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2020: climate crisis conscious investing

Icebergs swimming on world famous Jokulsarlon glacier lagoon in southern Iceland

Do not expect a lighter shade of green in 2020. That’s the call from Jon Forster, Impax Environmental Markets, as he explains his belief that the investment case underpinning environmental markets has never looked so compelling

The political discourse of Britain may have been dominated by Brexit in 2019 but it was not the only topic of conversation. The Climate Crisis (#ClimateCrisis) has moved from the fringe to a more central role of public concern – as we can observe from the range of protests movements, increased public awareness and changing consumer behaviour.

In November 2020, the UN’s climate change conference, COP 26, will be hosted in Glasgow and we should expect this to focus political attention as well of that of consumers and the media. Against this backdrop, new regulation is demanding investors take climate risk seriously, the FRC’s revised Stewardship Code for instance.  In short, regardless of how markets behave in 2020, sustainability and climate risk are set to rise in prominence, not fade away.

The case for environmental markets

Impax Environmental Markets Plc (IEM) was launched in 2002, and our focus has always been on the ‘green economy’; we believe it makes sound investment sense. The availability and price of energy, water, food, materials and other resource that meet the needs of a growing global population, that is increasingly urbanised, is a challenge that the existing model can no longer meet without significant improvements in the efficiency of supply and use. Meanwhile, depleted environmental resources such as clean water, clean air and arable land are limiting the potential for economic growth in many countries and losses from climate change related weather events have increased sharply and are having a significant economic impact.

To meet these challenges, the global economy is transitioning to a more sustainable model to which increased public awareness, regulatory change and improved economics are driving increased momentum.

Environmental themes for 2020

Electric Vehicles (EVs): Although much has been said already about the electrification of vehicles, as an investment theme, expect to see it accelerate (excuse the pun) in 2020.  Dieselgate began in 2015, but the switch back from diesel to petrol has meant CO2 has risen, requiring more emissions control and engine downsizing just as clean air targets have become more ambitious. There are a number of challenges associated with this, not least when you consider the phenomenal popularity of SUVs in the last decade.  In 2020, long stated Government bans on internal combustion engines creep much closer and manufacturers will respond. Falling technology costs and rising performance means EVs are becoming more affordable, with a large surge of product launches expected, which in turn will lead to increased investment in charging infrastructure. It is difficult to predict who will win the EV race, but we do know that all manufacturers need components and it is the producers of these components that we favour when exploring this theme.

The Industrial Internet of Things: In the last two decades we have seen software transform the office environment, now it is the turn of industry. With the ability to include microchips in almost anything and to collect and analyse big data, we are seeing the start of an evolution that we expect to gather pace over the next decade. Efficiencies can already be viewed in product design, ongoing predictive maintenance and in reducing the amount of energy used and waste produced. Software providers in this space are moving from a fee to a subscription model, offering interesting new long-term investment opportunities.

Fashion: Governments and consumers are becoming more aware of the impact that ‘fast fashion’ has on the environment; from the amount of water used to produce goods (it is estimated that it takes 7,600 litres of water to make a pair of jeans*), to the amount of fabric that ends up in landfill or incinerated (Wrap** estimate 300,000 tonnes of used clothing goes to landfill in the UK every year). With an EU paper on the industry expected in 2020, we are looking at the sector across the value chain. IEM already invests in alternative fabrics, like Modal, which are high performing and more ecologically friendly than cotton, which has a high-water footprint and contributes to water pollution (pesticides).

Exciting outlook

Environmental markets do have a high tracking error relative to global equities and so it is right to categorise them as higher risk. However, in the near-term, valuations look fair but we are seeing solid performance on earnings and are confident of superior growth. Taking a longer-term view, in my opinion, the investment case underpinning these markets (regulation, economics, consumer appetite), has never looked so compelling.

 

About Jon Forster.

Jon is co-manager of Impax Environmental Markets Plc (IEM) and a Managing Director of Listed Equities at Impax Asset Management, the specialist investor in the transition to a more sustainable global economy.

*Source: Author Stephen Leahy “Your Water Footprint: The Shocking Facts About How Much Water We Use to Make Everyday Products,”

**Wrap.org.uk

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