Environmental investing: public and private opportunities for family offices in a new era
Spurred by the far-reaching influence of the broad climate megatrend, the environmental theme now represents some of the world’s fastest-growing sectors, characterised by highly favourable economics and structural tailwinds.
The innovative and forward-thinking nature of companies at the forefront of providing environmental solutions gives investors exposure to a diversified range of businesses that can deliver a persistent return premium over the long term.
To provide even greater scope to capitalise on this trend, the opportunity exists across both public and private companies in various sectors and geographies – assuming there is a reliable and repeatable investment process.
These were some of the key takeaways based on insights from investment and market specialists at Pictet Asset Management, speaking in Hong Kong and Singapore with senior executives at family offices and endowments at discussions hosted by AsianInvestor about how to capture opportunities in public and private markets from emerging environmental themes.
Investing beyond the energy transition
Among the biggest misconceptions about environmental investing is the view of it being a niche area focused mostly on energy transition.
Instead, the opportunity set is broad and diverse. In addition to renewables, its coverage includes energy efficiency, sustainable agriculture and forestry, water supply and technologies, waste management and recycling, and pollution control.
From a listed equity perspective, the environmental solutions space focuses on different business models, industries, sectors and products, said Jennifer Boscardin-Ching, client portfolio manager at Pictet Asset Management.
“These are also not always correlated to each other,” she added, highlighting the diversity available when comparing forestry, agriculture and renewable energy investments, or technologies, software, utilities and waste management.
Put simply, the thematic of an environmental lens enables investors to identify the most compelling opportunities in fast-growing segments. These include:
- Greenhouse gas reduction – energy storage, energy efficiency, low/no/removal carbon technologies, and renewable energy technologies and services.
- Sustainable consumers – agri-tech, food safety, supply chain optimisation, and food-tech.
- Pollution control – water quality, air quality, soil preservation, and waste treatment.
- Circular economy – the sharing economy, recycling, resource efficiency, and bio-based materials.
- Enabling technology – sensors and data capture, the semiconductor value chain, design and engineering software, and green chemistry.
“Fundamentally, we have a very high conviction that we need to preserve the environment,” explained Goh Hui Yang, head of alternative investments for Pictet Asset Management in Asia.
The environment as a tech enabler
In terms of compelling areas for investors to focus on, Boscardin-Ching pointed to spending on urban resilience, including flood infrastructure management and water management.
This reinforces the importance of urban design. “How do we design cities to become more environmentally friendly, but also more resilient when it comes to climate adaptation,” she asked.
Indeed, the broad climate imperative and related opportunities cannot be overlooked. And within this, the projected market size for environmental technology, for example, is $12 trillion by 2030.
Indeed, a key trend for investors is the nexus between technology growth and environmental needs. In Pictet Asset Management’s view, environmental technology will play a critical role in addressing environmental challenges.
This offers an attractive investment prospect, added Goh, given that the penetration rate of environmental technologies is still low but expected to grow exponentially.
This stems from what Pictet Asset Management sees as a key limitation, or bottleneck, to greater take-up of artificial intelligence (AI) and related technologies: electricity capacity.
There are also a lot of opportunities on the energy efficiency side. ‘We're seeing a lot of demand for efficient cooling solutions for data centres, as well as grid infrastructure and electricity networks,” explained Boscardin-Ching. In turn, this is driving growth for clean energy.
From a private markets perspective, meanwhile, to help convert the potential of environmental solutions into financial returns, Goh has seen notable deal flow into enabling technology. For example, some of these technologies are critical for energy efficiency gains, or as part of a solar power plant, or for electric vehicles that use semiconductor technology.
Within this space, the firm’s investment approach focuses on technologies or products that are already profitable and commercially scalable, said Goh.
The different approaches by Pictet Asset Management to tech-led opportunities in both the public and private markets can broadly be represented by what the firm calls the ‘technology maturity curve’.
With public funds, investors tend to exposure to companies driven by innovation and growth, so typically on the left-hand side of the curve. In the private markets, however, Pictet Asset Management’s focus shifts to companies and sectors positioned further to the right along the curve. According to Goh, the goal is to reduce risk in performance and focus more on maintaining stability.
Participants in the discussion from family offices and endowments said they are also seeing a lot of flows on the tech side, with many families involved in related businesses so are comfortable and willing invest in something they know.
Some of the key opportunities identified included agri-tech, given the sheer size of the expected global population in the coming decades – potentially 10 billion by 2050 – yet the fact that so many people still don't have enough food. Connected to this is the potential for fresh water solutions.
Other areas of interest driving allocations among some family offices include digital infrastructure such as data centres, as well as renewables like solar, electric vehicles and battery-related businesses.
At the same time, target investments have to meet certain sustainability criteria based on the ESG rating but also with the investors' return and impact objectives aligned.
Making an environmental framework pay off
Investing in such specialist solutions requires specialists as part of the investment process, combining not only financial experience, but also significant sustainability expertise.
“We need to be more than generalist investors, because we need to know the technologies, how they work, and whether they will actually be useful,” said Boscardin-Ching. “Just looking at the financials is not enough on its own.”
At Pictet Asset Management, for example, the backgrounds of some portfolio managers include working in science labs, or regulatory agencies. In addition, expert networks are a key component – including research providers, advisory boards, scientists and policy makers.
In particular, one of the differentiators of Pictet Asset Management’s investment process as far as environmental investing goes is the Planetary Boundaries Framework.
Developed in 2009 by the Stockholm Resilience Centre and a group of internationally renowned scientists, this involves nine quantitative boundaries within which humanity can continue to develop and thrive. “Crossing these boundaries increases the risk of large-scale abrupt or irreversible environmental changes,” explained Goh.
As a result, the firm assesses the environmental impact of a target company’s economic activities across the nine boundaries to make sure they do not create significant harm. “We invest in companies that are within the ‘Safe Operating Space’,” added Goh.
Already the world has breached six of the nine planetary boundaries necessary to maintain Earth's stability and resilience. “So, to us, it's even more important to invest in solutions to help the economy get back within these boundaries, both on the public and private sides,” explained Boscardin-Ching.
Meanwhile, Pictet Asset Management also prefers to avoid investing in companies driven by policy, since this creates a significant amount of policy risk.
In general, while diversification beyond energy transition within private markets is challenging in terms of finding opportunities for consistent performance, the number of potential companies to invest in is growing given that companies are staying private for longer, in part to reduce regulatory compliance.
When it comes to ensuring and measuring impact, plus to distinguishing between company impact and investor impact, there are differences in the approaches based on the types of investee companies.
For private markets, Goh said there is more direct impact measurement. Data is sourced directly from the target company. In terms of listed businesses, companies often cover many regions and can have several different business segments. This requires investors to find a way to calibrate and consolidate across the portfolio, leading to a more top-down approach.
Ultimately, however, the Pictet Asset Management approach to environmental investing offers access to some of the most innovative, high-potential companies, given that the solutions represent such fast-growing sectors backed by favourable economics and long-term structural tailwinds.
Access the links below for more insights into Pictet Asset Management’s environmental capabilities: