In times of market turbulence, it is important for investors to maintain a sense of perspective. The next few weeks and months will be volatile and unpredictable. The coronavirus outbreak is proving to be a major challenge for governments and central banks, who have yet to find the right mix of policies to contain, and ultimately overcome, its economic effects. We’re confident they will and that markets will eventually recover.
In the meantime, investors should try to resist the urge to take drastic action. A more rewarding approach, experience tells us, is to focus instead on the trends that will power portfolios over the long run.
One such trend is environmental change and humanity’s response to it. Tellingly, equities that score well on sustainability appear to have been holding up better than the broader market in recent weeks. Corporations, consumers and governments are increasingly recognising the need to do more to protect our planet and limit our environmental impact. We expect such efforts will strengthen further in the future.
For investors, this presents risks to manage, and opportunities for capital growth. As the world sits up and takes notice, companies that waste resources and pollute will become increasingly risky investments. Conversely, the prospects for businesses who are developing innovative solutions to environmental challenges facing our planet will brighten. Such firms form the core of our Global Environmental Opportunities portfolio.
We estimate that the global environmental products are already a 2,5 trillion dollars industry, and, once the global economy has stabilized from the shock it is experiencing, it can grow by about 6-7% per year.
The problem investors face, however, is that there is no universally accepted method for measuring a company’s environmental footprint. Much of the environmental auditing that currently takes place is either too subjective or too narrow in scope: knowing how much carbon a business emits is useful but does not give the complete picture. The lack of universal standards also leaves the door open to greenwashing by businesses and investors alike.
At Pictet, we look at the Planetary Boundaries framework, developed by scientists at the Stockholm Resilience Centre. It quantifies a set of boundaries, which, if breached, would endanger the environmental conditions that have been instrumental to human prosperity over thousands of years. Of the nine areas measured, four have already exceeded their boundaries, including climate change and loss of biodiversity.
Crucially, an environmentally friendly approach often comes with efficiency gains. For example, sensors which measure pressure inside water pipes can identify leaks as soon as they happen or even predict them in advance, thus saving time and money on repairs. Improving efficiency will become an ever bigger priority as businesses recover from the current economic slump. Furthermore, given the focus on the environment, some of the fiscal stimulus may well be targeted towards projects in this area.
Technology will play a key part in the green revolution. Global environmental technology patents tripled between 2010 and 2015, according to WIPO data. Successful green tech – such as smart meters or high-tech recycling plants – is readily being embraced by corporates, consumers and governments.
Investments focused around the environment can also have defensive characteristics – a reassuring trait in the current market environment. Naturally, this segment includes industries which are traditionally considered defensive, such as utilities and water management. These defensive holdings should dampen market volatility while providing steady cash flow, especially when global economic growth is weak.
At Pictet Asset Management, we have been investing in thematic equities for a quarter of a century, and our experience testifies to the long-term potential of such an approach. We believe that investing in environmental opportunities can boost returns over the long-term, improve diversification and also offer the benefit of some defensive characteristics during short-term market volatility. •
Présent sur 17 sites à travers le monde (Amsterdam, Bruxelles, Dubaï, Francfort, Genève, Hong Kong, Londres, Luxembourg, Madrid, Milan, Montréal, Osaka, Paris, Singapour, Taipei, Tokyo, Zurich), Pictet AM gérait au 31 décembre 2019 185 milliards d’euros d’actifs investis sur les marchés actions et obligataires internationaux.