PAID CONTENT
Co-Portfolio Manager,
Impax Asset Management
Companies around the world have historically focused on generating value by exploiting natural resources, without much regard for how that’s achieved. However, many now recognize that’s not a sustainable long-term strategy and are moving away from this depletive economy.
Luciano Lilloy, Co-Portfolio Manager with Impax Asset Management, which manages the 10-year-old NEI Environmental Leaders Fund, says the motivation isn’t altruistic or regulation-based. Rather, he says, it’s a “core operational priority” for all businesses, driven by cost pressures, the need for reliability, and the desire to keep growing under tighter constraints.
He has been watching companies adapt in four distinct ways. First, they’re measuring and digitizing to make inefficiencies visible. Second, they’re electrifying and optimizing processes to reduce energy intensity. Third, they’re closing loops, going beyond reusing and recycling to enhance materials recovery. Fourth, they’re designing strategies around resilience so they can better cope with volatility in supplies of energy, water, and other inputs.
“These changes are no longer optional,” says Lilloy — and he emphasizes that making them is a win-win. “If you think in terms of resource optimization not as a constraint but as an opportunity, it could deliver better productivity and better resilience at the same time.”
As companies boost efficiency, reducing both input costs and operational risks, a large and growing market is emerging for businesses that provide efficiency and optimization solutions. This is where Lilloy and his team are finding very attractive investment opportunities.
Data centres as a microcosm of a global trend
With the explosive expansion of AI, data centres have been making headlines. Much of the focus has been on the strain these facilities are putting on local resources. But the constraints within which data centres operate are prompting them to become as efficient as possible.
One of the biggest constraints is the capacity of existing electricity grids. To support growing demand for power-intensive AI, data centres must invest in best-in-class equipment so they can maximize revenue by losing as little as possible in the conversion of power into intelligence or tokens. Profiting from this trend are companies like Hubbell Incorporated and Infineon Technologies, which specialize in power efficiency.
Meanwhile, liquid cooling is increasingly being used to maintain data centre equipment at an appropriate temperature. This is significantly more efficient than air conditioning, which cools the air in a room, because liquids can be targeted to cool the computers themselves. Xylem Inc. is well positioned on this front, with its expertise in water systems.
Then there’s a company like Autodesk, Inc., which is using machine learning — fuelled by data centres — to engage in generative design. Its technologies make it possible to analyze specific parts of an airplane, for example, and suggest ways to create those parts using a minimal number of materials. And after the resources are used? A business like Waste Management Inc. can help with materials recovery.
Managing risk through security selection and diversification
To be considered for the NEI Environmental Leaders Fund, 20% of a company’s revenue must come from environmental products or services. In addition, the company must demonstrate strong pricing power, return on capital, and balance sheets.
Two industrial gas companies, Linde PLC and Air Liquide SA, have met this high bar. Both help businesses improve industrial processes — for example, providing oxygen to pump through water to clean it rather than using more environmentally damaging and expensive chemical filters. Both also establish long-term contracts with customers that reinforce their financial stability.
A third criteria for fund holdings is that the company must have an attractive valuation. As Lilloy explains, “We love great companies, but they need to have the right price. Businesses need a sensible entry point to deliver attractive long-term returns.”
As in any sector, investors need to keep risks in mind. In the markets where some NEI Environmental Leaders Fund holdings operate, leadership is concentrated in the hands of a few players, some with very high valuations. There is the potential for volatility if a company fails to execute as expected, doesn’t meet growth expectations, or reduces CapEx (capital expenditure).
To protect investors against these risks, Lilloy says diversification is critical. He also draws attention to the value of a “picks and shovels” strategy that, for example, provides exposure to suppliers to data centres rather than the data centre operators themselves.
“Resource optimization matters because scarcity is now a structural economic issue,” he says. “The companies that provide solutions to resource-intensity optimization often become essential suppliers. They tend to have strong pricing power [and] very strong positions. Therefore, by having exposure to this strategy, investors can benefit from this durable demand, from the visible economics of this business model, and, ultimately, from the long-term compounding potential.”
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