Investing in the sustainability revolution.

All investment strategies have the potential for profit and loss, capital is at risk. Past performance is not a guide to future returns.

A revolution is on the horizon. Over the coming decades, our society needs to find ways to deliver prosperity in a sustainable and inclusive manner. This transition will have a profound impact on all industries. We believe that many incumbents will be challenged by this, creating opportunities for younger, innovative, and mission-driven companies to take their place. For investors, this presents an exciting opportunity to back growth businesses, contribute towards the transition to a sustainable future and generate attractive long-term investment returns.

The power of creative destruction

We believe that many incumbents will be structurally challenged by the transition towards a more sustainable future. For some, this is because their business models are based on fundamentally broken assumptions about the world. If a company is in the business of selling cheap, throw-away clothes, then being truly sustainable is going to hurt its bottom-line, because it means getting rid of everything it has been doing. For others, their past successes are now their Achilles’ heel. They are being held back by bureaucracy, legacy assets, vested interests and the demands of short-term shareholders. It’s a sad reflection of our industry that few incumbents can overcome those challenges and make a genuine positive impact on society. Instead, what we often see is management teams trying to cling on to their social license to operate by publishing glossy corporate social responsibility (CSR) reports, creating a few lines of ‘more sustainable’ products, while at the same time protecting and milking their legacy assets. If we are to move towards a more prosperous, sustainable and inclusive world, then our hope lies elsewhere. 

Fortunately, there is another way. In Capitalism, Socialism, and Democracy (1942), Austrian economist Joseph Schumpeter coined the phrase “creative destruction” - a process that “revolutionises the economic structure from within, incessantly destroying the old one, incessantly creating a new one”. Creative Destruction is a fundamental part of capitalism where entrepreneurs upend legacy industries. Those entrepreneurs do not have abundant resources, but they are ambitious and willing to take risks. More importantly, they are more agile and innovative because they don’t have to worry about protecting legacy assets or upsetting vested interests. Free from the challenges that hold back incumbents, they are coming up with innovations that will contribute towards a better future: from electric vehicles to plant-based meat, from digital bank accounts to novel therapeutics. For the rest of the article, we will look at two companies doing just that: Coursera and Beyond Meat.

Coursera

Improving education is a pressing challenge. The cost of education has increased significantly above inflation in recent decades. For more and more people, especially those on low-incomes, good-quality education is becoming increasingly unaffordable. As access to education deteriorates, society’s accumulated human capital, people’s expected lifetime earnings and social mobility all decrease. One explanation for the escalating cost of education is Baumol’s cost disease. It argues that prices will rise for sectors that experience little or no increase in labour productivity but require to pay higher salaries to attract employees. This is likely the case for education. Compared to other sectors, the use of technology in education has been limited. The incumbents in the industry, textbook publishers and some for-profit education institutions, have failed to innovate. Instead, they have simply passed on the cost increases to students year after year.

Coursera was founded with the ambition of democratising learning. By distributing learning contents online and enabling anyone to enrol, it aims to make education cheaper and more accessible. This model, known as Massive Open Online Courses (MOOCs), is not without criticisms, which include low completion rates and the bias towards affluent learners with access to IT. However, viewing Coursera purely as a MOOCs platform underestimates its long-term potential. In a way, Coursera is following the model of disruptive innovation proposed by the late Clayton Christensen. Christensen and his colleagues argued that when incumbents are occupied with serving the high end of the market with expensive products, they create an opportunity for newcomers to enter the market by serving the neglected customers, initially with a lower priced and lower performance product, which over time improves as the companies scale.  

Coursera’s initial target audience consisted mainly of people who are interested in acquiring new knowledge or gaining skills to advance or switch their career. Historically, they had been underserved by incumbents in the education sector and had to rely on expensive textbooks, evening classes or instructor-led training. Coursera provided a cheaper and more accessible alternative. As the direct-to-consumers business scaled, Coursera was able to invest in adding more functionalities. Today, Coursera offers a range of contents and tools that satisfy the needs of different learners, from guided projects to specialisations, to online degrees.

One impressive aspect of Coursera is its ability to work with different stakeholders in the education ecosystem, including learners, universities, employers and governments. A good example of this is Coursera for Campus, where Coursera provides its contents to colleges and universities. Some of those institutions, in particular community and teaching colleges, are facing a myriad of challenges. Escalating cost of education has made their degrees more expensive, and the value of their degrees is diminishing due to changes to the job market from technology and automation. The result is a decline in enrolment and significant funding strains. In the US for example, enrolments to degree-granting institutions have fallen from a peak of 21 million in 2010 to just over 19 million in 2020[1] and the pandemic seems to be accelerating this trend. With Coursera for Campus, colleges and universities are able to strengthen their curriculums in a more cost-effective way by incorporating lectures and projects from leading universities and businesses. Additionally, because Coursera has job-relevant training from employers such as Google, Microsoft, and Salesforce, those hybrid degrees are able provide students with the relevant skills for a changing job market.

Beyond Meat

The livestock industry has many characteristics that make it ripe for disruption. It’s a tremendously inefficient industry. The US livestock industry converts 1,187 Pcal (10¹² kcal) of feed into 83 Pcal of human edible proteins annually, an overall efficiency of merely seven per cent[2]. It is also a very concentrated industry, with the four largest companies controlling 85 per cent of the US beef market[3]. The combination of inefficiency and market concentration, which is often linked with price gauging behaviours, has resulted in a lack of innovation and a steady increase in prices for consumers. Since 2000, the price of ground beef in the US has risen by 167 per cent[4] compared to a 55 per cent cumulative increase in the Consumer Price Index[5]. At the same time, consumer tastes are changing. As the awareness of the environmental, health and animal welfare impact of meat consumption increases, more and more people are looking for alternatives.

Beyond Meat is one of the leading companies in the plant-based proteins category. The company’s insight is that the composition of meat is knowable and can be created using plant-derived ingredients rather than relying on the inefficient animal farming process. After years of research and development, Beyond Meat has created a range of products including burgers, sausages, mince and chicken nuggets that look, taste and smell just like their animal-derived counterparts. Whereas plant-based products have mainly targeted vegans and vegetarians in the past, Beyond Meat is looking to help meat-eaters consume more plant-based proteins. The company sees this as the area where it can have the greatest positive impact.  

We believe that the incumbents like the meat packers are going to struggle in this transition. They have profitable legacy businesses to protect and they are being held back by vested interests in the system. A great example of this is when Tyson Foods released products that contained both animal and plant-based ingredients, satisfying its suppliers but not the consumers. The inability of incumbents to quickly adapt to changing consumer tastes will create opportunities for companies such as Beyond Meat. It’s still too early to say that Beyond Meat will definitely emerge as the winner in this transition, but given the size of the livestock market, if the company is successful, its impact on society and the financial returns for shareholders could be enormous.  

Summary

We believe that entrepreneurs and innovative companies will play an important role in contributing towards a more sustainable future. On top of that, by disrupting slow-moving incumbents, they can create economic value for shareholders over the long term. This is risky and not all of them will succeed, but for those who are successful, the returns for society and shareholders could be enormous. As long-term investors, we believe that one of the most valuable activities we can do is to support those entrepreneurs and innovative companies in their mission to create a better future.

[1] National Center for Education Statistics (link)

^[2] Energy and protein feed-to-food conversion efficiencies in the US and the potential food security gains from dietary changes; A. Shepon, G. Eshel, E. Noor and R. Milo. 2016

[3] Packers and Stockyards Division Annual Report 2019, USDA

[4] https://www.bls.gov/regions/mid-atlantic/data/averageretailfoodandenergyprices_usandmidwest_table.htm

[5] https://www.bls.gov/cpi/data.htm

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