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For professional investors only. However, it is not intended for distribution to any person or entity who is a citizen or resident of any locality, state, country or other jurisdiction where such distribution, publication, or use would be contrary to law or regulation. Information used in the preparation of this document is based upon sources believed to be reliable, but no representation or warranty is given as to the accuracy or completeness of those sources. Any opinion, estimate or forecast may be changed at any time without prior warning. Investors should read the prospectus or offering memorandum before investing in any Pictet managed funds. Tax treatment depends on the individual circumstances of each investor and may be subject to change in the future. Past performance is not a guide to future performance. The value of investments and the income from them can fall as well as rise and is not guaranteed. You may not get back the amount originally invested. This material has been issued and approved by Pictet Asset Management Limited, which is authorised and regulated by the Financial Conduct Authority, and may not be reproduced or distributed, either in part or in full, without their prior authorisation.
Welcome
Technological advances and greater environmental awareness are behind a global drive to safeguard the world’s natural resources. It follows, then, that as we transition to a sustainable future investment decisions will need to further accommodate factors that relate to the environment, social impact and governance issues (ESG). Consequently, companies that are able to increase resource efficiency and minimise pollution are well placed to experience strong growth. In this Spotlight, Luciano Diana, senior investment manager at Pictet Asset Management, discusses how the Pictet-Global Environmental Opportunities Fund harnesses growth opportunities whilst protecting the environment. And Dr Marc-Olivier Buffle, senior product specialist, reviews how man-made environmental problems correspond to a wide range of individual and public health problems.
With governments and businesses responding to growing public pressure to reverse ecological degradation, a distinct and attractive group of environmental equity investments has emerged
Our goal is to discover which firms are developing products and services that make a real difference in reversing environmental degradation
Thanks to the emergence of a thriving environmental products industry, investing to protect the planet no longer means sacrificing returns, writes Luciano Diana, senior investment manager at Pictet Asset Management
As with all rapidly-evolving industries, identifying the most promising investment opportunities isn’t straightforward. That is why investment managers of the Pictet-Global Environmental Opportunities strategy have developed a process that deploys both a scientific, rule-based framework and traditional company-by-company research to build their portfolio. The first step in the process is to identify firms with the strongest environmental credentials. These are companies that neither make excessive use of raw materials nor generate disproportionate amounts of waste. Then, from this group, we seek businesses that specialise in the development of products or services that mitigate environmental damage. In order to identify firms with these characteristics, we perform an ecological audit that establishes the environmental footprint of more than 100 sub-industries. This audit incorporates two novel measurement tools – the Planetary Boundaries (PB) framework and Life Cycle Assessment (LCA) (6). The PB is a model that defines the ecological “safe operating space” within which human activities should take place (5). Developed by a team of leading scientists, the PB framework sets ecological thresholds for nine of the most damaging man-made environmental phenomena. The model quantifies a set of boundaries, which, if breached, would endanger the environmental conditions that have been instrumental to human prosperity over thousands of years. For example, if the world’s supplies of freshwater are to remain stable, humanity’s total consumption of water must remain below 5,000 to 6,000 cubic kilometres per year. Similarly, the PB states, if carbon dioxide emissions are to remain within acceptable levels, the proportion of CO2 in the atmosphere must not rise above 350 parts per million. The LCA is used to calculate the consumption of natural resources and the volume of waste emissions for each of the industries that make up the global economy. It quantifies an industry’s environmental impact through the entire product cycle, from “cradle to grave”, covering raw material extraction right through to disposal and recycling (7). In the first stage of our process, we map the output of the LCA using the thresholds defined by the PB framework. This enables us to identify the companies that have the smallest ecological footprint. Such analysis is necessary because we think most of the environmental reporting that is carried out today is too narrow or too subjective.
Unlocking potential
1 Pictet Asset Management 2 The Lancet Commission on pollution and health, 19.10.2017 3 According to the Chinese Academy of Social Sciences/South China Morning Post, as many as half of public protests in China involving at least 10,000 participants in 2000-2013 stemmed from concerns about pollution 4 Pictet Asset Management 5 Median 2016-18e sales CAGR (%) in local currency. Source: Bloomberg, Pictet Asset Management 6 We use Carnegie Mellon University’s Economic Input-Output Life Cycle Assessment (EIO-LCA) database to quantify the environmental impact of 157 corporate sub-industries, defined by MSCI and S and P Global with its Global Industry Classification Standard methodology. For more, see http://www.eiolca.net and https://www.msci.com/gics 7 Steffen et al, Stockholm Resilience Centre, September 2009 8 The portfolio has an average purity score of at least 60%
We use a proprietary scoring system, which takes into account the strength of the business model, management quality, valuation and operational momentum metrics. The ESG analysis is systematically integrated in this stage as well. The result is a concentrated portfolio of around 50 stocks, which offer the attractive risk-return profile and at the same time have a low ecological footprint, across a diversified list of environmental industries. But our investment process does not end there. Our aim is to be an active owner of the companies we invest in. For this, we exercise voting rights through a proxy voting platform and engage with the companies to ensure they have the best possible governance structure in place. We believe this responsible form of capitalism not only mitigates risks but also leads to sustainable long-term capital returns.
The majority of environmental footprint models focus exclusively on manufacturing processes; they fail to take into account the wider ecological impact of, say, suppliers, or of the products and services over their entire lifespans. Take the car industry as an example. A car’s lifetime emissions are four to five times higher than those stemming from its manufacture alone. Just measuring the level of emissions during the car production process is therefore insufficient to establish automakers’ overall ecological footprint. Once the LCA-PB process is complete, the second phase of the process involves taking a deeper look at the core business of each company that is identified in step one. Here, our goal is to discover which firms are developing products and services that make a real difference in reversing environmental degradation. For each company we assign a proprietary “thematic purity” value, which indicates what proportion of a firm’s enterprise value (EV), revenue or EBITDA is derived from environmental products and services. For a company to qualify for inclusion in the portfolio, its purity value must be at least 20% (8). These filters narrow down our investment universe to about 400 companies. Here, we double check that individual companies in the universe indeed meet the criteria defined by the PB. We then conduct detailed bottom-up analysis to identify firms with the most attractive risk-return characteristics for an efficient portfolio.
Wider ecological impact
The combination of people power, government policies and economics has given rise to a thriving – and eminently investable – industry for environmental products and services. China’s generously-funded anti-pollution drive, for example, is likely to boost the prospects of firms that develop environmental technologies such as filters for engines and industrial applications for pollution control. More broadly, as corporations worldwide embrace sustainable business practices, publicly-listed firms specialising in the development of a broad range of environmental technologies have mushroomed, while the number of patents filed for environmental products over the past decade has more than tripled. Overall, we estimate that the environmental products industry is already worth some USD2 trillion, and can grow by about 6-7% per year. That should matter to investors: companies operating in this sector should, according to our estimates, see sales growth of 6.5% per year, outpacing that of firms in the MSCI World equity index by more than 2 percentage points (5).
Stars aligned for environmental industry
Once a niche activity, environmental investing is now moving firmly into the mainstream. There are several reasons for that. To begin with, society’s attitudes towards protecting the planet have changed considerably in recent years. That’s partly because a growing proportion of the population has personal experience of the damage ecological degradation can cause. In 2015, pollution killed nine million people – three times more than AIDS, tuberculosis and malaria combined (2). Floods and droughts have brought untold misery to millions more. Social media has also helped shape world opinion. Thanks to Twitter and Facebook, people can voice and share their concerns about pollution and sustainability in a way they couldn’t before. People power has, in turn, brought about a change in government priorities. China is a striking example of this trend. In the run up to the 2008 Olympics, the US embassy in Beijing started tweeting hourly air quality data from its roof-top monitor. This was the first time the public had access to live data on airborne particles known as PM2.5, which kill more than 4 million people worldwide a year. As a result, local residents began voicing their concerns about air quality, eventually taking to the streets to stage large public demonstrations (3). In response to growing social discontent, China’s leadership unveiled a ground-breaking action plan in 2013 to tackle “Airpocalypse” with investments worth hundreds of billions of dollars and a slew of regulations. China’s investment in the environment has risen six-fold since the early 2000s, according to the data firm CEIC. But this is unlikely to be the end of its spending boom. Beijing has promised to invest even more heavily in advanced environmental science and technology. Also giving sustainable investing a shot in the arm is a sharp drop in the cost of technologies such as renewable energy, water recycling and agri-tech. In the US wind power is now cheaper than any other form of energy, having seen a 40% drop in production costs over the past decade. The costs of producing utility-scale solar power have declined by more than 60% over the same period (4).
A burgeoning environmental products industry
Transforming sustainable investment
Danica May Camacho was born on October 30, 2011, to the sort of fanfare rarely seen in Manila’s crowded public hospitals. That’s because she represented a global milestone – her birth brought the world’s population to seven billion. It was at once a joyful occasion and a reminder of the challenges posed by ever more people competing for finite resources. In less than 30 years’ time, the planet will be home to nine billion human beings (1), a larger proportion of which likely to be part of the middle class. This is certain to put even more pressure on the environment, testing it to breaking point. Investors are increasingly alert to these challenges. Many now recognise that, as stewards of capital, they have a crucial role to play in placing the economy on a more sustainable footing. But for them to become part of the solution, investors need to resolve a paradox. How can they become responsible guardians of the environment and simultaneously secure an attractive return on their investments? We believe the solution to that conundrum has already begun to take shape. With governments and businesses responding to growing public pressure to reverse ecological degradation, a distinct and attractive group of environmental equity investments has emerged. These are companies that combine strong environmental credentials with innovative products and services designed to safeguard the world’s natural resources. Such firms form the core of the Pictet-Global Environmental Opportunities portfolio.
Much of the slowdown in the growth of global emissions in recent years has been driven by a combination of reductions in the US and China
China is the world’s deadliest country for outdoor air pollution, according to analysis by the World Health Organisation (WHO)
Wind power continues to grow strongly, providing 3% of global power
Spending in environmental monitoring and testing is on the rise following the increased awareness of poor water and air quality
The cost of solar panels have declined 80% since 2008, according to a recent report by the International Renewable Energy Agency
In 2016, the number of electric cars on the road reached two million globally
The UK delivers 16.6 billion litres of high-quality water every day to 63.9 million people
1 Chartered Institute of Building, 2015. 2 The Freedonia Group, 2014. 3 US Enviroronmental Protection Agency, 2014. 4 Enviromental Finance, 16.02.18.
Germany’s government has also intervened on the issue of factory emissions, changing its environmental policies accordingly. Buffle adds: “Ageing infrastructure in the US and Europe has bolstered demand for smart building retrofit solutions across both residential and non-residential properties, such as thermal insulation, building automation, high efficiency appliances and LED lighting.” Despite all these spending efforts by the private sector and the consumer, Buffle remains concerned that not enough is being done to mitigate future environmental issues. “If we ignore the issues of deforestation, air pollution and nitrates usage, we risk adding further damage to the biosphere.” On the plus side, however, he says: “There has been a greater public awareness towards environmental challenges. Consumers and corporates are increasingly willing to spend more to improve the quality of lives and to protect our natural resources.”
“China and the emerging markets are doing the most when it comes to investing in their infrastructure and changing their environmental standards. The development of new infrastructure is an opportunity to install the latest equipment. Moreover, spending in environmental monitoring and testing is on the rise following the increased awareness of poor water and air quality.” Buffle continues: “High levels of industrial and agricultural activities in China have resulted in pollution permeating into the soil and groundwater. “To tackle the problem of water contamination, China has been developing wastewater technologies and ramping up investment in infrastructures.”
Infrastructure
According to research from Cancer Research UK, more than four in ten cancers occurring worldwide are in countries at a low or medium level of the Human Development Index, and in 2012, there were an estimated 14.1 million new cases of cancer worldwide, with lung cancer being the most common in men (more than 1 in 10 of all cancers diagnosed in men are lung cancers). Indeed in China nearly 4.3 million new cancer patients were recorded in 2015, according to the government’s statistics. More than 730,000 of them had lung cancer, accounting for nearly 36% of the world’s total. Internationally, small-scale studies have associated air pollution exposure with lung cancer. That is why China and the emerging markets are focusing on combating pollution. Cancer incidence and mortality have been increasing in China, making it the leading cause of death since 2010 and a major public health problem in the country, according to the National Central Cancer Registry of China. “The biggest illness affecting the global population is lung cancer and something has to be done about this,” says Buffle. China has responded to this air pollution problem, he adds, by “setting in motion a radical energy reform plan.”
Air pollution
The Pictet-Global Environmental Opportunities Fund has noted that companies are increasingly factoring in environmental concerns into their product strategy. So much so, that annual applications for environmental patents more than doubled between 2000 and 2012 (4). Dr Marc-Olivier Buffle, a senior product specialist at Pictet, says: “Companies that provide effective products and services, and which increase resource efficiency and minimise pollution, are well placed to grow strongly. By investing in these companies, investors can make a positive contribution towards a more sustainable world as well as generating attractive capital gains.” The Fund’s investment team believes there has been a decline in the use of the internal combustion engine due to de-carbonisation and pollution issues, which has created investment opportunities in components, semi-conductors and infrastructure for electric and hybrid vehicles. Companies like Tesla, Delphi, Valeo, Infineon are investing in this area. Buffle says: “Five years ago, the development of the electric car was a private affair, but now electric cars have been pushed to the forefront, with brands like BMW in Germany producing their own electric cars – so it’s not just Tesla monopolising electric car production. Today, the electric car is becoming part of everyday life. “Governments are working towards new environmental standards by reforming existing engines. I think in the future it will be very difficult for car manufacturers to make diesel engines. We are seeing a commitment to changing the standards of car making.” Another area seeing increased attention is cleaner eating. Food safety scares have been on the rise globally, along with increasing demand for traceability e.g. food labelling. This global trend towards cleaner eating has led to companies like ThermoFisher, Scientific Agilent and PerkinElmer to test food, air, water and soil quality.
How are companies embracing change?
Protecting the environment is now a priority for consumers, FTSE 100 companies and governments alike. Driven by technological advances and health concerns, the transition to a sustainable future is happening in different forms. In China, for example, the demand for domestic water treatment technology is increasing by almost 15% a year (1). In Morocco, one of the world’s largest solar panel plants began production in 2015 (2). And in the US, capturing methane from an additional 440 landfill sites could power half a million homes (3). The environmental market is now worth $2 trillion globally, and consists of companies which have a low environmental impact or which develop environmental solutions. By 2020, the sector is expected to grow to $3 trillion. The market includes the following themes and sectors: energy and utilities (renewables, energy storage, smart grids, biomass and waste-to-energy); transportation (hybrid and electric vehicles, light materials, fleet management), manufacturing (industrial automation, virtualisation, 3D simulation, power electronics), infrastructure and buildings (LED building, thermal insulation, building automation, high-efficiency appliances), and agriculture (precision agriculture, smart irrigation, food waste reduction). There are also companies within the environmental market that specialise in waste management, air treatment and pollution control, parts recycling, green chemistry, waste water treatment, sustainable agriculture and food testing.
A sustainable future can become a reality, says Dr Marc-Olivier Buffle, senior product specialist at Pictet Asset Management
The drive to safeguard the world’s natural resources
1 US Enviroronmental Protection Agency, 2014. 2 Chartered Institute of Building, 2015. 3 The Freedonia Group, 2014.
The investment approach of the fund allows the team to capture the best growth prospects from across our thematic funds, which operate in a variety of industries and geographic locations
Capturing the best opportunities
Investing in environmental companies offers investors the prospect of positively contributing towards a more sustainable world
Build a sustainable future
The environmental market comprises of companies which have a low environmental impact or develop environmental solutions andis expected to experience superior annual growth rates of 6-7% within the next 4 years
The move to safeguard the world’s natural resources will benefit companies which have low environmental impact and provide solutions to environmental challenges. Pictet’s Global Environmental Opportunities strategy aims to capture these investment opportunities across all areas of the global industry, whilst making a positive contribution towards a more sustainable world.
A long-term growth opportunity
Why invest in Pictet-Global Environmental Opportunities?
One of the world’s largest solar power plants began production in Morocco in 2015 (3)
Invest in renewables
Demand for domestic water treatment technology in China is increasing almost 15% a year (2)
Invest in water quality
Capturing Methane from an additional 440 landfill sites could power half a million homes in the US (1)
Protecting the environment is now a priority for consumers, companies and governments. Their converging interests, driven by increased global awareness, technological advances and health concerns, are underpinning a global drive to safeguard the world’s natural resources. Here are three investment themes, identified by Pictet, that can help protect the environment.
Invest in waste management
How should we respond to the increase in the consumption of resources?
Global environmental opportunities
Unprecedented growth in global wealth has led to unsustainable increases in the consumption of resources. The Pictet-Global Environmental Opportunities Fund seeks to make a positive contribution to a more sustainable world
Our investment process has evolved over decades and been tested in virtually every market environment. It integrates insights from our Cyclical Forums, which anticipate market and economic trends over the coming six to 12 months, and the annual Secular Forum, which projects trends over the coming three to five years. These top-down views are complemented by bottom-up perspectives from specialists and quantitative analysis of individual securities and portfolio construction. The Investment Committee, which is composed of senior investment professionals, drives decision-making on a daily basis.
Marc-Olivier Buffle joined Pictet Asset Management in 2014 as a Senior Product Specialist in the Thematic Equities team. Before joining Pictet, Marc spent 6 years at RobecoSAM where he acted successively as senior analyst, head of industrials and head of SI research. Prior to that he was responsible for business development at the Danaher Corporation. Marc started his career at Trojan Technologies in London Canada, where he lead a R&D team focusing on water treatment technologies. Marc holds a MSc in engineering from the ETH in Zurich, and a PhD from EAWAG in Environmental Chemistry and is the author of patents, scientific articles, technical and financial publications.
Dr Marc-Olivier Buffle
Senior Product Specialist, Thematic Equities Team
Luciano Diana joined Pictet Asset Management in 2009 and is Head of Environmental Thematic Investing. He is a Senior Investment Manager in the Thematic Equities team. Before joining Pictet, Luciano spent four years at Morgan Stanley, where he headed the London based clean energy sell-side research team. He began his career in 1998 as an IT strategy consultant at Accenture. Luciano holds a Laurea in Telecommunications Engineering from the University of Padua, Italy, and he was a Visiting Scholar at the University of California at Berkeley. He holds an MBA from INSEAD.
Luciano Diana
Senior Investment Manager, Thematic Equities Team
Meet the Pictet team
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