Align­ing val­ues with in­vest­ment op­por­tu­nity

Hu­bert Aarts of Im­pax As­set Man­age­ment talks about re­source scarcity, growth in en­vi­ron­men­tal busi­ness lead­er­ship and what this means for in­vestors

Investment Executive - - BRAND KNOWLEDGE -

As our most fun­da­men­tal re­sources – wa­ter, en­ergy and food – be­come in­creas­ingly strained, in­no­va­tive busi­nesses world­wide are an­swer­ing the call. Fo­cused on “re­source op­ti­miza­tion,” these en­vi­ron­men­tal lead­ers are ex­tend­ing the shelf life of nat­u­ral re­sources to sus­tain ris­ing global de­mand. As this move­ment evolves, these com­pa­nies have come to rep­re­sent valu­able growth op­por­tu­ni­ties and diver­si­fi­ca­tion for in­vestors.

Hu­bert Aarts, Ex­ec­u­tive Di­rec­tor and Co-head of Listed Eq­ui­ties for Im­pax As­set Man­age­ment, and sub-ad­vi­sor for the NEI En­vi­ron­men­tal Lead­ers Fund, sheds light on what’s driv­ing growth among en­vi­ron­men­tal lead­ers. He also talks about why in­vestors need to take no­tice and where op­por­tu­ni­ties in re­source op­ti­miza­tion lie.

We’re be­com­ing more aware of the en­vi­ron­men­tal chal­lenges around the world. In your opin­ion, what are some of the key en­vi­ron­men­tal driv­ers cre­at­ing growth for in­vestors?

We be­lieve that pop­u­la­tion dy­nam­ics, re­source scarcity, in­ad­e­quate in­fra­struc­ture and other en­vi­ron­men­tal con­straints will pro­foundly shape global mar­kets in the time ahead. We can think about these driv­ers in two ways. The first way is to look at trends in pop­u­la­tion growth and ur­ban­iza­tion, and the re­sult­ing in­crease in de­mand for scarce re­sources, such as fresh drink­ing wa­ter and food sup­ply. The sec­ond way of look­ing at en­vi­ron­men­tal driv­ers is to ex­am­ine the in­creas­ing amount of waste that we gen­er­ate, and the con­se­quences that arise, such as pol­lu­tion and cli­mate change. We strongly be­lieve that the busi­nesses that can suc­cess­fully mit­i­gate these risks rep­re­sent im­por­tant in­vest­ment op­por­tu­ni­ties.

Where are we in this cy­cle with en­vi­ron­men­tal busi­ness lead­ers? Are these com­pa­nies in their in­fancy, prime or, per­haps, even en­ter­ing a peak?

To un­der­stand the growth of these op­por­tu­ni­ties, you have to di­vide your out­look into where we are with the prod­uct in­no­va­tions them­selves and geo­graphic fac­tors. For in­stance, in terms of en­er­gy­ef­fi­cient ve­hi­cles, we’ve come quite far in de­vel­oped mar­kets to boost fuel ef­fi­ciency and re­duce emis­sions. Emerg­ing mar­kets like China are quickly catch­ing up to de­vel­oped mar­kets, but coun­tries like In­dia are fur­ther be­hind in this re­gard, even though In­dia faces mas­sive pol­lu­tion from diesel en­gines. Re­new­able en­ergy so­lu­tions are an­other ex­am­ple of this gap – ad­vanc­ing greatly but highly de­pen­dent on sub­si­dies and gov­ern­ment poli­cies. In many cases, we’ve come a very long way, but con­tin­ued growth de­pends on the will­ing­ness of gov­ern­ments and pop­u­la­tions to ac­cept these in­no­va­tions and im­ple­ment them. When we an­a­lyze op­por­tu­ni­ties, we take both of these fac­tors into con­sid­er­a­tion.

What would you say to an in­vestor who is still skep­ti­cal of in­vest­ing in sus­tain­abil­ity and en­vi­ron­men­tal in­no­va­tions?

Mar­kets were strong in 2017, but the con­sen­sus is that global growth is likely slow­ing. While past per­for­mance is not nec­es­sar­ily in­dica­tive of fu­ture re­sults, the com­pa­nies in the themes rep­re­sented in the NEI En­vi­ron­men­tal Lead­ers Fund, for ex­am­ple – wa­ter, en­ergy, waste and agri­cul­ture – per­formed at twice the rate of global mar­kets on a his­tor­i­cal ba­sis, so it ap­pears that there’s tremen­dous po­ten­tial ahead.

En­vi­ron­men­tal busi­ness lead­ers around the world also rep­re­sent a cer­tain set of small- and mid-cap­i­tal­iza­tion com­pa­nies. These com­pa­nies are not in most Cana­dian and global eq­uity port­fo­lios, and are un­cor­re­lated with a sig­nif­i­cant por­tion of the Cana­dian mar­ket, so, they can bring a strong layer of diver­si­fi­ca­tion to a port­fo­lio.

Us­ing these in­vest­ments as a core part of a client’s port­fo­lio – or as a com­ple­men­tary satel­lite strat­egy – is not a pass­ing fad. At Im­pax and NEI, we be­lieve it is sim­ply com­mon sense in­vest­ing. Well-man­aged com­pa­nies that are find­ing in­no­va­tive ways to op­ti­mize our fi­nite re­sources could be the fu­ture av­enues of global growth.

En­vi­ron­men­tal, so­cial and gov­er­nance (ESG) data is be­com­ing more read­ily avail­able. How do you use this data in your in­vest­ment process?

We be­lieve ESG data should be used at a num­ber of lev­els, but has to be com­bined with strong ac­tive man­age­ment and a deep un­der­stand­ing of en­vi­ron­men­tal de­vel­op­ments.

For ex­am­ple, we use ESG data to first screen the vast uni­verse of in­vest­ment op­por­tu­ni­ties down to a work­able num­ber. For us, that’s about 1,600 com­pa­nies. But ini­tial ESG screen­ing can only take you so far. We then con­duct our own re­search based on fun­da­men­tal bot­tom-up anal­y­sis and grade each com­pany on a pro­pri­etary scale.

ESG also plays a role at an­other level – that is, ac­tive en­gage­ment and di­a­logue with com­pa­nies we’re in­vest­ing in. We meet with them reg­u­larly to fur­ther as­cer­tain if they are truly adopt­ing sound ESG prac­tices. We also pro­vide guid­ance on how to im­prove their ESG prac­tices. This is not some­thing you can as­cer­tain from an ESG score alone.

What are the trends in en­vi­ron­men­tal lead­er­ship and where does the great­est po­ten­tial lie?

I be­lieve you can break down some of to­day’s big­gest op­por­tu­ni­ties into four main cat­e­gories: en­ergy ef­fi­ciency, wa­ter in­fra­struc­ture, sus­tain­able food and waste re­cov­ery.

Within en­ergy ef­fi­ciency, a rapidly emerg­ing theme is the elec­tri­fi­ca­tion of the car fleet, par­tic­u­larly the hy­bridiza­tion of cars which will be a sig­nif­i­cant trend in the near term. Here we are not so much fo­cused on car man­u­fac­tur­ers, but in­no­va­tive so­lu­tion providers in ob­vi­ous ar­eas – like bat­tery stor­age and, other ar­eas you wouldn’t ex­pect, such as wiring so­lu­tions, be­cause elec­tric ve­hi­cles re­quire sig­nif­i­cantly more wiring.

In wa­ter in­fra­struc­ture, de­mand for re­plac­ing ag­ing wa­ter sys­tems and in­fra­struc­ture is press­ing, es­pe­cially in China and In­dia where ur­ban­iza­tion and the mid­dle class are ris­ing fast. These parts of the world are in dire need of bet­ter wa­ter fil­tra­tion, mon­i­tor­ing, test­ing and dig­i­tal in­stru­men­ta­tion for both res­i­den­tial and in­dus­trial wa­ter sys­tems.

When talk­ing about sus­tain­able food sources, you need to look at grow­ing pop­u­la­tions with new de­mands. For ex­am­ple, in Asia you have peo­ple mov­ing away from eat­ing rice, to­wards con­sum­ing more chicken and beef. This is lead­ing to more food waste and less arable land, driv­ing in­no­va­tions such as sealedair pack­ag­ing for longer food shelf life and new fa­cil­i­ties that op­ti­mize food pro­duc­tion.

Think­ing in terms of waste re­cov­ery, the world is gen­er­at­ing more food waste and de­mand­ing more green­house-gas emit­ting live­stock – es­pe­cially as growth in emerg­ing mar­kets con­tinue – so new ways of re­cov­er­ing re­sources rep­re­sent a sig­nif­i­cant op­por­tu­nity. Also, there is strong growth po­ten­tial com­ing from sys­tems that re­cy­cle higher-value ma­te­ri­als, such as rare earth met­als and elec­tron­ics, which are ex­pen­sive and chal­leng­ing to ex­tract.

One thing is clear: these en­vi­ron­men­tal lead­er­ship themes are evolv­ing rapidly, which will pro­duce both new in­no­va­tions and qual­ity in­vest­ment op­por­tu­ni­ties in com­ing years for in­vestors in­ter­ested in mak­ing an im­pact.

Hu­bert Aarts Ex­ec­u­tive Di­rec­tor and Co-head of Listed Eq­ui­ties for Im­pax As­set Man­age­ment, and sub-ad­vi­sor for the NEI En­vi­ron­men­tal Lead­ers Fund

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