Investing for a sustainable future

Graham Smith
Graham Smith
Market Commentator6 December 2018

2018 is on course to be remembered as another year of severe weather events. From a devastating drought in Australia to Siberian winds then scorching summer temperatures sweeping across northern Europe, the year goes down as another marker of a world entering a period of extremes.

So when world political and business leaders convene at the World Economic Forum’s Annual Meeting in Davos in late January, unsurprisingly, perhaps, sustainability will be a discussion point. Along with global economic leadership and the “fourth industrial revolution”, “ecological challenges threatening socio-economic development” are set to be a key focus1.

Climate change will, of course, feature prominently in those discussions, but so too will the challenges arising from a rising global population and the pressing need for governments worldwide to improve the living standards of the poor.

According to the World Economic Forum’s Global Water Initiative, water is the “ultimate systems challenge”. That reflects its universal use as drinking water but also its status as an essential ingredient in food production, manufacturing, the energy industry – virtually as many areas of human endeavour as you care to mention.

The challenge is immense too. The United Nations estimates that more than two billion people lack access to safe drinking water and more than double that number lack access to safe sanitation, all at a time when climate change is only likely to increase the pressures on safe and equitable access2. Current methods of transporting and treating water contribute to a downward spiral of rising greenhouse gas emissions.

These though are exciting times. The “fourth industrial revolution” will potentially provide some of the answers as to how to best use and treat water and how clean and waste water can be transported efficiently.

Events like Davos provide the opportunity for governments and companies to forge partnerships aimed at tackling very big issues like these. The emergence of water crises the world over in recent years – from California to South Africa and, this year, most starkly in Australia – presses home the urgent need to act.

While companies with existing pump, pipe, meter and filter technologies will likely see demand for their products increase, a substantial space has been opened up to innovators.

The internet of things – which uses electronics and sensors to form information networks – is one way in which getting water to and from the right places could be improved. Virtual reality and artificial intelligence (AI) techniques are others. AI, for example, could be used to deduce what the output from a physical sensor might be were it installed in an inaccessible location.

The World Economic Forum envisages a future in which remote sensing will be used to improve drought and flood forecasts, and enable the real-time monitoring of water supplies or even the creation of efficient water trading platforms3.

The large-scale projects the world needs will demand a good deal of capital from both the public and private sectors. That’s where investors can make a valuable contribution.

From an investor’s point of view, the advantage offered by a fund committed to sustainability is the chance to gain an exposure to companies already tuned in to an increasingly challenging world environment. There’s also the possibility of acquiring a portfolio that behaves differently from other, more conventionally invested funds through the economic cycle, thereby helping to smooth out overall investment returns.

The potential disadvantage is that limiting investment only to environmentally sound companies reduces the number of potential investments at a fund manager’s disposal.

In the real world though, all active fund managers have to slim down their investment universes to a manageable number of stocks in one way or another. It’s the only way they can meaningfully assess and compare companies then continually monitor them.

In buying an environmentally sustainable fund, an investor is thereby simply exchanging one type of investment filter for another. How successful that proves to be on a relative basis largely comes down to the skill of the manager.

So as part of an already well diversified investment portfolio, it could make sense to set some money aside for a long term global trend, which has a better than average chance of producing stable or rising returns as the pinch points in the world we all know are starting to, well, pinch.

Funds are starting to emerge to take care of the sustainability question, including a new one from Fidelity – the aptly named Sustainable Water and Waste Fund. Managed by Bertrand Lecourt, this fund will invest in companies aiming to meet growing demand, as well as companies benefitting from improving water use. This diversification of interests guards against an overreliance on innovators continually developing a stream of novel solutions.

Companies on show in some other funds can also provide an exposure to water scarcity solutions and may well continue to do so as the pressure to maintain sustainable living environments intensifies. For example, Microsoft, whose Water Risk Monetizer Tool is already helping companies improve their decision making about current and future water needs, is currently the largest holding in the JPM US Select Fund.

Sources:

1 World Economic Forum, 05.11.18

2 UNESCO, March 2018

3 World Economic Forum, 25.09.18


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