- Decarbonisation could be the next industrial revolution
- Food, housing, and electric vehicles are all growth areas
- Investments can be direct or indirect, for example via managed funds
Responsible investing (RI) spans lots of different social issues and investment types. In this article we explore some of the megatrends impacting this growing area and the different ways, both direct and indirect, that investors can get involved.
Trend 1: Decarbonisation of the global economy is the next industrial revolution
Decarbonisation of the global economy has been called by some as the sixth industrial revolution, which shows the depth of its impact.
If you think about the impact previous revolutions have had on the economy and the market — from the original Industrial Revolution through to the most recent information and technology revolution — it's not hard to see the opportunities that may arise for companies assisting the decarbonisation process.
With 137 countries committing in the Paris Accord to a target of net zero emissions by 2050, this brings forth a multitude of opportunities from renewable energy to electric vehicles and battery technology.
We need to transition our engine supplies, our transport systems, our manufacturing and construction processes, and our agricultural practices. Almost every aspect of the economy will need to be transformed. And we are certainly seeing regulatory and policy tailwinds accelerating rapidly over the last months in order to aid that transition.
So, what kind of investment opportunities are available?
Some investment managers will focus on private equity that invests in verticals that are in some meaningful way reducing emissions, such as energy efficiencies, carbon markets, food production, or sustainable packaging.
Other managers may invest in more direct real assets such as large agricultural land holdings that are developing carbon offset projects.
Trend 2. Electric cars: the democratisation of technology
Consumer demand and affordability has brought electric cars to the forefront. During the fourth quarter of 2020, nearly one in six cars registered in the European Union was an EV. Now, hybrid vehicles sold last year comprised 12 per cent of all sales, and that’s more than double the level in 2019. This is not a fad. This is a structural change .
Consumer demand is changing, and the cost of production and delivery is coming down. This is a really interesting example of the way that consumer behaviours are driving change. Despite global vehicle production declining of the last two years, there has been growth within electric vehicles (1).
This demand has also been driven by governments issuing more stringent emission regulations in China, EU countries, and the US.
Given increases in regulations, stringent emission standards, net zero climate ambitions and mandates on charging infrastructure buildouts, this trend looks set to continue. And, with battery costs declining, these vehicles will become more affordable over time: the ‘democratisation of technology’.
With hundreds of new vehicles to enter the market in the short terms, investors should probably avoid trying to bet on which car company will succeed, but instead consider the supply chain for electric vehicles, for example, auto part suppliers.
An example company (please note this is not a recommendation!) is Aptiv — in mid 2021 it has a $40 billion market cap. It is a technology company that helps enable the safety of cars, providing vehicle architecture and software such as electrical distribution systems, engineered components, user experience, connectivity, security, and active safety. As we shift towards autonomous driving, software content in vehicles will become more and more important, and Aptiv is well positioned for this.
Other supply-chain options include battery components of the electric vehicles, as well as the commodities that benefit from battery demand which include copper, nickel, lithium, and cobalt.
Netwealth's 2022 Investing for good report
This research report examines investor behaviours and drivers for responsible investing (RI) in Australia and breaks down the Australian population into four RI investor segments. It explores their profiles, attitudes, and drivers to RI, and how to use marketing and brand tactics to appeal to this target market.
Trend 3: Food, ethical food
There’s a growing awareness of food and nutrition, especially with younger generations. We want to know what we’re eating, and where the ingredients are being sourced.
Consumers have a desire for a healthier lifestyle, which means movement towards foods with natural ingredients and subsequent increasing demand for healthy ingredients from commercial food manufacturing industry.
Adding to this is the growing awareness of the high rate of obesity in developed economies, which is arguably a strain on our healthcare systems.
As a result, the human nutrition market is expected to reach $465 billion by 2025, growing at a 6.6 per cent per annum (1) . Areas like as sport nutrition, weight loss, infant nutrition, brain health, personalised diets, and veganism are expected to grow as a result too.
Growth will be supported by growing middle class in emerging markets and a higher focus on nutrition among consumers in developed markets — especially given an ageing and increasingly sedentary population.
An example company (again, this is not a recommendation!) Dutch Company Royal DSM. They have evolved from being a coal miner about 100 years ago into a petrochemical company, to now largely being a nutrition and materials company. One of their focus areas is health and living, having developed plant-based meat, quality animal feed, probiotics, prebiotics, and omega 3 — all of which help the world eat better.
A DSM product called Bovaer, for example, tackles the impacts of animal farming, which is responsible for 14.5 per cent of human-derived greenhouse gases (1) . A feed additive, Bovaer prevents cows from releasing methane and is popular with farmers looking for economically viable, sustainable solutions.
Trend 4: Affordable housing: property investment that makes a difference
The benefit of funding social housing goes far beyond impacts on the individuals themselves. These broader benefits are for society as a whole due to the significant costs of homelessness, crime prevention, and healthcare costs.
Social bonds (as opposed to green bonds) are a vehicle that could be considered for such investment purposes, as they raise finance for initiatives that improve social outcomes for the community.
These bonds pay interest just like any bond, but importantly, the money that is borrowed is to only be used for predetermined projects. For example, a social bond would support projects such as social housing, gender equality or underprivileged education, whilst a green bond could be used for a wind farm, solar park, hydroelectricity project, low carbon building or low carbon transport.
Of note, other than green bonds and social bonds (which have a specific use of finance) there is a growing area of finance to the road to net zero, which is transition finance. These are general purpose bonds financing a companies’ transition to net zero.
An example of a social bond is Pendal Groups’ fixed income bond (again this is not a recommendation!) that is funding 83 social and affordable homes to the underprivileged. One of them is a social housing program in Western Sydney with brand new units and brand-new townhouses.
Pendal Group has partnered with one of Australia’s largest disability housing charities to better understand where the people they support want to live, what sort of properties they want and how those properties should be tailored. Pendal is making a financial investment and funding housing, as you would any property investment, but are delivering housing to a not-for-profit who can use it to support people.
These four megatrends are not just on the horizon — they’re here, and they will only get bigger over the coming years.
(1) How green innovation is changing the world for the better, and some investment options – Netwealth Trend Hunters webinar series, https://www.netwealth.com.au/web/insights/portfolio-construction-trend-hunters/