While the ‘ethical’ and ‘sustainable’ investment industries have been relatively well established for some time, the term ‘thematic’ is somewhat less familiar with investors. Although it is more of a recent trend, it is no less integral to our EST (ethical, sustainable & thematic) approach and involves the delivery of returns from a specific set of global themes which are thought to be driving change, through investment in the sectors and businesses that are best placed to exploit them.
Thematic investing essentially depends on identifying global trends that are likely to influence financial markets and above all, the way we live our lives, whether they are driven by economics, politics, cultural or demographics changes, or a combination of all factors. The core drivers behind most thematic investment funds are population growth, rising wealth in the developing world, natural resource and energy scarcity, and climate change and as such, the investment options available to UK investors are typically biased towards either environmental (‘green’) or social themes.
The impetus behind environmental investment stems from the growth in evidence surrounding the impact of climate change on the planet and the need to tackle it by securing sustainable resources for the future. Although a dramatic change to our environment may not be something you can see, or even perceive, happening, it is, and will continue to be, one of the principle drivers behind global political and economic action in the 21st Century.
The threat of catastrophic changes in the world’s climate, exacerbated by human action, is essentially leading investors to ‘think green’. Individual and societal behaviour has begun to shift in more recent years, with the introduction of organic and sustainable food choices in our supermarkets, the option to power our homes with renewable energy, the ability to recycle our household waste more effectively, and an increased awareness of our carbon footprint.
However, large swathes of the population are yet to appreciate the extent of their personal impact on climate change, and this is a necessity if the world’s population are able to live in a completely sustainable manner. This need has resulted in investment by governments and institutions in the clean energy, water, timber, and waste management industries, opening up an abundance of opportunities for private investors. As well as providing opportunities to access companies which are addressing climate change and resource scarcity through their positive impact on the environment, ‘green’ investment also enables investors to generate a credible financial return by supporting companies which are targeting areas of significant future growth in a rapidly changing world.
In the same way that environmental change can result in a tangible shift in favour of businesses promoting a more sustainable way of living, it also poses risks to mainstream investment, in areas which do not recognise changes in climate change. Regulatory pressure on behalf of national governments and corporations to reduce its impact are leading to strict new policies which may fundamentally alter the way businesses operate. Some of the largest economies in the world, such as the US and China, are leading the way in transforming the global energy mix as policy-making continues to support new technologies at the expense of the fossil fuel industries.
It is likely that this trend will only continue to gain momentum and therefore investors should position themselves accordingly.
Alongside environmental issues, thematic investment may also address social challenges such as burgeoning population growth, urbanisation, and social health.
Ageing populations are becoming a universal phenomenon (with the proportion of older people expected to double by 2050), yet longevity risk is chronically underestimated. The elderly are set to consume a growing share of resources, placing pressure on the remainder of the working population who face the burden of supporting them. This is a dynamic which future generations will not be able to ignore and as such, Governments and businesses are dedicating more time to analysing the threats surrounding the issue, presenting what we believe to be interesting opportunities for investors. This trend will be particularly pronounced in industries such as health and elderly care, insurance, and pensions, which should grow rapidly in line with an ageing demographic.
In addition, the rapid pace of urbanisation across the globe is leaving some cities, particularly in the emerging market nations of Asia and Latin America, struggling to cope. In many instances, they possess outdated infrastructure that lacks capacity, as well as depleting sources of energy, water and food. Urbanisation is undoubtedly an important driving force for growth, but in order for growth to be sustainable, consideration must be given to the framework that is needed to house, feed, educate and transport the population. Only by dedicating investment to such areas will the expanding regions of the world create resilient cities that are not only resource-efficient, but also offer a higher quality of life.