Three structural trends are driving investment that benefits the environment, says thematic investor Rainer Baumann.
Demographic changes in society combined with greater regulation and digitalization are driving sustainability investing onwards, allowing the creation of thematic funds that can capitalize on long-term structural shifts.
It is being led by the gradual dying out of the post-war generation known as the baby boomers, who are now in their 60s and 70s, and their replacement with the generation of millennials born since the mid-1980s who have a far greater interest in sustainability than their parents or grandparents.
“The first major trend is the replacement of baby boomers with millennials who are becoming more and more influential in taking investment decisions,” says Baumann, Head of Investment Management at RobecoSAM.
“We know from various studies that millennials will take a completely different attitude towards investment, as they also do in terms of how they behave and how they consume. They have a higher sense of responsibility, and will also take environmental issues more into consideration than previous generations. So, changing consumer habits is definitely one driving force.”
“The second trend is regulation – we see encouraging signs that it is moving in the right direction, and is driving more concrete rules that is supporting the wider adoption of environmental, social and governance factors (ESG) in investment and society.”
“But perhaps the most interesting trend is the fast acceleration of innovation, particularly in digitalization – we see a huge transformation of many traditional business models. That might be scary for certain traditional industries, but this change and transformation is also a huge opportunity for new businesses.”
“And that in a nutshell is currently what makes thematic investing so exciting – this combination of a huge technological shift with tightening regulation and changing consumer habits.”
Baumann says the automotive industry is a good example of how all three trends apply, as consumers demand more environmentally friendly cars, while regulation progressively tightens emissions standards and innovation makes cars more efficient.
“One sector that is going through a fundamental shift is the automotive industry, and the electrification of that sector; I guess we’ll see more innovation there in the next few years than we’ve seen over the past 30-40 years,” he told a recent Responsible Investor conference.
“We now have one million cars being sold this year that are either electric or hybrid, and we expect these numbers to grow to 8-9 million by 2020. And then it really kicks in by 2030-2040, when we will reach the point where more electric cars will be sold than those with traditional combustion engines.”
“So, there is a transformational shift that has created a completely new market for investment. That is something that at RobecoSAM we currently look very closely at; we look at how we can benefit from that by building portfolios that invest in the new value chain that is starting to come up.”
“Besides the car makers, there is of course a huge industry in the car supply chain, which is changing from the traditional industry to new applications in things such as car lighting systems. The next big step will be in radar technology that is essential in distance or speed monitoring. This ultimately is the technology that will allow cars to drive themselves.”
Meanwhile, the higher oil price seen in recent months makes petrol-driven cars more expensive run – aiding the sustainability cause – but that dynamic is becoming irrelevant, Baumann says.
“A rising oil price is always an indication of a strong economic growth, but generally I would say we are becoming more and more independent of the oil price, so it really doesn’t matter that much anymore,” he says.
“In the mobility area, for example, we are moving from combustion engines to electric vehicles, and we have seen development in building technologies where we’re moving away from fossil fuel systems to electricity-based systems.”
“What will become increasingly important will not be the oil price, but the electricity price. There we see the price remaining relatively low and stable, because we have an increasing supply of electricity from clean and alternative sources, and that keeps this transition ongoing.”
Baumann says investors should also not forget how the most basic or traditional of industries can still become attractive thematic investments from their innovation potential.
“We have a thematic investment strategy in the water space; this is considered to be a mature theme, but there is a lot of innovation going on, particularly in emerging markets, which gives our portfolios a lot of investment opportunities, and as a result, great returns,” he says.
And one trend that is growing in importance is investing in companies that can contribute to the United Nations’ Sustainable Development Goals. Introduced in 2015, the 17 goals range from eradicating world hunger and reducing global warming, to improving health care, technological access and educational standards in emerging markets.
It has led to the creation of the RobecoSAM Global SDG Credits fund targeting the bonds of companies whose products or services help to achieve the goals. A scoring system is used to find both positive and negative contributions which can be used elsewhere within both RobecoSAM and Robeco.
“We use a framework of the SDGs to report on the environmental benefit of our investments, and have made quite a substantial effort to map about 3,000 companies,” he says. “This framework is now being applied to our strategies to give a better insight into how these investments relate to SDGs – which ones have positive or negative impacts that need to be taken into account.”
“The second step is defining a framework of clear KPIs that are quantifiable over time in what a company really achieves in terms of water saved or emissions saved. It is quite a sophisticated exercise because all companies are different, operating in different markets, but we’ve put a lot of effort into it so that we can make clear assessments on the impact of these companies.”