Sustainable equities offer opportunities for strong returns over the long term, enabling investors to look beyond current market uncertainty, geopolitical turmoil and economic disruption.
The key, believes NNIP, is to find high-quality companies with sustainable behaviour. “We invest in the companies that are developing sustainable solutions in areas such as ESG data, cybersecurity and the green energy transition for which demand is set to increase,” said Pieter van Diepen, head of the firm’s impact and sustainable analyst team.
These are also high-quality companies with strong fundamentals. “In times of heightened uncertainty and volatility, these are the businesses that should provide relative stability and attractive returns,” he added.
Tomorrow’s sustainable success stories
Current events are accelerating key trends in sustainable equity investing.
The first of these is energy transition. “With 80% of global energy consumption still tied to fossil fuels, the need to develop renewable energy is clear from the environmental point of view,” Van Diepen said.
Greater energy independence has also come into focus in response to spiking power prices, weather-related outages and dependence on Russian supplies. Furthermore, power grids must be upgraded to enable – and meet demand for – increased electrification.
Affordable healthcare is another key theme given the rapid pace of advances in healthcare and medical technology in improving treatments.
“Funding for medical research is at historical highs. Yet picking which pharmaceutical company will come up with the next game-changing invention remains notoriously difficult,” added Van Diepen.
The third trend NNIP is backing is the digital revolution and, in particular, cybersecurity, where demand has never been greater. Notably, cyberattacks are increasing in frequency and intensity at the same time as companies have become more vulnerable as they shift operations into the cloud and more employees work outside the office.
Another focal point for sustainable investing are environmental solutions and materials. “Reducing plastic waste is critical to reaching our climate goals, yet globally only about 14% to 18% of the plastic produced each year is recycled,” Van Diepen said. “The goal is to create a circular plastic economy in which growth is decoupled from the consumption of finite resources.”
Among potential solutions are chemical and mechanical recycling, and the development of alternatives to petroleum-based plastics.
A fifth theme relates to consumer trends such as e-commerce. Online retail, for example, which soared during the pandemic, has largely maintained the levels achieved during lockdown.
“Two-sided e-commerce platforms are a sustainable play in this growing market, providing a simple, inexpensive on-ramp to entrepreneurship for many people who might not have had theopportunity to start a business otherwise,” explained Van Diepen.
Another likely winner in the sustainability race is smart manufacturing and services, amid the need to reduce greenhouse gas emissions from buildings by tackling the energy use of space and water heating, which makes up about half of a building’s energy consumption.
“That’s where heat pumps come in,” said Van Diepen. “Heat pumps lower energy consumption through the electrification of heating, avoiding boilers and furnaces that typically burn fossil fuels and delivering improved energy efficiency. This is a simple, mature technology, and the heat pump market is concentrated, so companies with pricing power and dominance in their geography are well positioned to succeed.”
The seventh theme for investors is fintech and financial inclusion, including ESG data and analytics. With booming demand for ESG data and analytics, the market is expected to more than double to $5bn in global revenue by 2025.
“Consolidation within the industry is also creating companies with greater pricing power, competitive advantage and range of offerings,” added Van Diepen.
Identifying the winners
However, finding businesses that will stand the test of time is not a quick or simple process.
NNIP believes the short answer is to look for companies that combine a strong competitive market position with the ability to generate sustainable growth and returns over the long term, irrespective of economic cycles and geopolitical events.
“We focus on performance over the long term – both the impact our portfolio companies will have on the environment and society, and the returns they will generate for investors,” said Van Diepen.
