The global economy is at a tipping point where the costs of failing to act on sustainability are becoming greater than those of acting. This was a key message from former Unilever chief executive Paul Polman to an audience of Impax investors at an event in London.
“We are rapidly moving from risk management to opportunity. That’s one of the reasons that the financial markets are getting involved so actively, and demanding change from companies,” Polman explained in an interview with Impax’s Chief Product and Marketing Officer, Meg Brown.
“Companies that focus on [sustainability] are more in tune with the needs of society, are probably more responsibly run [and can] see stronger top-line growth,” he continued. They also face lower levels of legal and regulatory risk and “have a more resilient relationship with people in the value chain, most importantly with their own employees. In a time of uncertainty, that is of tremendous value.”
Polman was chief executive of UK-listed consumer goods company Unilever from 2009 to 2018, during which time he combined a focus on sustainability with the pursuit of shareholder returns.
‘Optimising returns for all stakeholders’
Since leaving Unilever, he has continued to promote corporate sustainability, establishing the IMAGINE Foundation and, most recently, publishing a book, Net Positive: How Courageous Companies Thrive by Giving More Than They Take.
Polman defines a ‘net-positive’ company as one that “first and foremost takes responsibility for its total impact on the world”, including its social and environmental impacts throughout its value chain. A net-positive company also aims to “optimise returns for all of its stakeholders,” he continued, rather than focusing solely on short-term financial returns, as well as working towards “the wider transformation that society needs”.
The sustainability challenges we face are daunting. Polman noted that if the 4.6 billion years of Earth’s existence were translated into a scale of 46 years, human beings have existed for four hours, and the Industrial Revolution began just a minute ago. In that minute, according to Polman, we’ve cut down 50% of the world’s forests, and in just 20 seconds lost 68% of the world’s mammals, birds, reptiles and amphibians. “This is a challenging environment … What we’re seeing now is a change that needs to happen at a scale well beyond that of the Industrial Revolution and we only have a limited amount of time.”
However, Polman expressed optimism that that change is possible, citing rapid technological advances, growing engagement among young people and the economic opportunities presented by investing in solutions to the world’s sustainability challenges.
An expanding opportunity set
At the event, which marked the 20th anniversary of the launch of Impax Environmental Markets plc (IEM), the audience also heard from Impax’s Founder and Chief Executive Ian Simm, who recounted how he, Bruce Jenkyn-Jones (Chief Investment Officer, Listed Equities) and Jon Forster (Senior Portfolio Manager) raised the initial £50 million to launch IEM from a dingy office above a fast-food restaurant in west London.
The excitement of launching and investing the fund quickly evaporated as the technology-led downturn of the early 2000s spread into the nascent environmental sector. After struggling initially, the investment trust recovered and grew to eventually join the FTSE 250 Index in 2020.
Over the past two decades, the opportunity set for investors like Impax who are focused on addressing sustainability challenges has expanded significantly, Jenkyn-Jones explained. Back in 2002, when there were only some 250 companies globally with meaningful exposure to the environmental markets theme, those opportunities were concentrated in energy, water and waste. The environmental markets universe has since grown to more than 2,000 companies, Jenkyn-Jones said.
Paolo Macri, who manages Impax’s environmental markets taxonomy, which defines the investment trust’s investible universe, explained how it “sits at the start of our investment process”.
As part of the evolution of environmental markets, the taxonomy now includes the food and agriculture and transport sectors. Meanwhile, the focus on waste and recycling has widened to look at the circular economy, which aims to replace the unsustainable ‘take-make-dispose’ linear economic model. A new group within the taxonomy, smart environment, captures the plethora of digital solutions aimed at optimising resource use across every aspect of the global economy. The taxonomy is “driving us towards the most exciting opportunities [within] what we think is the next economy,” Macri said.
The investor event concluded with a question-and-answer session in which Jon Forster was joined by Nick Jefferies, chief executive of specialised electronic components manufacturer DiscoverIE, one of Impax’s investee companies, Jean Murphy, managing director of wealth management company FSG Investment Management, and Aine Kelly, an IEM non-executive director.
There was consensus among the panel that the environmental markets theme is poised for continued growth, supported by public policy, technological change and consumer preferences.
“This is the direction of travel,” Jenkyn-Jones said. “As we move towards net zero, to move to a more sustainable economic model, then all parts of the economy need to operate in a more environmentally friendly way. That means we’re going to find investment opportunities in broader parts of the economy.”