Investing to Protect the Environment
Thanks to the emergence of a thriving environmental products industry, investing to safeguard the planet no longer means sacrificing returns.
1. Overview
Danica May Camacho was born on 30 Oct 2011, to the sort of fanfare rarely seen in Manila’s crowded public hospitals. That’s because she represented a global milestone – her birth brought the world’s population to 7 billion.
It was at once a joyful occasion and a reminder of the challenges posed by ever more people competing for finite resources. This is certain to put even more pressure on the environment, testing it to breaking point. Investors are increasingly alert to these challenges.
Many now recognise that, as stewards of capital, they have a crucial role to play in placing the economy on a more sustainable footing. But for them to become part of the solution, investors need to resolve a paradox.
How can they become responsible guardians of the environment and simultaneously secure an attractive return on their investments?
I believe the solution to that conundrum has already begun to take shape. With governments and businesses responding to growing public pressure to reverse ecological degradation, a distinct and attractive group of environmental equity investments has emerged.
These are companies that combine strong environmental credentials with innovative products and services designed to safeguard the world’s natural resources - $SAB.MC (Banco Sabadell)$ATI (ATI Inc)$CHX (ChampionX Corporation)$POST (Post holdings) and $HOG (Harley-Davidson Inc)
2. Public shaping the Agenda
Once a niche activity, environmental investing is now moving firmly into the mainstream. There are several reasons for that.
To begin with, society’s attitudes towards protecting the planet have changed considerably in recent years. That's partly because a growing proportion of the population has personal experience of the damage ecological degradation can cause.
Social media has also helped shape world opinion. Thanks to platforms such as Twitter and Facebook, people can now voice and share their concerns about pollution and sustainability in a way they couldn’t before.
People power has, in turn, brought about a change in government priorities. China is a striking example of this trend. In the run-up to the 2008 Olympics, the US embassy in Beijing started tweeting hourly air quality data from its roof-top monitor.
This was the first time the public had access to live data on airborne particles known as PM2.5, which kill more than 4 million people worldwide a year. As a result, local residents began voicing their concerns about air quality, eventually taking to the streets to stage large public demonstrations.
In response to growing social discontent, China’s leadership unveiled a ground-breaking action plan in 2013 to tackle 'Airpocalypse' with investments worth hundreds of billions of dollars and a slew of regulations. But this is unlikely to be the end of its spending boom.
3. Stars aligned for Environmental Industry
The combination of people power, government policies and economics has given rise to a thriving investable industry for environmental products and services.
China's generously-funded anti-pollution drive, for example, is likely to boost the prospects of firms that develop environmental technologies such as filters for engines and industrial applications for pollution control.
More broadly, as corporations worldwide embrace sustainable business practices, publicly-listed firms specialising in the development of a broad range of environmental technologies have mushroomed.
The economic benefits – and investment potential – manifest themselves in several ways -
1. Precision Agriculture - A GPS guidance system can save a farm of 1,000 acres about USD13,000 in variable costs annually, paying for itself within one year.
2. Renewable Energy - Renewable energy usage has been growing rapidly thanks to falling production costs.
3. Smart Cities - Installing a suite of connected infrastructure such as water, electricity and waste, or upgrading ageing systems should cut bills and improve resource management.
4. Energy Efficiency - Investing in electric public transport, using more renewable energy and increasing efficiency in commercial buildings and municipal waste management could cut energy costs.
5. Pollution Control - Pollution mitigation and prevention can yield large net gains for the economy.
Conclusion
Overall, the environmental products industry is already worth some USD2.5 trillion, and can grow by about 6-7 per cent per year.
That should matter to investors - sales growth of companies operating in this sector should outpace that of firms in the MSCI All-Country World equity index.
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