The Times They Are a Changin’

The road ahead looks very different from that in the rear-view mirror. The global population is rising, as are standards of living, particularly in developing economies. As these standards rise, so does demand for animal-based, protein-rich diets, which require lots more feed grain to produce. Once abundant natural resources, such as clean water, are becoming scarcer. Aging infrastructure is threatened by both rising demand and long-term under-funding of repairs and upgrades, and pollution has become a systemic challenge to economic growth, as well as being a major threat to public health. Solving pollution challenges requires extensive and expensive measures, particularly in Asia. Perhaps most challenging of all, a warming climate is resulting in unpredictable and severe weather patterns and potentially disastrous geophysical consequences in the decades ahead.

Recognition of these global challenges is leading to a significant change in sentiment. Governments, businesses and investors have made commitments to reduce their environmental impact, and the transition towards a more sustainable global economy is underway. These trends will profoundly shape global markets, creating both risks and opportunities for investors, and innovative companies providing solutions to address environmental risks and opportunities are well positioned to benefit from this transition.

Defining Environmental Markets

Impax has been investing in Environmental Markets for nearly 20 years and, in collaboration with the leading index provider FTSE, in London, developed and continues to evolve the classification system that underpins the FTSE Environmental Markets Index series. This provides investors with a benchmark, and has led to the development of various index tracking products, attracting further investment into Environmental Markets. We classify these as follows:

  • New energy: renewable energy and energy efficiency
  • Water: transporting, optimizing use, cleaning, and treating water
  • Waste: reducing and recovering waste
  • Food, Agriculture and Forestry: improving food quality, farming efficiency and reducing waste

Why invest in Environmental Markets?

Higher growth in a low growth world

With the rising demand for environmental solutions, companies active in these markets have generally delivered higher growth in earnings than broader global equity markets. Given the powerful and rising macroeconomic drivers mentioned above, this trend looks set to continue for many decades.

Diversifying risks and opportunities

Investments in Environmental Markets can enhance portfolio diversification by providing exposure to innovative, high-growth companies that tend to be under-represented in broader market portfolios. These are often smaller high-tech companies that are not widely understood and often relatively under-researched by investment analysts. Exposure to these markets can also help to reduce carbon risk in portfolios, as these are the companies that will benefit if/when carbon taxes are imposed (e.g., energy efficiency) while avoiding sectors that will be most negatively affected (e.g., fossil fuels).

“Future proofing” portfolios

Investing in Environmental Markets is investing for the long-term transition to a more sustainable economy. Within the US, State and local politicians, universities, and business leaders, have pledged to reduce their carbon emissions. India, China and Europe have also reiterated their pledges to tackling climate change. India is investing billions of dollars into infrastructure development and tightening pollution regulations, while China’s current five-year plan, the 13th, has a strong focus on addressing environmental issues. It details plans for investing in clean water projects, a migration from coal to natural gas and a commitment to a major increase in the proportion of the country’s electricity produced from renewable sources (solar, wind and hydro). It is also promoting electric vehicles as part of its pledge to reduce air pollution.

Making a positive impact

Impax’s primary objective is to deliver superior long-term, risk-adjusted returns for our clients. However, we have developed a sophisticated method, assured by EY, a leading sustainability consultant, in order to measure the positive environmental impact of an investment in the fund. For example, in 2016, the Impax Specialists strategy, which invests in “pureplay” small- and mid-cap companies, made the following impact per $10m invested:

  • Carbon dioxide emissions avoided: 6,260 tCO2
  • Renewable energy generated: 2,370 MWh
  • Water provided/saved/treated: 650m gallons
  • Materials recovered/treated: 690 US tons

A multi-decade opportunity

The environmental challenges ahead are real and daunting. However, solutions do exist and we are seeing an increasing number of innovative companies developing technologies to address these challenges.

For investors, there is one conclusion: the times, they are a changin’. The transition to a lower-carbon economy is underway, and investing in Environmental Markets means investing in companies that are providing environmental solutions, capturing exciting growth opportunities, and delivering superior returns, while helping to maintain a better quality of life on our planet.

Copyright Impax Asset Management Ltd.

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