FINDING GROWTH IN A LOW GROWTH WORLD
Forward looking investors are realizing that growing populations, rising wealth (particularly in emerging economies), coupled with natural resource constraints, inadequate infrastructure and environmental degradation are profoundly shaping global markets, creating both investment risks and opportunities.
These trends are accelerating the transition towards a more sustainable global economy and are likely to drive earnings growth for well-positioned companies. Accordingly, an investment framework that incorporates both the rising risks and expanding opportunities from this economic transition is likely to provide investors with higher, long-term growth in their portfolios.
SUSTAINABILITY INVESTMENT OPPORTUNITY
The long-term, global macro-economic trends identified above (including growing populations, rising living standards, increasing urbanization, rising consumption, depletion of limited natural resources, and pollution) are creating strong demand for more efficient products and services.
Sustainability investments seek to enable more sustainable economic growth without increasing the detrimental environmental consequences. Resource Optimization portfolios consist of publicly traded, high growth companies whose fundamental business proposition is to profit from this optimized use and delivery of resources.
RESOURCE OPTIMIZATION STRATEGIES ARE SUSTAINABLE STRATEGIES
Resource Optimization strategies are founded on the concept of sustainability. Over the long run, investors are well served when innovative companies, operating in sustainable high-growth markets, offer products and solutions focused on the environment and engage in sustainable business practices.
For investors, this "sustainability screen" means that:
1) The market sector in which the company operates is sustainable given the global trends listed above
2) The company's product or service is sustainable, i.e. reusable, efficiently produced and/or utilized, and necessary to the world economy
3) The company has strong, sustainable margins derived from the optimized use of available resources
4) The company engages in intelligent, sustainable business practices that value long-term performance over short-term goals.
RESOURCE OPTIMIZATION FITS WELL IN A SUSTAINABILITY PORTFOLIO
Resource Optimization investments can provide investors with an effective way to integrate a sustainability oriented strategy into their portfolio by investing across all of the Environmental Markets1 sub-sectors.
A PEEK UNDER THE HOOD
Listed below are some of the investment themes behind these sectors, as well as a brief description of the types of companies involved.
The investment rationale behind energy has wide acceptance. Historically, energy markets have benefitted from high and increasing demand, relative price inelasticity, and high margins. Many believe that these conditions will continue but that the best opportunities in the future lie in new energy sectors such as Energy Efficiency and Renewable Energy, rather than in legacy energy sectors such as Oil and Gas.
The key to understanding the attractiveness of Energy Efficiency as an investment thesis is recognizing that it is almost always more profitable to save a unit of energy than to generate a new one.
Within Energy Efficiency, there are companies that enable consumers and enterprises to do more with less energy, such as companies that make products that extend the life of a cell phone charge; insulate buildings better; provide more efficient lighting and sensors to reduce energy consumption; and optimize heating and cooling to reduce energy demand.
There are also companies that help auto manufacturers meet ever higher fuel efficiency standards. With lower gas prices at the pump, more consumers are buying bigger cars, making the attainment of long term mileage goals more challenging for auto manufacturers. As a result, they are having to increase their spending on auto fuel efficiency equipment.
Renewable Energy is an increasingly attractive energy source due to rapidly declining generation costs globally. In the Renewable Energy sector, companies manufacture equipment for Renewable Energy projects such as solar panels and wind turbines. There are also companies that install and operate Renewable Energy projects, similar to an electric utility, as well as consulting firms which participate in the design and construction of projects.
Water, like other natural resources, is in itself a sustainable resource. What has not been sustainable is our past use of water in the global economy.
The investment drivers for water include the ever rising global demand for clean water and the pressing need to address our historic under-investment in water infrastructure.
The Water sector includes companies that produce equipment for water treatment and purification, as well as companies that provide water and/or optimize the delivery of water to end users. Companies include manufacturers of filters, valves, pumps, and pipes; water utilities; producers of water testing devices to ensure high water quality; companies whose products reduce the use of water in industrial processes and farming, and companies that produce water flow measurement devices.
This sector also includes companies engaged in producing pollution control systems for both water and air.
Waste and Resource Recovery represent a way to reduce the resource intensity of global economic growth by reusing products that would otherwise be buried in landfills.
Recovering resources is typically more cost effective (and profitable) than producing new materials. Investors should therefore consider companies that extract and reuse materials, such as car parts, electronic parts from used electronic equipment, and companies that recycle other consumer and industrial materials.
Other investment opportunities include specialist Hazardous Waste treatment and disposal, or Environmental Support Services companies which provide environmental mitigation consulting services to help design new facilities to address environmental issues.
Food, Agriculture, and Forestry
The investment opportunity in the Sustainable Food, Agriculture, and Forestry sector is catalyzed by the rapidly growing demand for food and the limited availability of new arable land. Feeding an increasingly hungry planet requires greater efficiency and less waste across the food and agriculture markets.
Investors can consider companies that are engaged in producing more food with fewer resources; companies that optimize the use of products and systems to get food to consumers with less spoilage; and companies that produce sustainable packaging, among others.
The existence of global trends that directly affect the resources on which billions of people rely on a daily basis is creating investment opportunities for long-term investors.
Resource Optimization provides an opportunity to benefit from increased demand for limited natural resources while reducing human impact on our planet. In this way, investing sustainably may offer the best of both worlds.
Note: 1"Environmental Markets" refers broadly to the FTSE Index Series that comprises a group of global companies with significant business activities relating to products and solutions focused on the environment. The index was developed in 2008 in collaboration with Impax Asset Management, acknowledged thought-leaders in environmentally focused investments. "Resource Optimization" is Impax Asset Management's nomenclature for proprietary actively managed portfolios of investments that fit within the FTSE Environmental Markets sector classifications.)
Disclaimer: The information and any opinions contained in this document have been compiled in good faith, but no representation or warranty, express or implied, is made to their accuracy, completeness or correctness. Impax Asset Management, its officers, employees, representatives and agents expressly advise that they shall not be liable in any respect whatsoever for any loss or damage, whether direct, indirect, consequential or otherwise however arising (whether in negligence or otherwise) out of or in connection with the contents of or any omissions from this document. This document does not constitute an offer to sell, purchase, subscribe for or otherwise invest in units or shares of any fund managed by Impax Asset Management.