United StatesThe world’s economies must transition away from today’s dominant energy and agricultural systems to ones that are equally productive but don’t lead to devastating side effects. Many companies are already making this shift, and we believe there are opportunities within the energy transition and societal shifts accelerating in the U.S. and around the world, as many actors move quickly to seize the economic benefits. Ed Farrington, President, North America, at Impax Asset Management, explains this transition to a more sustainable economy and its implications for investors.
What is the transition to a more sustainable economy?
We believe that disruptive forces are driving fundamental changes to the global economy. Our analysis shows that four themes – changing technology, climate and nature, societal changes, and policy and regulation – are creating sectoral transformations on the scale of the industrial revolution.
Evidence of this is already being felt across sectors. Today, 60% of all drugs in development are biologics (vs. 20% in 2002) and 48% of bank customers use mobile banking as their top option for managing their account.1,2 By 2026, 95% of the increase in global energy capacity will be renewables.3 By 2050, 70% of vehicles will be electric. 4
These trends can drive growth for well-positioned companies and create risks for those unable or unwilling to adapt. We believe that this forms an attractive landscape for skilled investors – particularly for specialists like Impax who understand the complexity of these changes.
How does this transition create investment opportunities?
The transition is multi-sectoral and happening across the global economy, from energy to food and agriculture, health care, consumer sectors and beyond. We believe equity markets often incorrectly calibrate the drivers of corporate value and risk in this area – for example the impact of new technology and business models, planned or anticipated changes to regulations and the scale and timing of future changes in consumer demand. Specialist managers are well-positioned to assess and exploit this mispricing.
One way investors can capitalize on opportunities created by the transition is by considering which companies are making everyday energy consumption more efficient. Renewables and electric vehicles are clear leaders in the clean energy transition, but our analysis and expertise within environmental markets surfaces more nuanced ways to invest as well.
For example, regulation has driven energy efficiency standards for buildings to prevent heat loss. Companies that make smart heating and cooling systems make compliance easier for building managers as these regulations become more widespread. At the same time, renters prefer more energy efficient buildings, and AI is enabling better monitoring and prediction. Technology and consumer preferences, alongside supportive regulatory trends, position these companies better than those that ignore these changes and continue building, selling and servicing less efficient systems.
Are there opportunities to invest in the transition outside of energy consumption?
As noted above, our approach supports a similar thesis for industries that might not typically be considered as part of the sustainable economy. Take personalized medical care, for instance. Hospitals and medical offices have traditionally offered treatments that are broadly appropriate for a particular diagnosis. However, a customized approach is becoming more possible (and affordable) with technology that offers more detailed, precise diagnoses for those seeking care. At the same time, patients are showing a preference for care that considers not only their specific pathology or ailment, but also factors in their gut biome, bloodwork or genetic makeup. We believe companies that enable this personalized medicine by manufacturing and adapting diagnostic tools are better placed to capitalize on these trends than those that continue with business as usual.
What is your view on the political headwinds in the US related to sustainability?
This transition will underpin a dramatic increase in new business creation, transform existing companies that are prepared to innovate, and create a vast range of new goods and services on par with the transformation of the information technology sector at the start of the century. It is time for those halting economic progress to join the rest of us and focus on seizing the potential offered by the transition.
Despite the political pushback, the transition to a more sustainable economy will not be derailed – the fundamental long-term drivers remain firmly intact.
Why should investors be considering the transition to a more sustainable economy in their investment portfolios?
These examples I’ve given have something in common. They provide better outcomes for consumers while minimizing the externalities generated by the old system. The world is changing, and companies that understand the urgency of this change are poised to benefit. Investing in the transition cannot happen soon enough.
The energy transition – and by extension the broader transition to a more sustainable economy – has proven resilient. In parallel, as urbanization, consumer preferences and other demographic trends are surfacing societal challenges, those challenges can be addressed more efficiently through innovative technologies.
The transition to a more sustainable economy is already underway. It’s creating jobs, leveraging breakthrough technologies, and surfacing leaders and laggards. Smart investors around the world are leaving behind those companies unwilling to adapt and positioning their portfolios for the future by investing in the new economy.
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Ed Farrington
Ed is President, North America at Impax Asset Management and Co-Head of the Client Group. Based in the Portsmouth office, Ed is responsible for distribution of Impax’s full capabilities across North America. Ed previously served as the Head of Distribution for North America. In this capacity, he oversaw institutional and intermediary sales and client service efforts, engaging with consultants, advisers, institutions and plan sponsors on issues ranging from investing in the transition to a more sustainable economy to navigating global retirement systems.
Ed joined Impax in 2021 from Natixis Investment Managers where he held multiple distribution leadership roles in London and Boston over the span of 12 years. Prior to that, he worked in sales and sales management for Fidelity Investments, Fidelity Charitable Services and Pioneer Investments.
With a bachelor’s degree in political science from the University of New Hampshire, Ed also holds the FINRA Series 6, 7, 24, and 31 registrations, and is a registered representative of Foreside Financial Services, LLC. He serves on the World Surf League advisory board, the Levitate Foundation and the sustainability advisory board at the University of New Hampshire.
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1 Danaher, 2022: Danaher Investor & Analyst Day 2022
2 Consumer Survey Banking Methods 2023 | American Bankers Association (aba.com)
3 IEA and McKinsey analysis from late 2022