After a year of confounded expectations, making predictions for 2017 may seem like a fool’s errand. But it is the job of investment managers to anticipate the future – and supported by a range of positive developments – we believe that the environmental markets investment thesis remains attractive.

Although the next US President has appointed a climate change sceptic to the post of senior environmental regulator, a Trump administration is likely to be positive for many environmental markets.  And, taking a wider view, the global trends that underpin businesses that provide solutions to environmental problems continue to gather momentum.

The macro-economic backdrop

The fiscal context is shifting from austerity to stimulus, with support for infrastructure investment expected from a Trump administration, as well as in countries such as the UK, Japan and Canada.  Smaller firms carrying low levels of debt, as is typically the case in environmental markets, also look well positioned to out-perform the broader global equity market if interest rates rise.

Potential upside from infrastructure spending

Increased infrastructure spending promises to boost key environmental market sectors, namely water and waste water infrastructure and technology, environmental testing and environmental consultancies.  These companies account for a far larger share of our investment portfolios than the US-based renewables firms that are most exposed to an uncertain fossil energy friendly policy.  But even here, we believe the downside has been overplayed.  Much support for renewables in the US is at the state level, while key federal tax credits for wind and solar were extended just 12 months ago, with substantial Republican support.  Perhaps most importantly, the increasingly attractive economics of onshore wind and solar means that they can continue to compete with coal- and natural gas-fired power generation.

International climate action on course

The mood at the COP22 climate conference in Marrakesh was defiantly optimistic.  The response from the international community to Trump’s pre-election threat to “cancel” the 2015 Paris Climate Agreement has been to redouble support for the climate treaty, with China, crucially, reiterating its commitment to addressing climate change.  A number of factors explain this mood of determination. First, the science of climate change has become increasingly compelling.  Second, the economic opportunity presented by the low-carbon transition is becoming increasingly attractive.  Third, the related problem of local air pollution in many developing countries provides a persuasive reason to curb fossil fuel use.

In addition, we remain bullish on renewable energy project investment in Europe, with wind and solar farms offering long-term, inflation-linked returns.  In 2017 we expect finalisation of the European Union’s latest directives on energy and climate that target by 2030 the cutting of greenhouse gas emissions by 40% (on 1990 levels), improving renewable energy production by at least 27%, and increasing energy savings by 27%.  

Sustainable real estate is also generating opportunities, with tenants and buyers increasingly seeking assets with high environmental standards – and lower running costs.

Looking towards the longer-term horizon

Environmental markets are highly diversified across industry sectors and geographies. Beyond the low-carbon energy, climate change and infrastructure themes, several additional emerging areas promise to deliver long-term outperformance.

For example, electric vehicles appear poised for a breakthrough, buoyed by the falling costs of lithium ion batteries.  We believe that up to a fifth of new vehicles could be fully or partially electric by as soon as 2025.  Given the market’s competitive dynamics, we see the most interesting investment opportunities in the component suppliers to the industry rather than the vehicle manufacturers.

The accelerating development of autonomous vehicles illustrates another exciting theme: information technology.  Driverless cars require sensors, software and big data analytics that have enormous potential in applications to improve resource efficiency.  We see this theme echoed in many other sectors, such as precision agriculture, building energy management and controls, and smart water and power systems.

We also see investment opportunities in helping companies adapt to the inevitable consequences of climate change. Take drought: water utilities in places such as California and Brazil have underperformed as a result of the revenue and cost impacts of water shortages. But regulators have responded in some areas by allowing utilities to increase pricing to recover investments in improved efficiency. This means well-run utilities should be positioned to increase profitability.

Hedging risk and accessing upside  

We believe that the environmental markets sector will continue to offer investors the flexibility, diversity and resilience both to deliver growth and hedge risk.  By taking an active approach to investing in these dynamic markets, the thesis applies as much in uncertain times as in more benign conditions. 

Ian Simm

Founder & CEO

Ian Simm is the Founder and Chief Executive of Impax Asset Management Group plc, one of the world’s leading investment managers dedicated to investing in the transition to a more sustainable economy. Prior to Impax, Ian was an engagement manager at McKinsey & Company advising clients on environmental strategy.

Outside Impax, Ian is a member of the UK government’s Net Zero Innovation Board, which provides strategic oversight of public sector funding of energy innovation programmes, and is a board member of the Institutional Investors Group on Climate Change, the European membership body for investor collaboration on addressing climate change. He is also a commissioner with the Energy Transitions Commission, a global coalition of leaders developing transition roadmaps to achieve net-zero emissions. Between 2013 and 2018, he was a board member of the Natural Environment Research Council (NERC), the UK’s leading funding agency for environmental science. He supports charities in the clean energy, healthcare and a range of scientific and environmental sectors. 

Ian has a first-class honours degree in physics from Cambridge University and a Master’s in Public Administration from Harvard University. In the last century he initiated and led an expedition to complete the first summer crossing of the Sahara Desert by tandem bicycle.

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