The four key drivers accelerating the move to the 'new' economy

October 10, 2022 13:15

Livewire Markets

Only a matter of years ago, thinking - or investing - sustainably was costly. Access to infrastructure investments was limited and expensive. There were few options. Snap forward and global ESG assets under management are likely to surpass $50 trillion by 2025 according to Bloomberg Intelligence.

The movement towards the 'new' sustainable economy is accelerating at a rapid pace.

David Winborne, Senior Portfolio Manager at Impax Asset Management, says there are four key drivers pushing this transition, starting with supportive regulation and backed with technology.

"Technology has improved, which has really driven the adoption of more sustainable-focused technology. I think we only have to look at the automotive industry to realise that technological innovation has really driven that transition towards electric cars and away from combustion engine cars."

In this edition of Expert Insights, David discusses the trends towards the 'new' sustainable economy, opportunities in older economy sectors like energy or financial services and the threat that greenwashing poses.

Edited Transcript

How has sustainability shaped the investing landscape over the past five years, and what do the next five years look like?

David Winborne: Yeah, I think many of the forces which have driven the transition to a more sustainable global economy have really accelerated over the last five years, and the impact, is essentially that there are four very powerful drivers for the transition to a more sustainable global economy.

The first, which we're very aware of, is that there's generally quite a supportive regulatory backdrop. We see tightening environmental standards and tightening food standards across the world, which is a nice favourable backdrop.

But there's three other very important drivers which are really accelerated in the last five years. Firstly technology has improved, which has really driven the adoption of more sustainable-focused technology. I think we only have to look at the automotive industry to realise that technological innovation has really driven that transition towards electric cars and away from combustion engine cars.

Five years ago we probably wouldn't have even considered buying an electric car because they were too expensive and the range wasn't there and there was no charging infrastructure. Well, technology's enabled all of those hurdles to be overcome.

The third driver is consumers wanting different things these days, and that really spans the whole range of consumer choices. As I mentioned, this includes electric vehicles and how they've developed.

But if you look at that the food industry, I think we're all much more aware now of the food we're putting in our bodies, and so we're seeing the rise of organic food at the high end, but it's meant that even still for general food products I think the move towards more natural food is really a big driver there.

And the fourth driver really is enterprises now changing their behaviours in response to consumers wanting different things. There was an interview with one of the CEO of a big packaged food company, and he said he didn't want his company to be known as the world's largest branded trash company.

In other words, when you buy your detergent bottle, it's now the responsibility of the packaging, or the package food company, to really take a bit more ownership of the waste produced. So if you take all those factors together they are very, very powerful drivers, we believe, towards more of a sustainable economy.

Over the next five years, many of those trends are accelerating, because if we think of what we've seen in those four areas, the cadence and change aren't slowing down. I think if we just take the news flow over the last few weeks only, we've had the Inflation Reduction Act in the US, which should meaningfully reduce US greenhouse gas emissions by 2030, and in turn, will drive investment in areas like electric vehicles in the US.

Another really important and slightly overlooked one is methane reduction efforts. As many of us know, methane is an even more potent greenhouse gas than carbon dioxide, so some of the companies to which we have exposure, which help reduce methane emissions are going to come into increasing focus, we think.

Is sustainable investing held back by the fact traditional indices are weighted toward the old economy?

I don't think so these days. If you look at the index weightings, you can see that areas that you'd call the old economy, such as energy, energy is only 4% of the ACWI Index now. Similarly, materials companies, including lots of the chemicals producers, the plastic producers, are only 4 or 5%.

The other sector you could call maybe a slightly old economy is some of the financial institutions, but actually, if you dive into those financial institutions you can actually find that some of them are very well aligned with the sustainable transition.

And just a few of the examples we invest in within that space, we invest in emerging market banks, and we do that because emerging market banks provide access to the formal financial system for people that were previously excluded.

Another area would be emerging market insurance companies, really providing that vital social security net for people in emerging markets where there's essentially no state provision if you get sick or you get old.

And the final area, which is really important in that seemingly old economy area, would be reinsurance companies that are able to cover some of those difficult-to-insure risks, such as natural catastrophe, cyber security hacking, and things like that. So even in a sector that would seem quite driven by the old economy, there are some really interesting opportunities.

And then if we look on the other side of things, at the big index weights these days, we see the technology is about 24 or 25% of the ACWI weighting these days, and large parts of the technology industry are really quite aligned with a sustainable transition. A major trend here is improving enterprise efficiency through the transition towards cloud computing, which is inherently more energy efficient than on-premise computing.

So IT is very important, and healthcare is another very important part of the sustainable transition. So healthcare is maybe 11% of the index weight, and again, lots of healthcare companies are addressing the pressing healthcare issues of our age, reducing systemically high healthcare system costs.

So, there are lots of parts of the new economy, and even some of those ones that maybe some people think of as the old economy, within which there are some really interesting sustainable opportunities in there.

Is 'greenwashing' a problem your fund encounters, and do you deal with it?

Yeah, I think it absolutely is a problem, actually. I think in terms of greenwashing, firstly for the investment industry, we're seeing a huge number of funds being launched or rebranded over the last few years towards being sustainable or ESG-focused funds.

And in many cases, there hasn't been necessarily the rigour in place in terms of the sustainability process, or ESG process, to arguably qualify them for that label, and so there's been a big flood of new entrants.

And what we've seen is regulators are increasingly clamping down on those companies, which I think is great, I think it's probably important to make sure that we do have some sort of discipline in the industry to make sure that it has credibility, and if someone launches a fund that hasn't really got any processes in place to ensure they are investing sustainably, it really damages the credibility of the industry.

The second thing we need to look at in terms of greenwashing is actually the way that the investee companies approach their sustainable credentials. It hasn't been unnoticed by lots of the big companies out there that there's a huge amount of investor interest in sustainability, so all of a sudden company websites are now strewn with sustainability credentials. And so it's our job to really pick through those claims of sustainability in terms of energy efficiency, and resource efficiency, to make sure they really stand up.

Just one other element there in terms of how that's impacted the investee, companies we invest in, we're noticing that in the case of company governance we're noticing that CEOs and CFOs are getting increasingly remunerated on sustainability targets, which sometimes are a bit manipulatable and intangible, so that's another thing that we engage with very closely with our companies to make sure that those numbers are reasonable.

New economy investing

Impax Asset Management invest in companies active in the growing resource efficiency and environmental markets. For more information on this investment strategy, visit the fund profile below.