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sustainability and investing

January 2020

Global Environmental Opportunities: transforming sustainable investment

Thanks to the emergence of a thriving environmental products industry investing to safeguard the planet no longer means sacrificing returns.

01

Overview

Danica May Camacho was born on October 30, 2011, to the sort of fanfare rarely seen in Manila’s crowded public hospitals. That’s because she represented a global milestone – her birth brought the world’s population to seven billion. It was at once a joyful occasion and a reminder of the challenges posed by ever more people competing for finite resources.

In less than 30 years’ time, the planet will be home to nine billion human beings, a larger proportion of which are likely to be part of the middle class. This is certain to put even more pressure on the environment, testing it to breaking point.

Investors are increasingly alert to these challenges.

Many now recognise that, as stewards of capital, they have a crucial role to play in placing the economy on a more sustainable footing. But for them to become part of the solution, investors need to resolve a paradox. How can they become responsible guardians of the environment and simultaneously secure an attractive return on their investments?

We believe the solution to that conundrum has already begun to take shape. With governments and businesses responding to growing public pressure to reverse ecological degradation, a distinct and attractive group of environmental equity investments has emerged. These are companies that combine strong environmental credentials with innovative products and services designed to safeguard the world’s natural resources.

Such firms form the core of our Global Environmental Opportunities (GEO) portfolio. 

02

A burgeoning environmental products industry

Public shaping the agenda

Once a niche activity, environmental investing is now moving firmly into the mainstream. There are several reasons for that.

To begin with, society’s attitudes towards protecting the planet have changed considerably in recent years.

That's partly because a growing proportion of the population has personal experience of the damage ecological degradation can cause. In 2015, pollution killed nine million people – three times more than AIDS, tuberculosis and malaria combined.Floods and droughts have brought untold misery to millions more. Social media has also helped shape world opinion. Thanks to platforms such as Twitter and Facebook, people can now voice and share their concerns about pollution and sustainability in a way they couldn’t before. 

People power has, in turn, brought about a change in government priorities. China is a striking example of this trend.

Fig. 1 how to spend it
Growth in China's environmental spending (in RMB bln)
China spending.png

Source: CEIC, Environmental Financing Strategy, Credit Suisse, Pictet Asset Management

In the run-up to the 2008 Olympics, the US embassy in Beijing started tweeting hourly air quality data from its roof-top monitor. This was the first time the public had access to live data on airborne particles known as PM2.5, which kill more than 4 million people worldwide a year. As a result, local residents began voicing their concerns about air quality, eventually taking to the streets to stage large public demonstrations.2

In response to growing social discontent, China’s leadership unveiled a ground-breaking action plan in 2013 to tackle “Airpocalypse” with investments worth hundreds of billions of dollars and a slew of regulations. 

China's Premier Xi Jinping has named environmental degradation as one of the three main battles the country has to fight along with political and financial risks and poverty alleviation, adding that: "We will never again seek economic growth at the cost of the environment."

China’s investment in the environment has in fact risen six-fold since the early 2000s (see chart). But this is unlikely to be the end of its spending boom. Beijing has promised to invest even more heavily in advanced environmental science and technology.

Also giving sustainable investing a shot in the arm is a sharp drop in the cost of technologies such as renewable energy, water recycling and agri-tech. In the US wind power is now cheaper than any other form of energy, having seen a 40 per cent drop in production costs over the past decade. The costs of producing utility-scale solar power have declined by more than 60 per cent over the same period.

Stars aligned for environmental industry

The combination of people power, government policies and economics has given rise to a thriving – and eminently investable – industry for environmental products and services. China's generously-funded anti-pollution drive, for example, is likely to boost the prospects of firms that develop environmental technologies such as filters for engines and industrial applications for pollution control.

More broadly, as corporations worldwide embrace sustainable business practices, publicly-listed firms specialising in the development of a broad range of environmental technologies have mushroomed, while the number of patents filed for environmental products over the past decade has more than tripled.

Fig. 2 becoming innovative

Global environmental technology patents

world patent.png

Source: WIPO

The economic  benefits – and investment potential – manifest themselves in several ways:

  • Precision agriculture: A GPS guidance system can save a farm of 1,000 acres about USD13,000 in variable costs annually, paying for itself within one year. Even if only 10 per cent of US farmers use GPS for planting seeds, it could save 16 million gallons of fuel, four million pounds of insecticide, and two million quarts of herbicide per year.3
  • Renewable energy: Renewable energy usage has been growing rapidly thanks to falling production costs. Being bid at less than USD0.02 per kilowatt hour, solar power will soon be cheaper than any form of fossil fuel-based power generation.4 The cost of electricity from offshore wind farms, once one of the most expensive forms of green energy, is expected to drop by some 70 per cent over the next two decades.5
  • Smart cities: Installing a suite of connected infrastructure such as water, electricity and waste, or upgrading ageing systems should cut bills and improve resource management. Barcelona, for example, saves USD58 million annually with smart water technology that uses connected sensors and cloud servers to monitor irrigation and water levels.6
  • Energy efficiency: Investing in electric public transport, using more renewable energy and increasing efficiency in commercial buildings and municipal waste management could cut energy costs by about USD17 trillion worldwide by 2050.7
  • Pollution control: Pollution mitigation and prevention can yield large net gains for the economy. In the US, an estimated USD30 in benefits has been returned to the economy for every dollar invested in air pollution control since 1970.More specifically, we see strong  growth for companies developing technologies such as filters for engines and industrial applications for pollution control.

Critical mass

Overall, we estimate that the environmental products industry is already worth some USD2 trillion, and can grow by about 6-7 per cent per year.
Fig. 3 environmental industry in numbers
EIInNumbers_center.jpg

Median 2016-18e sales CAGR (%) in local currency. Source: Bloomberg, Pictet Asset Management

That should matter to investors: companies operating in this sector should, according to our estimates, see sales growth of 6.5 per cent per year, outpacing that of firms in the MSCI World equity index by more than 2 percentage points TO UPDATE.9

03

A process to unlock the potential of environmental investments

 

Fig. 4 planetary boundaries
EnvironmentalImpactPerformance.jpg

Source: Stockholm Resilience Centre, Pictet Asset Management, as of 29.12.2019

 

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But our investment process does not end there. Our aim is to be an active owner of the companies we invest in. For this, we exercise voting rights through a proxy voting platform and engage with the companies to ensure they have the best possible governance structure in place. We believe this responsible form of capitalism not only mitigates risks but also leads to sustainable long-term capital returns.

Investors have long appreciated the need to protect the planet but also have harboured misgivings about the financial trade offs that might involve. Now, thanks to emergence of thriving environmental products industry, those concerns should quickly fade. Protecting the environment and investing for capital gain can indeed go hand in hand. 

Fig. 5 Actively engaging

Example of how we've engaged with a UK-based environmental utility company

timeline.jpg

Source: Pictet Asset Management

04

Making an impact

The Global Environmental Opportunities portfolio achieves a significantly more positive environmental impact than that of a typical global equity strategy across all nine dimensions, particularly in climate change.
Demonstrable
Environmental impact as measured by the Planetary Boundaries framework , Pictet Global Environmental Opportunities strategy versus MSCI World Index
Article Content Center.jpg

Source: Pictet Asset Management, NEOSIS. Data as of 30.06.2019

For example, carbon dioxide emissions of companies in our portfolio stand at 454 tonnes of CO2 equivalent per million dollar of annual revenue (tCO2 eq/mn$), compared with 1,948 tonnes for the MSCI World index.

This is one of the many positive environmental impact investors can achieve with this strategy.

As stewards of global capital, they play a key role in protecting the environment. 

On one hand, investors can provide vital funding to the companies developing products and services that can reverse ecological damage.

On the other, they alone have the power to withhold or withdraw capital from businesses that fail to take their environmental responsibilities seriously. For investors, the opportunity to bring about change has never been greater.

Many investors have long appreciated the need to protect the planet. But they have not always been convinced sustainable investment was financially viable. Thanks to the emergence of thriving environmental products industry, the calculus is now changing. Investing to safeguard the natural world does not mean sacrificing returns. It can enhance them.