No longer a niche concept, environmental considerations are becoming an integrated part of investment decision making and risk analysis. The new, sustainable economy is on the rise and it’s being driven by environmental business leaders spanning regions and sectors across the globe.
Focused on stemming threats to natural resources, businesses that are solving pressing environmental needs are replacing less sustainable businesses with increasing success and investor support. And, performance numbers are showing that an environmental values-based portfolio can be financially rewarding. In fact, this approach to investing is based on the conviction that these environmental leaders are a strong portfolio diversifier and have sound business models that can help to mitigate risk.
This movement is taking place as our most fundamental necessities to life – water, energy and food – become more strained. A recent research paper suggests that by 2030, the world will need 50% more food, 30% more fresh water and 50% more energy as populations, the emerging markets middle class and demand for commodities escalate. 1
A paradigm shift for investing. New opportunities.
“The trajectory has to change and is already changing in big ways,” says David Richardson, Executive Director of Impax Asset Management, which is sub-advisor for the NEI Environmental Leaders Fund. “The challenges we face as a civilization are now driving a new global economy and creating many opportunities for investors.”
As these challenges grow, businesses focused on boosting the shelf life of resources to sustain global demand – better known as “resource optimization” – appear to be leading the way. As these environmental leaders mature, they can become a vital source of diversification and growth for portfolios, and can be a part of meaningful advisor-investor conversations. Here are three ways companies with an environmental focus can add value:
Source of growth in a low-growth world
“While stock market returns have been strong this past year, the general consensus is that global growth is slowing,” Richardson explains. In this environment, it’s vital for advisors and clients to proactively seek out areas of growth. Companies focused on resource optimization represent industries, innovations and business models with attractive investment potential that can help drive growth.
Uncorrelated with Canadian market; adds diversification
Environmental business leaders tackling resource optimization represent a specific set of small- and mid-capitalization companies that are typically off the radar of most domestic investors and asset managers. “They simply don’t exist within most Canadian and global equity portfolios, so the gains that they potentially add can materially contribute a strong layer of diversification for investors,” says Richardson.
The smart money has bought into being environmentally smart
More investors want to take action against the depletion of natural resources. “These types of investors are no longer represented mainly by millennials and women,” says Richardson. “Retail and institutional investors of many types now welcome the opportunity to drive real, positive change and improve a portfolio’s risk-return characteristics.”
“Clients respond positively when they see the measurable benefits a fund is bringing to the world at large. That lends a great deal of credibility, especially for portfolios with a certain mandate to uphold,” Richardson explains.
The drive towards greater resource optimization is creating opportunities across a vast range of sectors, subsectors and all parts of the supply chain. To uncover opportunities from this wide universe, you have to begin by adhering to environmental, social and governance (ESG) principles.
Richardson cautions that ESG is not everything. “ESG screening alone can’t help us identify the best of the best,” Richardson says. “Further active management and thorough bottom-up research is necessary, to complement ESG metrics. This includes ongoing engagement with these companies to capture the highest level of environmental leadership rather than those companies who throw money at attaining a positive ESG ranking.”
Key environment trends for 2018
Where are the best opportunities within key environmental themes? Richardson identified key trends in the following four areas that have the potential to grow:
Energy efficiency and renewables: Alternative energy sources gaining traction
Richardson believes that companies that enable consumers and businesses to do more with less energy are on the rise. These include innovators in battery storage, insulation, lighting, heating and cooling. Certain manufacturers of equipment, consultants and designers of solar panel and wind turbine projects, and those involved in rewiring energy systems are also experiencing significant growth.
Water: Focus on Purification
Across the globe, demand for clean water and better water infrastructure can’t be understated. Companies with upside include producers of water treatment and purification systems. A big focus is on digital water-flow instruments and measurement devices, along with manufacturers of filters, valves, pumps, and pipes that help reduce the use of water in industrial processes and farming.
Waste and resource recovery: High-tech recycling
The potential high growth areas in this theme are not centred on recycling companies but, rather, systems that recycle higher value materials, such as rare earth metals and electronics. These materials are expensive and challenging to extract, so recovering resources is typically more profitable than producing new products.
Food, agriculture and forestry: Reducing food waste by extending shelf life
Rapidly growing demand for food and a decreasing amount of new arable land are prompting businesses to innovate the food supply chain. Meeting this demand will require greater efficiency and less waste across the food and agriculture markets. For example, Impax is investing in a technology known as sealed air packaging, which extends the shelf life of foods, which can help dramatically reduce food waste.
1 Population Institute, The “Perfect Storm” Scenario 2030
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