As we mark Impax’s 20th anniversary this year, it seems appropriate to consider what the next two decades of investing in the sustainable economy might hold. What will the world look like after another two decades of progress?
Specific technological breakthroughs and, most importantly, the timing of major shifts are impossible to predict. Plastics are a case in point. No one could have predicted that a BBC nature documentary – ‘Blue Planet II’ – and a change in policy in China would combine to transform the landscape for recyclers and producers of sustainable packaging. However, as with waste treatment and alternative packaging companies, our investment philosophy enables us to take a view on sustainability trends and position portfolios to ensure we can take advantage of tipping points when they materialise.
Let's start with what we know...
- Disruption is already well underway in a number of key sectors, including low-carbon power generation, water treatment and supply infrastructure, industrial efficiency, personalised diagnostic healthcare and speciality insurance, to name a few. Our investment universe comprises companies already offering economically viable solutions to sustainability challenges.
- The scaling-up of these solutions is the ‘known known’ of the next two decades. Investing here creates a good backdrop for growth. Identifying the best business models with high barriers to entry and a disciplined approach to valuation will remain important as these markets can attract excess capital.
...and consider what we don’t yet know
- Some environmental challenges do not have economically viable solutions yet despite efforts to develop new technologies and supportive policies. For example, transport emissions – both CO2 and local air pollutants – are continuing to accelerate. Within the food supply chain, consumer and regulatory pressure to deliver higher quality nutrition with a lower environmental impact is still at an early stage. Exactly which solutions will ultimately succeed remains subject to debate, research and market testing. In this context, identifying management teams who understand rapidly changing markets and have products to suit different scenarios can help inform investment allocations.
- Will Millennials still think sustainably when they have grown up? There are signs of a generational shift in attitudes, and companies see an opportunity to capture changing consumer demand among the millennial generation demonstrating preferences for more sustainable lifestyles and modes of consumption. An open question is whether they will retain these preferences as they grow older and assume corporate and political leadership? If they do, that would accelerate responses to the environmental and social challenges we face.
- Sudden shocks from exposures on social media will continue. The democratisation of information through digital communication platforms is likely to continue to expose business models that are exploiting natural or human resources for short-term profit. But quite what they will uncover next, no one knows. At Impax we prepare for the unknown by avoiding companies operating in economic sectors facing systemic risks; integrating environmental, social and governance factors into a wider risk assessment within fundamental analysis; and applying rigorous valuation discipline incorporating scenario analysis.
The future is never clear, but we do know that climate change represents a significant challenge for investors and companies in the future. Analysing prospective investments via a 'Sustainability Lens' will add value by identifying solution providers, as well as steering us away from companies with fragile business models, potentially undermined as environmental and societal trends accelerate over the next two decades.