The drivers of Environmental Markets are deeply rooted and continue to gather momentum.
Population growth, increasing urbanisation, climate change, environmental policy and regulation, and inadequate infrastructure are profoundly shaping global markets and driving the transition towards a more sustainable global economy. Companies and technologies providing solutions to these challenges are generally growing faster than broader listed equity markets.
This trend is accelerating as governments and investors around the world recognise the economic benefits of shifting to a more sustainable and lower carbon global economy. This has been highlighted by the defiant reaction to President Trump’s decision to take the United States out of the Paris Climate Agreement. Many US companies and State politicians have pledged their continuing allegiance to the Agreement, with many countries, including the EU, China, and India reiterating their own pledges.
We have identified three areas in Environmental Markets that are proving to be interesting and giving us food for thought.
1. Emerging markets
Emerging markets continue to drive strong growth opportunities in Environmental Market companies, often at attractive valuations versus “developed” countries.
India, for example, is currently presenting numerous interesting prospects, and we have recently visited several companies. These include natural gas distribution companies that are benefiting from Indian government bans on the use of fuel oil and coke for industrial purposes, and are further supported by parallel initiatives to increase natural gas as a proportion of the energy mix from 11% in 2010, to 20% by 2025.
2. LEDs and next generation “connected” lighting
Light emitting diodes (“LED”) lighting markets are expanding at 15-20% a year, driven by energy efficiency regulations that are leading to the phasing out of incandescent and halogen lighting, and the falling costs of technology. The payback period for LEDs is increasingly short, especially for commercial and industrial markets. However, LED penetration is still low at around 5% and is expected to grow to 20% by 2020, creating a significant investment opportunity.
We also see huge potential for “connected” lighting, which adds sensors to the lighting infrastructure to collect, analyse and use data. Examples of its applications include automated dimming, tracking of machinery or assets in a factory and targeted marketing to customers in retail environments.
3. Water in the era of the “Internet of Things” and “Big Data”
Technological advances are changing the ways in which water is managed and used. For example, advanced metering solutions are growing at nearly twice the rate of traditional water meters. This reflects strong support from utilities, which are recognising the opportunities to add smart meters to their asset base on which they earn a regulated return, while also reducing their operating costs. Smart meters play a critical role in more effective metering and pricing of water and are key to reducing water use.
Over the longer term, we believe that utilities will be forced to focus on more effective management of their infrastructure, particularly reducing leakage rates and avoiding catastrophic failures through improved integration of sensors and monitoring.
Finally, smart pump technology is developing rapidly, including the launch of waste water pumping systems with integrated intelligence. These systems can adapt performance in real time and provide feedback to pumping station operators, increasing efficiency and reliability, and making them simpler and cheaper to run than traditional technologies.
Opportunities for investors
The shift to a more sustainable and lower carbon global economy is already happening, and the drivers behind this transition are strengthening. The growth in companies providing environmental solutions, and the lower valuations evident in emerging markets, lead to the conclusion that Environmental Markets offer investors both compelling growth opportunities and the potential for superior returns.
Jon Forster is co-manager of environmental markets at Impax Asset Management.