This year Good Money Week runs from 29 September to 5 October 2018. One of the key themes of this year’s event – an annual campaign run by the UK Sustainable Investment and Finance Association (UKSIF) – is female economic empowerment and the gender investment gap.
The campaign, ‘Who Funds The World?’ is one of those being featured. The campaign follows research by Good Money Week which revealed that 58% of women do not think financial institutions understand them and their needs.
Gender investing aside – what actually is sustainable investment?
Jon Forster, co-manager of the Impax Environmental Markets trust, said sustainable investing is, “a way of saying I would like to make money from investing but I don’t want to do so at the expense of the environment”. He added that: “Impax Environmental Markets PLC does this by investing in companies that derive at least 50% of their revenue from products or services with a positive environmental impact.”
The rules of sustainable investing – Jon Forster, Impax Environmental Markets Trust
One: look for themes
Themes do play out in markets and that is usually because they are supported by a number of factors that come together to propel growth. Three that we currently favour are electric vehicles, the war on plastics and extreme weather. To illustrate how themes can help you to invest more sustainably let me explain why.
Electric vehicles (EVs): Dieselgate was a watershed moment for EVs. It led to more regulation and changing consumer perceptions. At the same time the technology costs for EVs began to fall making the economics more appealing. The interaction of these factors is expected to drive rapid growth in the sector, from less than 1% current penetration to 20 – 25% by 2030. If you consider your own experience the likelihood is that five years ago you knew no-one who owned or was considering owning an EV, today it is far more likely that the opposite is true.
The war on plastics: in 2016 China imported two-thirds of the world’s plastic waste, so when China introduced its import ban on waste plastic it forced Governments and companies to rethink plastic waste. A rapid change in policy and regulations towards plastic and recycling followed; such as the EU target to recycle 75% of packaging waste by 2030. Public awareness has also undergone rapid change, thanks in no small part to the BBCs Blue Planet II documentary series. Again, it is the coming together of these factors that makes this ‘theme’ attractive from an investment perspective.
Extreme weather: hurricane Florence hit the US in September and whilst the full scale of the impact of the damage is still being assessed Moody’s has already estimated that the economic toll will be somewhere between $38 and $50 billion US dollars. Even the most outspoken sceptic would struggle to disavow that the world is experiencing more extreme weather events. Yet weather events don’t have to be as extreme as a hurricane to have an economic impact. In the UK this year we experienced an extended heatwave and unusual cold weather thanks to the ‘Beast from the East’.
The latter meant damaged water pipes and transport disruption, the former impacted agriculture in particular. Unsurprisingly adapting to and mitigating the impact of extreme weather events is a global issue and one that should interest sustainable investors.
Two: consider how best to benefit from a theme
After you have identified a theme you need to consider how best to benefit from it. This isn’t always clear-cut. For example, with electric vehicles we see a lot of disruption being brought to the market and with disruption comes change. Who will win the EV race? We think it is impossible to call that right now, so we don’t invest in EV manufacturers like Tesla. Instead we prefer to invest in the technology and components that support these vehicles. For example, we invest in a company that produces transducers which manage and control the flow of the drivetrain. When considering adapting to and mitigating extreme weather events there is the immediate response and longer-term infrastructure investment to consider. So, in the short-term there is a need for back-up power generators and specialist clean up services for example, whilst in the longer-term water treatment facilities contaminated by tidal surges or flooding need upgrading.
Three: choosing an investment
If you are looking to invest directly into companies where could you start? We suggest investing in well established, proven, profitable companies with strong management and business models. It will help to look carefully at growth margins, returns and balance sheets. Take valuations into consideration and when you identify what you consider to be winners hold them for the long-term. If you want to be reassured that they are valid as sustainable investments check, or start with, the FTSE Environmental Markets Index Series, which classifies the environmental markets universe and the companies that sit within it.
If you are looking to invest in funds that offer sustainable investment it is also worth a quick look under the hood. How do they define sustainable? Does this chime with your view? Sustainable or environmental investment funds are not all built the same. Some use what we call negative screening, which means excluding certain types of companies for example fossil fuels or tobacco.
Others, like Impax Environmental Markets PLC, use positive screening. By which we mean we look for certain attributes that we like to invest in, namely energy, waste, water and sustainable food and agriculture. There are funds that invest based on ranking systems, either their own or an independent party, for example an ESG screening which can favour larger companies that have the resources to report on these topics. And of course, there are both passive and active options.
It sounds complex, why should I bother?
Investing sustainably may sound complex but investing long-term we think it helps investors to identify opportunities to make winning growth investments. The world is transitioning to a more sustainable economic model and as it does opportunities are being created for new technologies, services and products. Impax Environmental Markets Plc applies this filter to invest in companies providing cleaner, more efficient products and services. We think these companies will be ‘the long-term winners’; the positive net-environmental impact is the ‘free’, good for everyone, cherry on top.