The 20-year transformation of environmental investment markets

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This article was written by Impax Asset Management, a specialist asset manager investing in the opportunities arising from the transition to a more sustainable global economy.

As the global economy shifts to become more sustainable, the set of related investment opportunities is broadening, widening and deepening.

The growth of the environmental markets investment universe is clear evidence of the increasing influence of drivers such as resource scarcity, environmental and social regulation, and consumer preferences for more transparent, authentic and healthy products.

This growth can be seen across three metrics:

  • the absolute number of qualifying stocks
  • their market capitalisation
  • their geographic spread

Rapid growth in the number of companies

In 1999, Impax launched the Environmental Technology 50 index (the ET50), comprising the top-50 listed companies deriving at least 50% of their revenues from at least one of three themes:

  • clean energy
  • waste and water management
  • pollution control

At that time, there were around 250 companies globally which qualified for the universe from which the index was selected.

By 2007, the trend of larger-cap companies, growing organically or acquiring smaller specialists to capture the environmental opportunity, was becoming evident. In response, Impax created a broader universe based on a 20% revenue exposure to the themes, extending the universe to about 450 companies.

Following further expansion of the themes into food-related sectors, the sustainable food and agriculture opportunity was incorporated in 2012. Today, Impax’s thematic equity universe comprises almost 2 000 companies.

Exhibit 1: Number of companies in Impax’s thematic equity universe

Source: Impax Asset Management, BNP Paribas Asset Management, as of September 2018

Market capitalisation

The growth in absolute numbers of eligible stocks has been mirrored by growth in their market capitalisation as pure-play companies have successfully expanded and as large incumbents in mainstream sectors have developed or acquired environmental technology businesses.

In the early years, the investment universe was dominated by unprofitable early-stage companies. Over 50% of the ET50 companies had a market capitalisation of less than GBP 500 million. Today, the average market cap of companies in our thematic universe is USD 3.8 billion.

Geographic spread

Over the last decade, we have seen rapid growth in the investment universe in Asia. Between 2009 and 2018, the number of companies there has almost doubled, from 342 to 630, as the need to tackle local pollution became a priority for human health, resulting in opportunities for companies offering solutions.

Exhibit 2: Geographical spread of companies in Asia-Pacific universe

Source: Impax Asset Management, BNP Paribas Asset Management, as of September 2018

A more diverse investment opportunity

This larger investment universe, with a wider range of companies in terms of market cap, purity and geography, provides greater opportunities for active investment management.

We believe that the transition to a more sustainable economy will continue to disrupt an ever-larger proportion of the global economy and that investment portfolios which focus on well-positioned companies, while avoiding those unable or unwilling to adapt, could outperform.

To read more on sustainable investment, click here.

Bruce Jenkyn-Jones

Co-Head of Listed Equities, Executive Director, Impax Asset Management

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