have been happening for a long time have accelerated in the last 12 months, which could have dramatic implications for the structure and cohesion of our society.
Many businesses and individuals rely on unprecedented levels of government and central bank support. High government deficits and historically low interest rates mean there is less room to support the economy through “traditional” channels. The long-term impact of this stimulus is unclear, as are the speed and mechanisms of unwinding it. It could be a challenge in the coming years to balance the moral imperatives of supporting the most vulnerable in society while ensuring macroeconomic stability.