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
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