Industry Voice: Impact investing - a key role to play in reshaping the future

Today, the world is confronting the global coronavirus pandemic: so far, it has spread to 188 countries, infecting more than 18m people and killing more than 690,000, in turn putting a severe strain on health systems and economies worldwide.

But amid this crisis, we have a chance to build a better future. For responsible investment strategies, Covid-19 has resulted in a paradigm shift: it has put a focus on the critical need to build resilience in healthcare, food and water security, and across supply chains. It has also put climate change and worker rights under the spotlight.

Impact investing is forward-looking: it aims to identify businesses and organisations pursuing purpose-led activities whose products and services tackle the pressing needs of the global economy and environment. Indeed, our thematic approach to impact investing seeks to identify opportunities created by megatrends - and as a result, we have been investing in pandemics long before the outbreak of Covid-19.

Here we dive into the details of two megatrends, exploring their sub trends and how they are shaping our investment thinking. We also identify companies that can tackle these challenges and opportunities.

Megatrend: climate change

Climate change is the defining issue of our time: it threatens the lives and livelihoods of billions of people, natural disasters and extreme weather destroy crops and deplete fisheries, leaving people without income or food. Since 1998, extreme weather events have resulted in 16,000 deaths and economic losses of $142bn every year._[1] To respond to a changing climate, we must build resilience to these threats.

Sustainable technologies can be particularly impactful when it comes to addressing the climate crisis. We see renewable energy, electric vehicles and energy efficient housing as some of the main pillars in the fight against climate change. We continue to see a huge opportunity in renewable energy across the globe. Production costs have fallen precipitously: renewable wind can now compete with fossil fuels on an un-subsidised basis. As such, we anticipate strong growth in the industry for many years to come.

Portfolio examples: Our exposure ranges from a renewables-focused utility to a wind turbine manufacturer. Ørsted is leading the way in renewable energy. As a global leader in wind technology and bioenergy, it is striving to build an entirely ‘green world'. Meanwhile, Kingspan, a recent portfolio addition, helps create energy efficient housing. The company is a global leader in insulation and its products not only reduce carbon emissions, but some of them are made from recyclable materials. We believe products like these, which can help reduce emissions from buildings, are critical to tackling the climate emergency as buildings account for about 40% of all global carbon emissions^[2].

Megatrend: water

For six consecutive years, water crises has been listed as a one of the World Economic Forum's top five global risks^[3].

One of our impact themes is water and it is aligned to SDG 6 (clean water and sanitation) and SDG 13 (climate action). We believe that improving access to quality water supply and preservation of the resource are critical to the environment. After all, water is essential for agriculture and food security, and it is the lifeblood of our ecosystems.

As one of our most precious natural resources, efficient and sustainable management of water is critical, particularly as climate change is expected to exacerbate water scarcity.

Portfolio examples: Two of our key holdings, Ecolab and Xylem, help to create positive impacts towards this theme by providing solutions across the water cycle. Ecolab is a global leader in water and sanitation solutions across food service, food processing, hospitality, healthcare, industrial and oil and gas markets. Through its cleaning and sanitation products and analytics capabilities, it helps deliver clean water and safe food to its customers, while reducing their water use, carbon footprint and waste. Meanwhile, Xylem delivers wastewater treatment solutions - and it is a pioneer in creating innovative water technology solutions, including Flygt Concertor, the world's first wastewater pumping system with integrated intelligence. These companies demonstrate how sustainable technologies can be used to produce a better long-term environment.

Investing in pandemics

There has been much debate about how the global coronavirus pandemic has changed the way people live around the world. For many, the lockdown has provided time for reflection - an opportunity to consider what is truly important. For us, we believe the pandemic will serve as a catalyst to accelerate existing trends, thereby increasing the awareness of risks facing economies, the environment and society alike.

One of our theses is that we will increasingly see a transfer of funds from governments to the private sector to help address pressing environmental and societal challenges worldwide - issues which governments do not have the capacity or expertise to tackle or have failed in their attempts to do so previously.  As governments worldwide look to fiscal stimulus to support the re-opening of economies, we believe that companies addressing the SDGs are best placed to benefit - and in doing so, they can help shape a sustainable future for all.

Read our full Federated Hermes Impact Opportunities Fund H1 2020 report, to find out more about our recent activity and performance, our engagement progress, and how we have been investing in pandemics through our impact themes.

 

Ingrid Kukuljan, Head of Impact Investing, Federated Hermes

 

 

 

 

 

 

 

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