By Newton’s Future Earth investment team at Newton Investment Management, a part of BNY Mellon Investment Management
In May 2021 the US Environmental Protection Agency (EPA) made headlines when, for the first time in its history, it acknowledged a link between human activity and climate change. This was a significant step given the US’s status as the world’s second largest emitter of CO2 after China and given previous efforts to dial down climate change awareness during the presidency of Donald Trump – but it also demonstrates how rising global understanding of the need for environmental stewardship is feeding its way into the wider policy framework.
In addition, it highlights how the theme of environmental protection can radically rearrange the outlook for returns. Shortly ahead of the EPA’s announcement, US president Joe Biden set out his Green New Deal – a US$2 trillion investment programme which aims to support the transition to electric vehicles and to virtually eliminate the role of fossil fuels in the power grid.
For Newton’s Future Earth investment team, the message is clear: Investing needs to change if it is to take into account this sudden sea change towards greater environmental awareness.
Consider some uncomfortable truths and the measures being taken to address them:
Demand for global freshwater reserves far exceeds available supply. Agriculture is by far the largest consumer of freshwater supplies globally (at around 70%), and wastage levels are high. By 2030, the world will require 40% more water to cater for a rapidly expanding population, but, by the same token, 50% of global crop yields could be at risk from water reserve depletion.
Water is by no means the only natural resource that a growing population will need more of. In the next 10 years forecasts suggest we will need 25% more energy and 35% more food.
A rising demand for energy, coupled with targets to meet globally ratified climate objectives, will continue to accelerate the transition away from heavy-emitting fossil fuels towards renewable sources of energy.
With urbanisation levels growing globally, companies are looking at new solutions to reduce energy-related emissions from buildings. More than one third of all energy-related CO2 emissions come from buildings.
For every three tonnes of fish in the ocean, there is one tonne of plastic waste. Around 8 million tonnes of plastic are deposited into the ocean every year. Countries are starting to take notice: 34 nations have already introduced, or are planning to introduce, legislation to reduce plastic wastage, including China.
Deforestation rates are accelerating at an unsustainable pace. In 2018, the world lost 12 million hectares of tropical rainforest – that’s the same landmass as North Korea or the equivalent of 30 football pitches being removed every minute.
Current global warming, caused primarily by man-made emissions, is on course to hit 4°C by 2100. Should temperatures rise by more than 2°C, extreme weather events will become more frequent and the damage irreversible.
So, how might investors respond to this roll-call of environmental challenges? For the Newton Future Earth investment team, responding to the needs of the planet is not only the right thing to do, but also the most sensible option.
"Our view is that it makes sense for investors to gain targeted exposure to those companies offering innovative products and services to address the resource and environmental challenges we’re facing,” they observe. “Equally, companies that are best positioned to provide these solutions should benefit from future structural demand – and that should help to drive long-term earnings.”
Here, says the team, a focus on just four sub-themes – clean energy, efficient infrastructure, electric vehicles and resource management – could be sufficient, since they encapsulate everything from urbanisation trends to renewables; recycling to technological innovation – and much in between.
“With the unrelenting stress on the world’s environmental resources, there’s a coordination of both pressure and intent across individuals, businesses and governments to ignite action for positive change,” the team concludes. “By considering a wide range of environmental concerns, companies and policy makers are becoming more proactive. This, in turn, creates the potential for both winners and losers not just today but for many years into the future.”
For further information, please visit the BNY Mellon Investment Management website.
For Professional Clients only. Any views and opinions are those of the investment manager unless otherwise noted. This is not investment research or a research recommendation for regulatory purposes.