Ten themes for sustainable investing
Hamish Chamberlayne,Portfolio Manager with Janus Henderson’s Global Sustainable and Responsible Investment (SRI) Team, details the ten sustainability themes – five environmental and five social – that guide the generation of the team’s investment ideas.
The development of the world economy has reached a critical juncture. Over the last century it has depended on the availability of cheap resources to drive economic growth. However, the supply and use of many natural resources are approaching their limits.
Climate change is the most subtle, yet arguably the most important, constraining factor. We believe the defining investment issue of our time will be transitioning to a low carbon and sustainable economy while maintaining the levels of productivity required to deliver the goods and services that growing and ageing populations require.
We invest in companies that are rising to the challenges posed by global megatrends and those seeking to transform the industries in which they operate. In building our portfolios we are also aiming to balance environmental and social sustainability. The ten themes that guide the generation of our investment ideas are split into five environmental and five social themes, and the concept of ‘sustainability’ runs throughout our investment process. We believe that well-managed companies that have a competitive advantage will generate sustainable cash flows and returns on invested capital.
Five Environmental Themes
Currently transport contributes to 23% of global greenhouse gas emissions from fuel combustion (source: World Bank), making it a significant target for government curbs. This risk presents an opportunity for companies at the forefront of pioneering new energy technologies, vehicle efficiency, and public transport infrastructure. For example, advances in lithium-ion (Li-ion) battery technology mean that fully electric vehicles are becoming a more viable option for the average consumer in terms of cost, range (distance per charge), and driving experience (eg, low noise, zero emissions, greater internal space), such that they could challenge the dominance of combustion engines and traditional auto manufacturers within the next 10 years. Public transport, including rail and bus networks, is an important area of investment for reducing emissions, noise pollution, and congestion through shared journeys. Additionally, cycling is increasingly being promoted by governments for health and environmental reasons, which is supportive of companies with goods and services linked to it.
The World Health Organization estimates that 1 in 10 people globally lack access to safe water, while 1 in 3 lack access to proper sanitation. It is expected that half of the world’s population will be living under the threat of water scarcity by 2030. Water is under growing pressure both on the supply side (insufficient fresh water, uneven distribution, poor quality, climate change) and the demand side (increasing use in agriculture, industry, and municipal/residential areas). Governments cannot act alone to solve shortages – significant investment is required in infrastructure, alongside behavioural changes among all consumers to bridge the supply gap.
If the world economy is to limit the increase in global average temperatures to 2 degrees over pre-industrial levels, then investment in renewable energies is going to be crucial. The price of wind and solar power continues to decline, and is now on a par with, or cheaper than, grid electricity in many countries. Solar makes up less than 1% of the electricity market, but could become the world’s biggest single source of renewable energy by 2050, according to the International Energy Agency. One exciting development for the market is the falling costs of viable energy storage solutions: storage can help smooth the peaks and troughs associated with variable output from solar and wind farms
Roughly two thirds of primary energy contained in fossil fuels globally is wasted. Efficiency improvements are vital if we are to achieve economic growth while keeping carbon emissions within recommended levels. Changes will not just be needed within the industrial and transportation sectors: residential and commercial buildings are the largest and most inefficient users of energy globally. Incandescent light bulbs are an extreme example of energy loss; in contrast LED bulbs can be 90% more efficient and last 10 times longer.
As the global population continues to grow and urbanise, cities are facing a sharp rise in the volume and costs of their waste. The World Bank estimates that if no steps are taken, the amount of global solid waste produced is on course to exceed 11 million tonnes per day by 2100, three times as much as produced currently. Rather than being recycled, the vast majority of waste that is collected goes straight to landfills or is incinerated, releasing lethal toxins, greenhouse gases and leachate (liquids). Companies involved in waste management, recycling, and environmentally-focused engineering and infrastructure consultancy companies will be at the forefront of enabling this to change.
Five social themes
Sustainable Property and Finance
Financial institutions can be a force for good, lending to the real economy and allocating capital to where it is most productive. Consumer (retail) banks provide essential products and services for savers and borrowers, including current accounts and residential mortgages, and allow smaller and medium-sized businesses to manage cash flows, secure commercial property, and grow their enterprises. Also falling within this theme are social sector organisations that deliver affordable housing and supported living, and life insurance companies, which provide financial security and peace of mind for individuals and their loved ones.
There are several key aspects to this theme including workplace safety, road safety, consumer safety, and safety from cyber-attacks and financial crime. According to the World Health Organization injuries continue to kill more than 5 million people each year. Of this, about 2.3 million people die as the result of workplace accidents or occupational illnesses, and road traffic injuries claim around 1.25 million lives. Outside of these figures, many more people are seriously injured or left with permanent disabilities. In the area of consumer goods, complex global supply chains mean extra vigilance is required for assuring the safety of food and household goods/products. Lastly, cyber-attacks are growing in sophistication and frequency, resulting in an increased demand for cybersecurity.
Quality of Life
Gross domestic product (GDP) data continues to be used as the best measure for economic well-being, but an increasing number of national and local governments are using happiness data and research in their search for policies that could enable people to live more enriched lives; the less tangible aspects to our societies are arguably as important to health and wellbeing as material wealth. Companies that are well-governed, act as responsible employers, promote societal well-being, and consider their impact across all areas of their respective supply chains, are vitally important for creating a sustainable global economy.
Knowledge and Technology
Global productivity growth has been slowing. Productivity growth is essential if we are to achieve sustainable economic growth and therefore provide an adequate economic environment for a growing and ageing global population. Productivity improvements can come from many different sources: among these are mobile communication and networks, connectivity, intelligent use of data, improved access to knowledge and education materials, robotics, additive manufacturing or 3D printing, and advanced material science. Technical innovation is also catalysing ‘the sharing economy’, a socio-economic ecosystem built around the efficient sharing of human and physical resources.
Ageing populations are beginning to put systemic pressures on health provision and social care services in many developed economies, and this is likely to be a trend for developing economies too. According to the Organisation for Economic Co-operation and Development (OECD) more than 25% of the global population is projected to be over 65 years old by 2050 compared with just 15% today. A US study also indicates that around 50% of lifetime health expenditure is incurred during the senior years, so the challenge will be providing affordable care and services for this growing segment of society over a longer time horizon – as life expectancies are also rising.
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