Partner Insight: Global Environmental Opportunities: transforming sustainable investment

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Partner Insight: 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.

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.

Public shaping the agenda

Once a niche activity, environmental investing is now moving firmly into the mainstream.

For example, 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[1].  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.

China’s investment in the environment has risen six-fold since the early 2000s (see chart).

 

Fig 1. Growth in China’s environmental spending (in RMB bln)

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

 

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

Source: WIPO

 

The economic benefits – and investment potential – manifest themselves in various ways such as precision agriculture, renewable energy, smart cities, energy efficiency, and 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

*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[2].

 

Investing for a sustainable future

Environmental issues are now a matter of global importance. Companies that provide effective products and services that increase resource efficiency and minimise pollution are well placed to grow strongly. In our view, by investing in these firms, investors can make a positive contribution towards a more sustainable world, as well as generating attractive capital gains.

 

[1] The Lancet Commission on pollution and health, 19.10.2017

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

 

Disclosures

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This article was a paid posting by Pictet Asset Management all views and/or opinions are those of the sponsor and not of Investment Europe.