Sick of high power and food bills? Time to focus on the solutions (and the investment opportunities)

Prices of basics, food and energy, have skyrocketed since the pandemic. You can keep whining about it or you can invest in the solutions.
Chris Conway

Livewire Markets

Without overselling it, the need to become more efficient in how we produce food, generate electricity, and preserve water is critical to the furtherance of our species. 

Too dramatic, you scoff? 

Perhaps, but consider what has happened since the pandemic, when supply chains were gummed up. Food prices? Through the roof. Energy prices? Through the roof. 

I'm not talking here about hugging a tree and sitting around the campfire singing 'Kumbaya'. I'm talking about ensuring regular people have access to affordable and reliable food, electricity, and water. 

Fortunately, there are now hundreds of companies around the world focused on creating these efficiencies and, heaven forbid, generating a profit for investors at the same time - yay for capitalism. 

What's more is that Hubert Aarts, Deputy CIO at Impax Asset Management, is charged with finding those companies doing it better than anyone else. 

In the following interview, Aarts explains that you don't have to give up performance to invest in these companies, what the main characteristics are that he and the Impax team look for, what would cause him to exit a position, and the five big opportunities he sees over the next five years. 

Note: This interview was recorded on 29 November 2023. You can watch the video or read an edited transcript below.

Edited Transcript

What is one thing you want investors to understand about sustainable investing and your approach?

Hubert Aarts: 

When investors want to share in this huge opportunity investing in sustainable economies and stocks, they need to understand that you do not need to sacrifice returns for having a sustainable portfolio containing many assets or companies that provide those solutions. 

So that is the first step that an investor should think of. There's no need to give away performance.

Secondly, when you build a portfolio like that, what you do not want - and be careful of this - is greenwashing. So you really need to understand the portfolio manager that you choose. What is the proof of the stocks that they buy? And so at Impax, we've been for many, many years looking at companies, asking “What is the percentage of revenues coming up with these environmental solutions?” And then, we build a portfolio.

What we do once a year, is we take the end snap of that portfolio, we measure all the CO2 emissions, and we look at the CO2 avoidance of all the stocks. And there is a net CO2 avoidance possible across the portfolio, so that's a good result to show to investors - "Listen, you're so much better than a plain vanilla equity portfolio."

Secondly, we engage a lot with companies on sustainability plans because it's not only what the company does and provides service and products, but also, how do you behave. Because you can make a very good water filter system, but if you, let's say, use child labour to do that, you're not a sustainable company. So what you do and how you do it.

That also means that we can measure across the portfolio how much water is treated, saved, and provided by these companies. How much renewable energy is generated by the companies in the portfolio and how much material is recycled, reused, or waste avoided across the portfolio. So that is definitely important. That means that you have a real sustainable portfolio.

And then lastly, it's an important and interesting investment theme i.e., you make a return out of it. So we are, as professionals, looking at all these opportunities and we pick the ones where we think you can make a return out of it. And that is the 360 - from sustainability, valuation, engagement and risk-adjusted returns that you do not need to sacrifice for.

What are the key characteristics that the equities in your portfolio share?

The characteristic for the portfolio overall is very much that we look for quality underlying earnings growth. That is very important. 

That doesn't mean that you don't have cyclical areas. We do, as you think that a lot of it is manufactured. So we have a lot of manufacturing exposure, industrial exposure, but what we do is we look at companies with high return and capital employed where you have good healthy margins, and how the margins swing through an economic cycle. It’s not boom-bust. So that is a very important starting point once you have a huge opportunity set of companies to invest in.

Secondly, we look at the quality of the management team. They all need to be good quality management teams because if you have a strategic plan, how can you execute on that? So you need to be able to rely on management teams. You need to understand that the management team under-promises and over-delivers instead of the other way around.

Thirdly, very important within our selection, the criteria that you see across the portfolio is that our sustainability levels of ES and G, we have our internal scoring system. Excellent, good, average and fair, that you get above average sustainability across your companies. So what they do, strong return financials, quality management team, and strong environmental criteria and characteristics.

What would lead you to exit a position?

Of course, not everything works well for us. We have investments, and that is the nice thing about investing in listed equities because you make an investment decision, things can change. You might get disappointed with the management team. We had a recent example with that. So we exit a position because we can’t rely on that management team anymore. That's one reason to exit a position.

Secondly, an environmental story. Think about LED lines becoming more and more standard, so the growth rates are deteriorating. So you might think then, "Okay, that's an exit because we don't see the great opportunity that we had 10 years ago in that particular stock or sector." And we switch to another opportunity. The next one.

Thirdly is just the economic cycle. You might have economic cycles that go against you. It could be higher interest rate, inflation pass on, or just balance sheet issues - stress. So, there are several reasons why we exit a position. And what we need to know, understand, is that sometimes stocks go down very hard for sentiment reasons. So we look at the downside review. If the stock is weak, is this worth an exit? Is it worth buying more, or is it worth patience to sit through that?

Can you share your top five opportunities for the next five years and why you picked them?

Building energy efficiency. All the technologies are available to you. So we have companies and they have seen huge opportunities, order books filling up with energy-efficient heating, ventilation, air conditioning, and heat pumps. Heat pumps are really the new technology, the more efficient technology. So that is definitely one.

The second one is natural ingredients for food. That will not stop. You will continue to see that people want to eat healthier. We want to have better food that is easier to break down by the environment.

Thirdly, water quality. Every day, everywhere, in each economic activity, we use a lot of drinking water. As human beings what we want is to have safe and reliable drinking water so we can invest in testing and measuring and treating of that water. So that's the third one.

The fourth one is electrification. We don't need to invest in the OEMs, but you can invest in companies that provide charging stations, connectors, cables for electric vehicles.

And the last one I would say is that digital infrastructure. We all live in a digital era, so the growth will continue in becoming more efficient with your energy. That would mean that we have to share data i.e., cloud computing, efficient data centres, etc.

So you can see there's a very diverse set of opportunities, and I've just given you five.

Learn more

Impax offer a range of investment solutions, which provide opportunities to invest in the transition to a more sustainable economy. Each is underpinned by proven, proprietary investment tools. To learn more, visit their fund profile or website.

Managed Fund
Impax Sustainable Leaders Fund
Global Shares
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1 fund mentioned

Chris Conway
Managing Editor
Livewire Markets

My passion is equity research, portfolio construction, and investment education. There are some powerful processes that can help all investors identify great opportunities and outperform the market, and I want to bring them to life and share them...

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