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Portfolio perspectives | Podcast - 14:32 MIN

Talking Heads – Listed equities and the shift to a sustainable economy

2 Authors - Portfolio perspectives
11-20-2023 · 7 Min

How can investors invest in listed equities benefiting from the transition to a more sustainable economy? What are some of the key drivers and how does one identify companies that stand to profit from these trends?

On this Talking Heads podcast, Andy Craig, Co-head of the Investment Insight Centre, talks to Hubert Aarts, Deputy Chief Investment Officer for listed equities and Senior Portfolio Manager at Impax Asset Management, about the outlook and the opportunities in areas from renewable energy, environmentally friendly buildings and green transportation to sustainable housing and offices.

Hubert argues that efficiency gains can come in many forms including reducing food waste and smart irrigation, and resource optimisation and a leak-free water infrastructure. He highlights policy initiatives such as the EU Green Deal, the US Inflation Reduction Act and China’s plan for a lower carbon economy by 2030.

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Read the transcript

This is an audio transcript of the Talking Heads podcast episode: Listed equities and the shift to a sustainable economy

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 on the topics that really matter to investors. In this episode, we’ll be discussing investing in environmental markets and the opportunities arising from the transition to a more sustainable economy. I’m Andy Craig, Co-head of the Investment Insight Centre. And I’m delighted to be joined today by Hubert Aarts, Deputy Chief Investment Officer for Listed Equities and Senior Portfolio Manager at Impax Asset Management. Welcome, Hubert.

Hubert Aarts: Thank you, Andrew. I’m delighted to be on this podcast

AC: Just so that listeners know, BNP Paribas is a minority shareholder in Impax Asset Management, which was founded in 1998 and has since pioneered investment in the transition to a more sustainable economy. Can you talk us through the path Impax has walked during this time and the role of investing in listed equities benefiting from the transition to a more sustainable economy?

HA: Impax’s vision is that when you build portfolios you should look at companies that have a sustainable business model – so not just listed companies that can make profits, but looking at how they make profits.

Over the past 25 years, we have compiled a universe of companies that not only offer a sustainable environmental solution, but whose business conduct is up to the standards we expect. From 50 names 25 years ago, we now have more than 2 000 names are listed on stock exchanges across the world that we classify as sustainable or environmental solution providers.

Over those 25 years, many investors – such as BNP [Paribas] have followed Impax and said, ‘that’s a very interesting proposition and we want to work with you’. So our client base has grown significantly. More importantly, we have been able to hire more people in the listed equity team, so we can cover more stocks and engage with more companies. We can better analyse companies’ business models, identify their sustainable products and the environmental solutions they offer. We can also judge the quality of their management team and how the management is incentivised according to the sustainability targets they set themselves.

AC: Environmental market investment opportunities have grown substantially over the last 20 years. What are the key drivers in these markets and how does Impax seek out companies that will benefit from these trends?

HA: We look at six main areas to find sustainable companies.

The first is anything to do with energy, energy efficiency and renewable energy. Secondly, companies can make their own premises far more efficient, installing LED lights, energy-efficient air conditioning, heating and ventilation systems and more insulation. Companies can also build more sustainable housing and commercial residential real estate.

There is efficient transportation. We see significant inner-city pollution because of transportation, but shipping and airlines also need to do their bit. We can invest in companies making components for electric vehicles, as well as EV batteries and charging stations. Hydrogen is a huge opportunity for the heavy transportation industry such as shipping and heavy trucking.

A third area is sustainable food. 25% of the food calories produced is never consumed. There is wastage in packaging, transport and simply the food that households, retailers and restaurants throw away. So, we can invest in companies [developing systems for] more efficient harvesting via software and smart irrigation, and better logistics via more efficient software to help meet demand within the food value chain. Food waste can also be less damaging for the environment if natural ingredients are used. You can make energy out of food waste by composting it.

Then there is the digital infrastructure. We need to upgrade the grid [and] use far more efficient servers and so we can invest in companies that provide efficiency drives within digital infrastructure.

Another bucket is resource optimisation. What we are trying to do is avoid single-use products, specifically plastic ones. If you cannot avoid using plastic because it’s light, then make sure that you can reuse or recycle it or replace single-use plastics with fibre-based or even cotton-based products.

Another segment is the water value chain, which we break down over three areas. One is infrastructure – anything to do with building water supply and treatment facilities and related utilities. The big drivers are in the developed countries. We have still a lot of water leakage – around 15% to 25% in major cities – which means we are using a lot of energy treating water and then it just leaks away. Of course, growing urbanisation needs more water, and water quality is also an issue.

AC: Policy is critical in driving forward the environmental transition. Can you give us examples of supportive policies for the companies that you invest in?

HA: We have seen policy accelerate in recent years. During Covid, there was a lot of stimulus to keep economies going and much of it went into sustainable areas. That was a positive message. In Europe, we have the Green Deal, in the US, the Inflation Reduction Act, the Chips [and Science] Act and the Jobs [Jumpstart our Business Startups] Act. China said it wants a lower carbon economy by 2030, but net zero by 2060.

Within the Green Deal, what is important is sustainable projects – more onshore and offshore wind [power] and more solar power. It also looks at what can be done with buildings and housing. Heat pumps are important because it lowers buildings’ carbon footprint. A lot of city pollution comes from heating and ventilation, so if you can make that more efficient by using heat pumps or ground source heat pumps, it’s a good start.

In the UK, there’s a need to reduce dependence on gas and some families in remote areas are still burning oil, so they need to switch to ground source heat pumps or solar and wind.

The US Inflation Reduction Act includes three high-level areas of stimulus. One is to ramp up onshore and offshore wind and solar power as well as offering heat pumps. The second area is more efficient buildings – replace old heating and ventilation equipment, have energy efficient glazing and buildings, insulation materials, better roofing, better LED lighting, and so on.

And the third area is the [electricity] grid upgrade. We can talk about renewables and electric vehicles, but what’s critical is to be able to take the electricity onto the grid, so the expansion of charging stations is another important driver. You need to upgrade the grid, but also provide charging stations for the hydrogen transportation opportunity.

Still in the US, the Chips Act is about reshoring technology that had been outsourced to the Far East. When you build factories in the US for digital equipment and products, you need to do that in an efficient way, so we invest in companies helping to reduce water, electricity and energy use.

AC: From an investor’s perspective, which type of companies are accessing these interesting and exciting opportunities across this broad range of sectors and activities?

HA: We focus on solution providers that are helping in the transition to a more sustainable economy. For example, efficient air conditioning and heating ventilation companies are seeing their order books filling up with clients who need to replace a 10 or 12-year-old piece of equipment with a more efficient one. Although the lifespan might still be another 10 years, the savings you can make today by replacing it earlier are significant. Building energy efficiency is low hanging fruit.

In the transportation sector, there are companies that make the crucial components of a hybrid or a full electric car. As the use of hydrogen develops, there are industrial gas companies that have good knowledge of the technologies to help use hydrogen in truck and shipping engines.

In food, we can invest in companies that provide technologies, software and hardware for farmers to help their resource efficiency. We can invest in companies that help to recycle, reuse or compost waste. We have companies to deal with the waste from the electrification of the transportation sector, such as batteries. In the water value chain, we can invest in companies testing and monitoring water. We can be more conscious about the use of water when we have smart irrigation.

This whole field [of environmental solutions] is very broad and we’re excited to see the growth, the investment opportunities, the margin development of all these companies because they are producing the environmental solutions that are needed, that have good, strong demand, and therefore also profitability and strong cash generating characteristics.

AC: When you at Impax report on the impact of the portfolio companies, what sort of methodology and metrics do you use to measure the companies’ impact?

HA: We have developed a methodology that looks at the Scope 1, 2 and 3 [greenhouse gas/GHG] emissions of all the companies in the portfolio. From that number, we ask how do they avoid CO2? We can then deduct the CO2 avoidance from the emissions. At the next level, we ask how much water is treated by companies in the portfolio? The other number we provide is how much renewable energy is generated by some of the companies. Lastly, we look at how much waste has been reused, recycled and kept out of the environment. Our report is called Impact. It’s on our website, where we explain the methodology and the outcomes.

AC: Thank you for joining us today.

HA: You’re welcome, Andrew, it was a delight to explain our investment philosophy.

Disclaimer

Please note that articles may contain technical language. For this reason, they may not be suitable for readers without professional investment experience. Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice. The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns. Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions). Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.

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