#Market Strategy — 11.01.2017

Benefit From The Promising Growth In Responsible Investments

Marc Eeckhout

SRI (Sustainable and Responsible Investment) aims to combine financial performance with a social and/or environmental impact.

file

A full range of SRI solutions are available to clients to suit their investment profile. There are numerous investment possibilities: Energy: renewable energy; energy management, distribution and efficiency; Water: infrastructure and treatment; Waste: management, equipment; Pollution control and Smart cities. SRI funds perform in line with (or better than) traditional funds in the long term.
 

SRI themes supported by a tighter regulatory environment

SRI is an investment discipline that takes into account Environmental, Social and corporate Governance (ESG) criteria to generate long-term competitive financial returns while having a positive societal impact.

Economic regulation, Capex and population growth, rising living standards, infrastructure deficits, finite natural resources and pollution are powerful drivers. More and more sectors are participating in the SRI story.

SRI themes are increasingly supported by the regulatory environment. Therefore, the climate change conferences “COP21” in Paris (December 2015) and “COP22” in Marrakech (November 2016) were important milestones for cementing the agreement to limit average global warming in 2100 to 2°C above pre-industrial levels. This will be a strong growth driver in the long term.
 

The main targets
 

  • Reduce greenhouse gas emissions by 40% by 2030

  • Increase renewable electricity to 20% by 2030

  • Cut carbon emissions by 26-28% by 2025 and increase renewable electricity to 28% by 2030

  • Cut energy consumption by 20% and raise renewable electricity to 22-24%

  • Increase non-fossil energy sources to 40% and cut emissions by 33-35% by 2030

Companies that have adopted adequate ESG practices are usually efficient and have solid business fundamentals. They are able to create value-added products and services. They tend to outperform in the long term. Sustainability trends are not yet fully appreciated by stock markets.
 

The most popular SRI themes

Energy: global energy consumption has more than tripled over the last 50 years and will increase by a further 37% by 2040. Therefore it is necessary to invest in:

  • Renewable Energies: Wind (wind turbine & gearbox manufactures); Solar: demand for solar is expected to rise because the price of solar modules in $ per watt produced is declining;  Renewable Power Producers
  • Energy Management and Distribution: smart grid suppliers, Lithium – Ion batteries: strong demand from electric vehicles and energy storage systems
  • Energy Efficiency: Buildings with efficient lighting, isolation, windows, power management and home automation.
  • Substitute fuels, such as propane, natural gas, electricity and hydrogen
     

Water: of the Earth’s water, only 3% is fresh. Of this amount, 7.5% is usable. Water used for agriculture and urban consumption is set to triple, and to double in industry. Without water there is no economic growth. Governments worldwide increasingly recognize the importance of useable water. Companies offering solutions in this area should grow tremendously in sectors such as:

  • water infrastructure: pumps, pipes, irrigation valves and smart applications
  • water treatment: chemical treatment, filtration, monitoring and water reuse
     

Waste: the steady increase in general waste is supporting growth of companies operating in waste management, hazardous waste management, waste technology equipment, recycling and value-added waste processing, etc.

Pollution control: pollution prevention and sustainability efforts must be accelerated. Fixing pollution problems is essential for efficient economically-viable manufacturing, providing services and addressing many environmental problems.

Smart cities: climate change has been a significant factor in the push for smart cities, in the hope that enhancing our highly-populated urban areas will decrease environmental risks such as gas emissions and waste production, while increasing efficiency in natural resource management (water and energy distribution).
 

Risks to our base case
 

  • Unforeseeable changes to policies in favour of the energy transition

  • Investors with doubts about this long-term investment

  • A significant deterioration in equity market sentiment, with investors turning from stocks to less risky assets

  • A strong decline in the oil price may have a negative impact on investments in environment solutions and renewable energies