From exclusion to solutions: the modern approach to this investment opportunity

What does the sustainable investing space look like?

Hubert Aarts: Really, how we look at it at Impax is not just a theme or not just ESG, but we incorporate everything. For a company to become part of our investment universe, it needs to have strong credentials for the products and the services they provide.

Those services could be building energy efficiency, energy-efficient air conditioning systems, water treatment infiltration companies, leak detection companies, packaging companies for sustainable food - extending the shelf life so you have less food waste thrown away. Within resource optimisation, making sure that you have more recycled materials, reuse materials, don't come up with single-use plastics, et cetera, so bring less waste to the landfill.

Overall, we also look at the sustainability angle from the company and how it behaves. So we look at the management team, the reliability, the strong environmental credentials. What does that mean? We ask the companies, "What are your sustainability targets? How are you going to reduce your carbon footprint? How are you going to reduce your water consumption? And also, how are you going to treat waste coming out of your factories? How are you going to measure that? Is it properly scientifically measured? And are you remunerated for hitting those targets?"

We have what a company does, how it behaves, what it does, and how you measure it. And then we have strategies that look at a more sustainable area, wider than just an environmental solution. 

Also, social offerings - access to education, access to finance, access to healthcare in some areas. So, we have quite a broad spectrum in our universe and opportunities to invest in.

How is Australia positioned compared to peers?

We've seen a good pledge from the Australian regulator, from the Environment Agency as well, a proposal to say, "Well, okay, we need to reduce our coal and oil and gas industry”. We need to reduce that after 2032, I believe. So that is one good policy. The question is, how are you going to do that? You must have thought about it, you can't just introduce those rules.

As you know, there are a lot of opportunities from wind and solar. I know that electrification of the transportation sector might be a very slow rollout because the petrol price per litre here is two Australian dollars, whilst in Europe it's four Australian dollars per litre, or in the UK, three and a half. So you definitely have a transition cost there where you say, "Is it worthwhile for a consumer to transition to an electric or hybrid vehicle if your petrol price is not the issue?" So we need to have more regulation on that front, maybe higher stamp duty on it, or maybe make your electric vehicles subsidised by the combustion engine so you can transfer that money from combustion engine into subsidies for electric vehicles.

We talked about the energy generation and we talked about the electrification of transportation sector. And then, we need to see more effort in new buildings. Travelling in Australia, Melbourne, and Sydney, a lot of new buildings are going up. Are they really the new latest green buildings that we can imagine? I've still seen incandescent light bulbs in some new buildings instead of LED lights. I think the need across the whole value chain, you need to ask, “Well, what is available? What can we introduce and what is achievable? Therefore, I think Australia has to play a bit more catch-up.

Where do you see the biggest opportunities in this space?

We have really four or five big drivers across the opportunity set. One is the continuation of building energy efficiency, replacing old infrastructure. If you have a hotel, a hospital, or school, and your energy bill is pretty high, you can really cut your energy bill. And at the same time, your carbon footprint by replacing your heating, ventilation, cooling equipment. There is also regulation within that. That means that your new equipment is also environmentally friendly because you have different refrigerants within that. So you capture two positive trends there, and that is affordable.

Then we see the transportation sector. We think we can invest in companies that provide components for the electrification. At the moment, we do not invest in the manufacturers of the vehicles, because it's a different story but an investment theme that could be very interesting. But we, as portfolio managers, need to find investment opportunities from a valuation perspective.

Then we have the sustainable food value chain. 30% of calories for consumption are never consumed. So how can you tackle that at the harvesting side, at the packaging side? Have better technologies for sorting, logistics, make sure that the supply-and-demand match is better, make sure cooling systems are more efficient, make sure at the consumer side that you have a better packaging, you extend shelf life food so you don't throw it away too early. In Europe, they're talking about doing away with the maturity date on food or expiration date on food and going to best-before date because it doesn't mean it's not good anymore, but it might maybe not look or taste as well.

And then we have the whole water issue, the everlasting chemical, the PFAS, the polyfluoroalkyl substances. We don't realise how much contamination there is still in water, after treating wastewater, going back into rivers and the lakes. And the farmers are the big users of that water to irrigate fields. They contaminate crops, so they need to have safer water. So we need to invest in companies that provide filtration systems, monitoring systems of water. We have those opportunities.

And then, leak rates. The utility spectrum still sees 15-25% of water leaking away whilst you have wasted all that energy cleaning that water. Then the consumer cannot use it. So you fix your leak rates, you reduce your carbon footprint as a utility. But also we can invest then in pipe manufacturers. And we have a lot of manufacturers with, let's say, plastic parts or fresh water and drinking water made from 60% recycled materials as well. So many environmental opportunities are coming together when you fix one solution. There are many more opportunities, but that's where we remain very excited. Building energy efficiency, transportation sector, food sector, and the sustainable water value chain.

Can you share some examples of the innovative investments you have identified in this space?

If we think about the latest technologies in buildings' energy efficiency, we know that insulation materials are getting better and better. Of course, LED lights consume 80% less electricity, so that is a must to go that way. That's the easy bit. If we go a bit more technical, let's say, natural ingredients, we have food, but it still contains a lot of chemical ingredients. We have quite a few companies now that we can invest in. They come up with solutions to make those chemical ingredients, replace them with natural ingredients. It's better for human beings, but also better for the environment because food eventually ends up at the landfill unless you compost it. But also, when you compost it's much better for methane gas generation that you have no chemicals in there.

And then the latest innovation is also within the water treatment side. PFAS, again, everlasting chemicals - very difficult to trace those everlasting chemicals in the wastewater stream in the drinking water stream. We have companies that come up with the latest testing technology that's helping that. And then secondly, we need companies, and we have those, that come up with better treatment opportunities because you can trace it, but then you also need to be able to treat it. So there's a lot of innovation going on.

And then lastly, I haven't mentioned, the whole reshoring, what's happening in the US from technology manufacturing in areas where you need to build new factories. Usually factories are energy intensive, water intensive, and they need a lot of logistics. So we have companies coming up with better, innovative industrial productions, facilities and systems to reduce your water consumption, electricity consumption. And then we have the hydrogen opportunity within the heavy trucking or for the shipping area, we can invest in companies that provide latest technologies generating green hydrogen. It's small, it's at the early stages, but we see more and more money going into hydrogen development as well.

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Impax offer a range of investment solutions, which provide opportunities to invest in the transition to a more sustainable economy. Each is underpinned by proven, proprietary investment tools. To learn more, visit their fund profile or website.

Managed Fund

Impax Sustainable Leaders Fund

Global Shares

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