Sustainably-themed investing: affecting positive change through disruption

Looking at companies through a thematic lens could allow investors to grow their investments, while delivering tangible positive change on the environment and/or society.
Global X Team

Global X Team

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Against the backdrop of a global pandemic that impacted most facets of society in an unprecedented fashion, two investment areas shone through in 2020: thematic investing and sustainable investing. Thematic investing refers to the process of identifying disruptive macro-level trends and the underlying investments that stand to benefit from the materialization of those trends. Sustainable investing is an investment approach that considers environmental, social, and governance (ESG) factors, alongside financial ones, in the pursuit of competitive returns and positive impact for people and planet.

While at first glance these two areas may seem independent from each other, thematic investing and sustainable investing are not only far from mutually exclusive, but potentially synergistic and complementary to each other in certain circumstances. Both investment philosophies inherently focus on a long-time horizon.

In the following sections, we will discuss why it may make sense to consider sustainably-themed investments, and then highlight CleanTech, Renewables, and Clean Water as sustainable themes in focus.

Sustainably-themed investing: aligning impact with growth

Broadly speaking, there are three categories of sustainable investing approaches: Integration, Impact Investing, and Exclusionary.

Typically, ESG-oriented ETFs track indices that employ integration and/or ESG-related exclusions in the security selection process. ESG data is a critical input to this process, informing company-level composite ESG scores (for an integration approach) and business involvement metrics (for an exclusionary approach). If exclusions are part of an index methodology, index providers use business involvement metrics, usually expressed as revenue percentages, to narrow investment universes down to only companies with an acceptable level of involvement in certain activities, like manufacturing or distributing weapons or alcohol, for example. In ESG integration approaches, company-level ESG scores or ratings are used alongside traditional considerations to identify and weight index constituents.

In the next sections, we will discuss how CleanTech and Renewable Energy, and Clean Water initiatives contribute to sustainability goals, while providing investors with potential for economic profit.

CleanTech and Renewable Energy

Clean Technology, or “CleanTech,” describes myriad disruptive technologies that mitigate or inhibit negative environmental impacts. The business activities under this theme could involve renewable energy production, energy storage, smart grid implementation, residential/commercial energy efficiency, and/or the production and provision of pollution-reducing products and solutions.

Since the inking of the Paris Agreement in 2016 to fight climate change on a global scale, many signatories have upped the ante, vowing to take more aggressive measures in the pursuit of carbon neutrality. The European Green Deal, for example, is a set of policy initiatives by the European Commission with the overarching goal of making Europe the first climate-neutral continent by 2050. In North America, the Government of Canada submitted draft legislation in November 2020 to Parliament, titled “The Canadian Net-Zero Emissions Accountability Act”, adding Canada to the list of over 120 countries pledging to reach net-zero emissions by 2050.

Clean Water

Water fuels life on earth and is a fundamental input for economic productivity. While it is seemingly abundant, competing uses and structural challenges presented by population growth, pollution, and climate change are stretching water resources precariously thin. Clean water – the water we drink, prepare our food with, and use for sanitation – faces the most immediate pressure with the direst societal and economic impacts. Over 2.3 billion people live in water-stressed countries and in 2019, unsafe drinking water resulted in more deaths than diabetes, malaria, or HIV/AIDs.2, 3, 4

Fortunately, a shift to a more sustainable model is possible, led by government policy, technological innovation, and growing consumer and public health advocacy. Keys to this transition include:

  • Sustainable and next-generation water sourcing
  • Innovation in water treatment and distribution
  • Wastewater management and water reuse

Conclusion

Thematic investing and sustainable investing approaches are each important in their own right and top-of-mind for today’s increasingly ESG-minded investment community. In our view, sustainably-themed investing is a way for investors to recognize the benefits of both approaches, leveraging key concepts drawn from each. Importantly, looking at companies through a thematic lens could allow investors to grow their investments, while delivering tangible positive change on the environment and/or society. In particular, we believe well-defined themes such as CleanTech, Renewable Energy Production, and Clean Water, can all serve investors well in their quest to achieve multiple objectives (financial and otherwise) simultaneously.

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Sustainably-themed investing: affecting positive change through disruption