Thematic investing is a great way to connect with sustainability issues, because it directly addresses what we see and face every day, a delegate at last month’s Global ESG Summit commented at a panel discussion. The panellists agreed, discussing the benefits of using thematics and the UN Sustainable Development Goals as a way into conversations about sustainability with clients, and meeting their values and needs.
However, liquidity issues, a narrow universe and recent turmoil has plagued sustainable investing, with thematic equities, which includes areas such as water, clean energy, agriculture, ecology and healthcare, all underperforming this year.
Despite this, we know how important these themes will be for a sustainable future. For example, “where and how we consume food is one of the biggest human cost threats to biodiversity and our ecosystems”, Margaret Kuhlow, global finance practice leader at WWF International, said in her keynote speech at the summit.
Here, we take a look at five of these key themes – food, water, clean energy, social housing and healthcare – and speak to investment experts in each area about the challenges and opportunities they are seeing.
Water: Protecting the world’s most precious resource
Access to clean drinking water and safe sanitation infrastructure is critical to public health and underpins why water is the world’s most precious resource, according to Yohann Terry, portfolio manager at Man GLG.
Around 9% of the world does not have access to clean drinking water, and an accelerating population growth combined with urbanisation and the effects of climate change are causing significant supply and demand problems.
Terry, who manages the Man GLG RI Sustainable Water and Circular Economy Fund, which launched in March, explains how investing in circular economy practices “will play an important role” in driving the sustainable changes in manufacturing required to meet these challenges. He says Entegris is an example of a standout company providing advanced fluid treatment solutions to semiconductor manufacturers, which rely heavily on clean water to operate. “This optimises production processes and reduces waste within a critical, growing industry,” he adds.
Hadrien Gaudin-Hamama, ESG analyst at Mirova, agrees investing in circular economy solutions is key for addressing water issues. “Nature-based solutions and digital tools serving circular water use could reduce pollutions and improve water efficiency on a path towards resilient cities,” he says.
Terry adds: “The sector has faced a valuation reset since last autumn, but the long-term need for high-quality companies that deliver innovative solutions has never been greater.”
Food: War in Ukraine contributes to global food crisis
Since Russia invaded Ukraine in February there has been increased demand for more efficient agriculture, according to Kim Tilley, portfolio manager/analyst on the Lazard multi-asset investment team. The two countries make up the bread basket of the world and now face long delays before their farmland could again be productive. Another contributor to the food crisis is global fertiliser shortages.
The Lazard Sustainable Agriculture strategy invests in farm innovation and a lot of that is precision agriculture, Tilley explains. One example in the strategy is John Deere, which has a technology called See & Spray Select.
“It can be installed on a sprayer and has a set of high-tech cameras that are synced to processors – they identify only weeds via colour recognition,” says Tilley. “These cameras can scan more than 2,000 square feet a second and the identification to spray happens within a 200-millisecond window. Farmers can save nearly 80% on their herbicide costs.”
Another area of innovation is companies reducing the greenhouse gas emissions from agriculture. The sector, along with forestry and other land use, is responsible for nearly a quarter of greenhouse gas emissions annually. Tilley uses the example of Bovaer technology, which is added to cows’ feed and reduces their greenhouse gas emissions by 30%.
John Levy, director of impact at Franklin Real Asset Advisers, adds there is also an exciting opportunity in vertical farming, which he says “will mature into a defined real asset sector that will be a part of well-diversified portfolios”. He predicts over the next few years we will see “alternative use cases for underutilised land and vacant buildings, and create opportunities to drive lasting social and environmental impact”.
Social housing: Climate change and soaring energy costs shine spotlight on real estate
There has never been a better time to highlight the need for more quality, affordable homes, with the rise in the cost of living and the pandemic leading to increased working from home. With soaring energy prices, the role of real estate in the decarbonisation of the economy is also under the spotlight.
“There is a need to innovate within the social housing sector, to not only provide more good quality housing, but also to support the UK’s energy transition,” explains Steve Bolton, head of corporate debt, Europe at LGIM Real Assets. However, he adds, we must ensure social and affordable housing are receiving the investment needed to “at least facilitate but ideally accelerate” the energy transition.
At LGIM Real Assets, the team are looking for more innovative funding structures in their investments, including the “use of proceeds and decarbonisation-linked financings”, which Bolton says “allows us to see how our funding is being used, specifically into energy efficiency works, for example, or funding the development of new below-market-rent homes”.
He reiterates the call for more investment as he says: “With the need for investment in both new homes (to alleviate increasing need) and existing homes (to enable the energy transition) only increasing, we expect these types of structures to play a more important role in future partnerships.”
Resonance’s communications director Paul Handford says there is significant growing interest from investors looking at social housing for part of their wider ESG and place-based investment strategies, in particular from local government pension schemes.
“This trend is driven by pension funds looking to invest in the geographical area of the UK they operate in, making a regional social impact while generating a risk-adjusted return and still achieving broader national diversification.”
Clean energy: Thematic approach is vital if we are to decarbonise the sector
For Hector McNeil, co-CEO of HANetf, a benefit to a thematic approach to investing in clean energy is the exposure to renewables it offers investors. While the generation of electricity currently accounts for around 27% of global greenhouse gas emissions, decarbonising the sector is paramount, McNeil says.
A challenge for energy distribution systems is the speed at which the energy transition is taking place, Vincent van Haarlem, fund manager of the Triodos Energy Transition Europe Fund, notes.
Van Haarlem explains the pace of change means the energy grid needs to be updated to “facilitate a modified utilisation model with more decentralised, more sustainable supply and additional demand driven by electrification of sectors such as transportation and industry”. He adds that current supply chain disruptions are resulting in even longer lead times and increasing prices for hardware-based solutions.
“Innovators are introducing mitigating solutions for capacity restrictions – offering shorter lead times and requiring less resources than grid operators alone can offer,” says Van Haarlem.
Battery storage is a case in point, providing storage capacity and data-driven solutions that mean timing of energy consumption can be aligned with supply, leading to “a more efficient, more intelligent use of hardware compared with outright grid capacity expansion”, he says. According to the fund manager, the Triodos Energy Transition Europe Fund has invested in GigaStorage – a frontrunner in battery storage in the Netherlands and a strong contributor to the much-needed dialogue on this area.
Healthcare: ‘Picks and shovels’ companies are innovation powerhouses
One of the big shifts since the Covid-19 pandemic is the value of in vitro diagnostics (IVD), which underlies 70% of clinical decision-making in hospitals. It is becoming more appreciated as part of the healthcare industry, explains Maxine Wille, investment analyst for Equity Impact Solutions, at Regnan.
Wille says her team believes IVD, which includes devices such as Covid-19 tests and blood glucose monitors, will be “a critical enabler for a more preventative healthcare system, becoming a hotbed of innovation within diagnostics and enabling more rapid, cost-effective and accurate tests”. She adds these, in turn, will increasingly enable early diagnoses that lift survival rates, while also cutting treatment costs.
Wille also notes some contract development manufacturing organisations (CMDOs), the “picks and shovels” companies of the healthcare sector, are “under-appreciated innovation powerhouses. CDMOs are starting to produce novel, next-generation therapeutic modalities such as cell and gene therapies”. However, they must overcome some adoption hurdles as the modalities move into the commercial stage, says Wille.
Senior investment manager on the Pictet-Health Fund Grégoire Biollaz notes the opportunities in innovations that reduce healthcare costs. He says demographic shifts causing an older global population create the challenge of more age-related disease and means keeping people healthy for longer is key to curbing healthcare spending growth.
Says Biollaz: “Despite scientific innovation and progress in medical research leading to better, more efficient standards of care, healthcare costs are rising rapidly due to inefficiencies and wasted resources in the system. Technology has disruptive potential in this area and companies enabling better care and efficiency are poised to capture attractive markets for themselves.”
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