Talking Heads - Our 2024 Thematics Barometer

This is an audio transcript of the Talking Heads podcast episode Our 2024 Thematics Barometer

Andrew Craig: Hello and welcome to the BNP Paribas Asset Management Talking Heads podcast. Every week, Talking Heads will bring you in depth insights and analysis through the lens of sustainability of the topics that really matter to investors. In this episode, we’ll be discussing a new report on thematic investing. And just to be clear about what we mean by thematic investing, we’re talking about the construction of portfolios based on choosing companies that are expected to benefit [from] or are promoting a structural change that should over time significantly impact economies and redefine business models. Examples would be climate change or environmental issues, technological change, resource scarcity. All of these would qualify for thematic investing. And of course, it’s an approach which goes across regions, industry sectors and investment styles. It has grown considerably in recent years. I’m Andrew Craig, Co-head of the Investment Insight Centre and I’m joined today by Mark Buckley, who is global head of Investment Management with Coalition Greenwich. Welcome, Mark, and thanks for joining me.

Mark Buckley: Thank you, Andrew. It’s a pleasure to be here now.

AC: As I mentioned, BNP Paribas Asset Management has recently published its third report on thematic investing research. The study was conducted in partnership with BNP Paribas Corporate Investment Banking Division and with your organisation, Coalition Greenwich. The survey covered almost 200 institutional investors and intermediary distributors in Europe, Asia and North America. To start, it would be good to talk about the findings . How and why are investors using thematic investing strategies?

MB: 59% of the respondents said that we are using or plan to use thematic investing strategies in either our organisation’s portfolio or our clients’ portfolios. That was up from 52% last year. Another 18% said we may consider, haven’t decided yet. And then 23% said no, we do not plan to invest in thematic investing strategies.

When we look by intermediary distributors, we have seen that they’re using thematic investing to a substantial degree. 76% said that we are either using or plan to use and this was 77% last year. That’s really a high level.

In 2023, 35% said we’re using or plan to use thematic investing, this year [it was] 50%. Now that’s a big jump year on year and particularly with institutional investors.

We also looked at the usage by region and we had already seen that in Europe it was very prominent:  about 2/3 saying that we’re using or planning to use thematic investing in Europe. We saw growth came in the other regions. In Asia, 41% last year, 51% this year. In North America, 23% last year, 41% this year staying we’re using or planning to use thematic investing. So, thematic investing [is] mainstream in Europe and with intermediary distributors. Where we’ve seen growth year on year is with institutional investors. And in both Asia and North America.

One of the things we asked about is where investors are allocating, which asset classes are they allocating to for thematic investing. And most common thematic investment is in active equities. We see continued investment in fixed income and multi asset. The big change is really private markets. If you look just at the private markets, the percentage of investors who say they are deploying thematics at a level of 10% or more of their or their clients’ portfolio, that increases from 14% to 24%. And we see particularly increased interest in private markets thematic investing from institutional investors. That’s one of the big changes year on year.

Now we also asked are they using thematic investing for short-term tactical investments or for the longer term. 95% of the respondents said we’re using thematic investing for the longer term. The percentage that said we’re using it for shorter-term tactical investments [was] highest in Asia:  31% said yes, in Europe, 22%, in North America just 7%.

Now switching gears slightly, I just want to talk for a moment about the objectives, you know, why are investors using thematic investing? What are e some of the key reasons? Two main reasons came out. The first was achieving a positive impact and making a contribution to sustainable outcomes across all regions. 

That was the main reason globally and number one in Europe.  The second most highly chosen objective was to enhance investment returns. And here we saw that this was the number one reason in the other regions: in Asia and in North America.

Now we’re interested in asking the non-users, why are you not using it? And those two reasons are #1 investment performance concerns and #2 perception of high fees and cost. And those have been the top two for all the surveys that we’ve conducted.

AC: That’s very interesting to hear that the money invested is, growing and [that it] is a global approach to investing. If we look [at] the themes that investors are particularly interested in, what would you say are the themes that investors find most appealing?

MB: As a starting point, we asked investors what they consider to be [the] most important factors when selecting a thematic investment. And these included the investment process, the portfolio managers, risk management. But clearly the number one factor is the relevance of the theme.91% of the investors said that the relevance of the theme is either very or extremely important to them. So, it’s critically important to understand which strategies investors find most appealing.

And as a result, we asked about a series of sustainability themes as well as innovation and disruption themes. The sustainability theme  was certainly the most appealing across all regions. Number one was renewable clean energy and number two was climate change solutions.

There were a number of other themes that came up that have a significant investor interest. First net zero: about 21% said this is something [they were] really interested in. 

Some other environmental themes that came up strongly [were] water –  this was in particular with intermediary distributors, [and] circular economy. This was up particularly in Asia. Then on some of the social themes, health and well-being was pretty strong again this year. I would highlight demographics and ageing population, particularly with institutional investors. And finally, diversity and inclusion. This is very prominent in North America in particular.

Now switching to the innovation and disruption themes. In 2023, we asked about artificial intelligence and robotics as one choice. We split those two choices in the research this year. As a result of that, but also the fact of just the sheer focus on artificial intelligence, artificial intelligence just rocketed way ahead of anything else in the innovation and disruption theme grouping. Others where here was significant, significant investor interest: healthcare innovation on the institutional investor side, strong and up; biotechnology also up strongly with institutional investors; and then robotics, particularly in Asia.

AC: The themes that you’ve mentioned obviously reflect the topics and the developments which are shaping the world, and which have been driving markets over the last 12, 18, 24 months. Mark, if you were to give us some sort of insights into the benefits investors perceive from thematic investing, what would you highlight in particular?

MB:  Number one is around achieving a positive impact, making a contribution to sustainable outcomes. Thematic investing really fulfils this objective for many investors.  As an example, 91% see a link and a quarter see a very strong link. The second objective was enhancing investment returns. We asked a question about what impact do you think that employing thematic investing has on short-term and long-term investment performance. For the short term, [which] we defined as one to three years, 33% said that employing thematic investing has a positive impact on investment performance. If we look across the investor type, what we see is that institutional investors, 36% said they see it as a positive short-term impact.

Where we’ve seen a change over the years is on the intermediary distributors. In 2020, 67% said positive impact short-term; that went down last year to 38% and this year at 29%. The long term we define as three to five years. And the headline is 82% of all the respondents said that they think that investing in thematic investing has a positive impact on long term investment performance.  We asked over the next three years, how do you plan to use thematic investing in your portfolio and 53% said that they plan to increase [their] focus on thematic investing, particularly in equities, fundamental active equities. 

We did see it across all asset classes; about 1/3 of the investors saying that they plan to increase the focus on thematic investing in fixed income. But again, private markets one of the themes coming up quite strongly, where 51% said [they] expect to increase the focus on thematic investing.

AC:  That was a very comprehensive review of thematic investing, which, as you’ve emphasised, is seen by investors as a means of making a difference as well as enhancing potentially investment returns. Thank you very much for joining me, Mark.

MB: Thank you.