The rise of the conscious consumer

Invesco Fixed Income believes the analysis of ESG-related factors in the credit research process helps identify emerging themes that can decide tomorrow’s fundamental winners and losers. As such, we believe asset managers that view ESG analysis as a source of alpha stand to benefit. Currently, the rise of a more conscious consumer is merging ESG and fundamental analysis more than ever in our evaluation of consumer-oriented companies.

The emergence of the “conscious consumer”

The “conscious consumer” is an umbrella term that refers to a consumer who engages in the economy with an awareness of how his or her consumption impacts society at large. The conscious consumer is not only making economic decisions in the checkout line but is willing to pay higher prices in exchange for more ethical business practices.

At Invesco Fixed Income, we see several megatrends that are likely to support a shift in consumer behavior toward such ESG considerations over the longer term:

• Increased environmental awareness:
  Globally, people are growing more concerned about the environment. In the UK, concern for the environment is at its highest level on record.¹ In the US, the percentage of Americans who say global warming is important to them is at an all-time high of 72%.² 

• Access to consumer education:
  There are more research tools at consumers’ disposal than ever before, and more consumers demand transparency and authenticity in the products they purchase. Recent surveys have found that transparency is important, or extremely important, to 81% of shoppers.³

• The power of collective action:
  The rise of social media has allowed consumers to label companies they view as bad actors, with almost immediate impact.

The conscious consumer in the marketplace

We have already seen examples in which the conscious consumer has driven consumer sector performance. Consider the organic food market, which has more than doubled in size in the US since 2010, delivering a compound annual growth rate (CAGR) of 8.1% , compared to a 2.42% CAGR for the overall food market.⁴ The organic consumer was galvanized by the prospect of buying a pesticide-free product with better nutritional value. Plus, there was the added benefit of shunning industrial farming, a practice that many consumers consider unethical.

The conscious consumer’s increased demand for organic products demonstrates a trend we have seen play out across many consumer subsectors. In beverages, a similar theme has emerged as healthconscious consumers have reduced their demand for sugary drinks. In the so-called “fast-moving consumer goods” (FMCG) sector, sustainably marketed products made up 54.7% of market growth in the US from 2015-2019, despite having only a 16.1% market share.⁵

Going forward, we believe companies that understand and resonate with the conscious consumer stand to benefit, and this understanding is likely to separate the fundamental winners and losers.

Monitoring companies that benefit from the conscious consumer

We believe companies that can generate a higher level of trust with consumers through sustainable business practices will be fundamental outperformers in the long term. These companies will probably also exhibit lower regulatory risks, as the rise of the conscious consumer has also led to more aggressiveregulation of certain business practices globally.

While measuring company authenticity and consumer trust is a difficult endeavor, we believe monitoring key ESG risk factors can put us on the right track:

Environmental

• Packaging material and waste: With more than 40% of the world’s plastic packaging waste mismanaged⁶ (meaning that disposal is not formally managed in a dump or recycling center), consumers and regulators globally are lining up against plastic packaging. We believe it is important for companies to tackle this risk head-on. Companies that are aggressive about managing plastics packaging risks are likely to see better demand for their products over the long term and are less likely to come under scrutiny from non-governmental organizations (NGOs) or risk regulatory fines. We look for companies that outline a sustainable packaging policy and disclose their plastics packaging volume.

• Raw material sourcing: Many companies in the consumer sector rely on commodities that can have adverse impacts on their local environments. A failure to commit to sustainable raw material sourcing can result in negative brand sentiment on social media or increased scrutiny from environmental groups or NGOs. We look for companies that disclose the percentage of raw materials drawn from sustainable sources and are signed up to the Membership of the Roundtable on Sustainable Palm Oil (RSPO).

Social

• Opportunities in health and nutrition: With global consumers increasingly conscious of the health implications of the products they consume, we believe companies that offer healthier products stand to benefit. In order to track this, we take a holistic look at a company’s research and development program and the scope of reformulation programs of companies that are slanted toward unhealthy products.

Governance

• Business ethics: The conscious consumer cares deeply about business ethics. To monitor this, we seek to understand a company’s value system and how it drives its actions as an organization. We look for whistleblower hotline programs and usage, as well as dedicated ESG teams and consistent monitoring and disclosure of ESG risk factors and progress on ESG goals.

Conclusion

We believe the rise of the conscious consumer will lead to the fundamental outperformance of consumer sector companies that embody better ESG characteristics. This trend has already played out in various consumer subsectors, such as the organic food subcategory, and stands to repeat itself as regulators and consumers place increased importance on sustainable business practices globally.

At Invesco, we believe ESG research is an integral part of the bottom-up, fundamental research process. With ESG and fundamentals becoming more intertwined every day, asset managers who view ESG as a source of investment performance stand to benefit, in our view. Those who view ESG as merely a formality in the investment process and only “check the box” might be left behind.