Investors are increasingly recognising the need to seize opportunities in environmental equities, which are crucial for addressing global environmental challenges and offer exposure to a diverse array of high-growth companies.
WHILE investors may have benefited recently from the growing concentration of US exposure in global equity portfolios, the downside is that they may lack sufficient diversity in their allocation.
Environmental equities, which have little overlap with broad equity indices, might just be the solution.
At the same time, these stocks offer an attractive source of returns from a fast-growing investment universe, fuelled by substantial capital flows and government initiatives leading the transition to a more sustainable economy.
Companies in this market are often innovative and at the forefront of solving critical environmental issues positioning them well for sustainable growth.
The environmental imperative
Environmental threats posed by megatrends such as changing demographics, infrastructure deficit, climate change and pollution are all around us.
Water, for example, is at the centre of the climate crisis. More than 2 billion people worldwide lack access to safe drinking water, 1 while extreme weather events such as floods and droughts increasingly illustrate the risk that climate change poses to human life.
Yet there is global momentum behind change. The 2022 US Inflation Reduction Act comes to mind as the most significant climate legislation in the country’s history.
It has created US$500bil in new spending and tax breaks that aim to boost clean energy, reduce healthcare costs, and increase tax incentives to accelerate the transition to a clean-energy economy. 2
Elsewhere in the world, the European Union aims to mobilise 1 trillion euros in sustainable investments from public and private funds to finance the European Green Deal and achieve its climate-neutral goal by 2050.
As a result, there are more investment opportunities across broadly diversified environmental markets than ever before.
Expanding opportunities
The raft of government support and private capital targeted at these environmental concerns means that companies providing solutions are well-positioned to deliver substantial growth for investors in the long term.
Meanwhile, firms that are unable to adapt to a more sustainable global economy may struggle.
To take advantage of the growing opportunities in environmental markets, BNP Paribas Asset Management’s global and Asian environmental strategies focus on six investible themes:
While these strategies maintain exposure to businesses with resilient demand, such as those in the water, waste management and recycling sectors, the opportunities to access growth are much more wide-ranging than traditional ideas such as renewable energy. Examples include:
Advanced water treatment: Using state-of-the-art membrane filtration systems and flow cytometry technology to detect contaminants like microplastics
Digital infrastructure: Advanced semiconductors which play a key role in industrial power networks
Smart environment: Leveraging data and technology to reduce energy use, improve air quality, optimise water usage and crop yields through smart irrigation and enhance sustainable transportation and housing.
Innovative tech-led companies are particularly well-positioned for growth. For instance, French multinational Schneider Electric, a leader in the 'digitisation of everything', offers smart systems that optimise energy efficiency and infrastructure performance in real-time. 4
Gaining exposure to the environmental pay-off
BNP Paribas Asset Management offers multiple strategies to help investors achieve their goals:
- Global environmental equities strategy: Enhances a broad global equities portfolio with diversification while capitalising on a multi-decade transition to a sustainable economy
- Water equities strategy: An alternative thematic investment proposition beyond technology. The annualised 20-year return rates for technology (10.6%) and water equities (9.7%) are comparable 5
- Asian environmental equities strategy: Captures the rise of environmental markets via Asia’s structural growth.
All these strategies are designed to capitalise on the growing global demand for innovative solutions to urgent environmental challenges such as climate change, resource depletion and water scarcity. The dynamics cannot be ignored, and ‒ over the longer term ‒ companies that are able to provide solutions will have a powerful business case in terms of growth and profitability.
BNP Paribas Asset Management’s global environmental-equity and water-equity strategies are the backbones of, respectively, the award-winning Manulife Global Aqua Fund and the MAMG Global Environment Fund.
Notably, both funds are recognised in the annual list of top-performing unit trusts and mutual funds for 2023/2024, compiled by FSMOne Recommended Funds.
To learn more about investing in these environmental opportunities, click here.
References
- World Bank, “World Water Day: Two billion people still lack access to safely managed water”, 22 March 2023,
- McKinsey and Company, “The Inflation Reduction Act: Here’s what’s in it”, 24 October 2022
- Impax Asset Management, as at 31 December 2023. Based on companies generating a minimum of 20% in revenue from solutions to environmental challenges.
- Schneider Electric, 2023 Annual Report
- Bloomberg, 30 June 2024. Technology: MSCI World Information Technology net total return index (USD). Water: S&P Global water total return index (USD). Past performance is not indicative of current or future performance
