Solutions aimed at making efficient use of natural resources offer significant growth prospects for investors, and companies in this sector present excellent earnings momentum and attractive valuation, according to Bruce Jenkyn-Jones, managing director of listed equities at Impax Asset Management.
The London-based investment boutique focused on environmental markets, with €2.4bn in funds under management and advisory, is BNP Paribas Investment Partners’ sub-adviser in this space. The French firm, with €15bn in AUM and advisory in sustainability strategies, has a 28 per cent stake.
“Resource scarcity is a well-identified theme, but most investors and asset allocators have mainly focused on supply expansion, investing in commodities, renewables or unconventional gas,” says Mr Jenkyn-Jones. Allocation to companies providing efficiency solutions has been much lower, he says, but there are compelling reasons to increase exposure to this sector.
According to a recent study from McKinsey, in the last century global population quadrupled and global economic output expanded roughly 20-fold, with a jump in demand for different resources of anywhere between 600 and 2,000 per cent. However, commodity prices, as measured by the McKinsey Global Institute (MGI) commodity price index, fell by almost half when measured in real terms, driven by technological progress and the discovery of, or expansion into, new low-cost sources of supply.
But over the past decade there has been a remarkable rise in commodity prices (see chart), with resource scarcity being exacerbated by changing demographics, urbanisation, increasing wealth and rising consumption, particularly in emerging markets, as well as climate change.
As replenishing reserves of materials is increasingly difficult and expensive, the growing resource scarcity shocks across a number of sectors will have to be met by an efficiency revolution. “We are at a tipping point where resource scarcity is really starting to kick in,” says Mr Jenkyn-Jones.
The target investment sectors for efficiency solutions are energy, water infrastructures, waste management and related technologies. For example, in the lighting sector, LED technology is considerably superior in both efficiency and lifetime than conventional light sources. Its market share is projected to grow to 70 per cent of the global lighting market in 2020 from the current 10 per cent. Companies such as Dialight in the UK which “is in the vanguard of finding the right markets for LED technology,” are interesting investment opportunities.
The universe of around 350 companies worldwide in the efficiency solutions space is large enough to enable construction of a diversified portfolio.
Equity funds in this sector such as the Parvest Global Environment or Parvest Environmental Opportunities are expected to deliver superior performance over the long term, having similar volatility to global equities, as they invest in areas that grow faster than the rest of the economy, states Mr Jenkyn-Jones.
However, there is a “wider macro risk” to efficiency solutions, as this sector is cyclical, being exposed to the consumer markets, he warns. “We are currently overweight efficiency solutions, but if we became more negative on the wider economy, we would be more cautious and look for utility or more defensive type of companies.”
The environmental sector is much more than renewables, stresses Eric Borremans, head of development, sustainable investments at BNP Paribas Investment Partners. “Unlike renewables, which are driven by regulation, efficiency solutions are driven by pure economics, and this is one of the reasons why there is significant growth potential. Companies invest in efficiency solutions because it makes financial sense.”
