Money Observer: Three hot growth opportunities for sustainable investment

Some people avoid plastic bags, while others have stopped smoking. As awareness around environmental concerns is increasing, investors are considering more carefully how to put their money to work in a way that doesn’t harm the environment.

But while sustainable investing might bring to mind solar panels and government subsidies, the sector is much broader than most people expect. People also wrongly assume that investing in a sustainable fund or company means prioritising your morals over your returns and that high volatility is inevitable.

In reality there is a wide choice of investment areas, and many sustainable funds have an impressive track record with great returns.

Ethical financial advisers often mention the Impax Environmental Markets trust and FP WHEB Sustainability as good examples. These funds invest specifically in companies that focus on products to reduce water waste, improve energy efficiency, and develop clean and sustainable transport services.

In an interview with Money Observer, Jon Forster, senior portfolio manager at Impax Environmental Markets highlights three current growth areas in the environmental space.

Electric car components

The first area destined for growth is electric cars. ‘The technology is now mature,’ says Forster. At the same time, governments around the world plan to phase out petrol and diesel cars in favour of electric vehicles. By 2030, he says the number of electric cars will have risen from its current level of 1 per cent of vehicles worldwide to about 30-40 per cent.

Similarly, a report by Legal & General Investment Management (LGIM) has argued that there is going to be a rapid adoption of electric vehicles in the next seven years. Car battery costs will continue to decline, moving closer towards cost parity with internal combustion engines over the next decade, according to LGIM fund manager Shaunak Mazumder.

Crucially, not only Tesla but companies that produce car and infrastructure components for all car producers are set to benefit.

When analysing companies in the space, Forster considers four criteria. He looks for critical components, broad market exposure, reasonable valuation and competitive advantage. The Impax Environmental Markets fund lists all its holdings online and a look at the list reveals that Umicore, LEM and Delta Electronics Thailand fall into that category.

Umicore, for example, is a company that helps to facilitate the reduction of cobalt in batteries. Cobalt is one of the key materials in electric cars’ batteries. Over 60 per cent of the world’s cobalt comes from the Democratic Republic of Congo, a notably volatile region. As a result, manufacturers have been working to reduce the cobalt content in their batteries.

Plastics and recycling

The second growth area focuses on plastics and how they’re recycled. All of us encounter plastics every day. Sadly, most plastic packaging doesn’t get recycled but ends up in our oceans, as Blue Planet II brought so vividly to our screens.

The EU countries collectively currently use 100 billion bags per year, according to the European Commission. This creates tremendous amounts of waste, because most plastic bags are only used once.

More than 40 years after the launch of the universal recycling symbol, only 14 per cent of plastic packaging is collected for recycling. When additional reprocessing is factored in, only 5 per cent of plastic is retained for a subsequent use, according to the Ellen Macarthur Foundation.

In the November Budget, the UK government made plastic waste a key objective. At the same time China has banned the import of foreign waste, while EU policymakers have called for a ‘more circular economy’ where recycling and reuse are encouraged. The 5p charge on plastic bags implemented by the EU and UK has been credited with reducing their use by 85 per cent.

This combination of government intervention and consumer awareness is very promising as an investment backdrop, according to Forster. Opportunities in the space include companies that focus on recycling infrastructure and deposit schemes. These schemes provide machines where people can return plastic bottles and receive a small amount of money in return. They’re commonplace in Scandinavia and Germany.

Tomra is one such company in the Impax fund’s portfolio. It focuses on ‘reverse vending machines’, laser and optical sorting and recognition technology for recycling.

Software that enables energy efficiency

The third area of growth focuses on software which enables energy efficiency. Such software can be useful in the area of ‘precision agriculture’. There, it helps farmers assess their fields and know the amount of water or pesticide needed. This enhances the yield of the field, while decreasing pollution. One company in the portfolio which focuses on this is Trimble.

‘Environmental markets have a very wide breath,’ says Forster; moreover, he adds, ‘these markets are not correlated, which provides great diversification.’ He also states that his trust has a slightly higher risk profile than a portfolio of global equities, but that the two don’t greatly differ.

The trust returned 14.6 per cent over one year and 70 per cent over three years; it currently trades on a 6.26 per cent discount.

This article was originally published in Money Observer on 22 February 2018:

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