Locking into sustainability and ESG investment
Industries like plastics could face increased pressure due to growing awareness of sustainable investment
The current trend of investing in companies and assets that are well positioned to benefit from the shift to a more sustainable global economy appears to have an unstoppable momentum.
The new dynamic has been welcomed by most investors and yet the idea of investment aligned with a commitment to the advancement of environmentally friendly business practices and the conservation of natural resources is not new.
Speaking with The Asset in Singapore recently, Kirsteen Morrison, senior portfolio manager at Impax Asset Management, highlighted that her firm locked into the principles of sustainable investment as far back as 1998.
Morrison was in Asia as part of her work with wealth manager St. James's Place. The UK listed wealth manager chose Impax in 2018 to manage their Sustainable and Responsible Equity Fund after what Morrison described as “one of the most rigorous selection processes” that she had undertaken.
The St James’s Place fund looks to benefit from opportunities arising from this shift to a more sustainable environment, such as the clean energy transition, advancement in healthcare technology and the mitigation of climate change.
Impax manages approximately 15.1 billion pounds (US$19.39 billion) as of September 30 for institutional and individual investors globally, and is committed to providing strong long-term risk-adjusted returns.
The asset manager believes that demographic change, resource scarcity, inadequate infrastructure and environmental constraints will continue to shape markets profoundly.
These trends, which will progressively drive the transition towards a more sustainable global economy, should lead to outperformance for well-positioned companies.
The London-based firm has 52 investment team members across offices in the UK, Hong Kong and the US. The Hong Kong office was launched over a decade ago at the same time Impax launched its Asian product.
Sustainability is very much part of the firm’s DNA and has been the basis upon which strategies have been built since the firm was founded over 20 years ago.
A strong theme coming out of Asia, Morrison says, is that Asian family offices are beginning to look at investing in assets that support sustainability and ESG and are leading that trend in Asia. She noted that both banks and high-net-worth clients are also starting to get interested and enquiries are increasing.
“It's the rising awareness, more broadly of difficulties and challenges, but with wealth passing to the younger generation who are more aware and more interested, that is leading to them making these inquiries,” says Morrison.
“They want to manage money differently and that is increasing this traction and momentum. And we're seeing that globally,” she adds.
But unravelling which companies will be long-term winners in the new investment environment can be a challenge.
Among the industries under threat are plastic producers as the accumulation of plastic in landfills and oceans is a rising environmental risk.
And according to recent reports, the petrochemical-derived material now represents a growing threat to our health too. A study from the University of Newcastle in Australia revealed we could be ingesting microplastics.
According to the study, most of these tiny pieces of plastic come from drinking water, but it's also found in other items such as shellfish, beer, and salt.
Oil and gas producers, chemical firms, plastic packaging companies, and soft drinks manufacturers could all experience a negative impact on earnings unless they innovate and address growing consumer sentiment.
Exxon Mobil, DowDuPont, BASF, and Formosa Plastics, to name a few, could see a generational backlash from informed investors unless they address these environmental concerns.
Failure to adapt to the growing mood of environmental sustainability concerns could see investors sell out of companies if they are not satisfied with their actions on sustainability issues.
In this age of transparency and disruption, the plastics producers and the whole value chain tied to the industry must accept changing customer demand or face obsolescence.
“There's a bifurcation in the cost of capital, between those who are seen as solution providers and have good ESG footprints, and those who are seen as part of the problem and legacy industries. So we need to step back in the rate of use, and recycling is what will facilitate that,” Morrison says.
She points out that the reason glass is not seen as a big issue any more is because there is a very well-developed glass recycling infrastructure. At present, plastic does not have that.
But Morrison believes if industries build up the plastic circular economy infrastructure, it won't cause the same problems that it does today. By keeping plastic within the economy through recycling and reuse it has a purpose, it is when you dump it into the environment as waste that it becomes a problem.
A potential winner in this scenario is the company that creates a solution. One such idea is called a reverse vending machine.
Morrison gives a small but poignant example of an initiative in Norway. The Scandinavian country is home to a reverse vending machine company. The recycling rate of plastic bottles in Norway is 97%, compared to the global recycling rate of 14%.
When you buy your bottle from the vending machine, you pay a premium of about 20%, however when you put the bottle back into the machine you get your premium payment back.
“A financial motivation of that size is enough to change behavior so you need to create the incentive that means that if there's a collection of plastic, it stays out of the environment. It then becomes a feedstock for the future bottles to be made with a heavy, or a high recycled content,” Morrison adds.
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