Sanjeev Lakhani, co-portfolio manager of Impax Asset Management’s Environmental Markets strategies, comments on the investment opportunities emerging as climate pressures drive growing demand for resource efficiency and resilient infrastructure.
The wildfires and drought conditions affecting parts of Europe this summer are a stark reminder that the consequences of a changing climate are already being felt.
While much of the investment debate has traditionally focused on companies developing solutions to mitigate climate change, there is another side to the opportunity, businesses helping their customers adapt by using energy, water and other resources more efficiently.
The need for these solutions is becoming increasingly apparent. Extreme heat places greater demands on cooling and electricity systems, while drought increases pressure on water supplies and infrastructure.
At the same time, elevated and volatile energy prices have reinforced the economic importance of reducing energy consumption.
There is also a growing political consensus around the need for greater resilience and resource security, even where governments disagree on the direction and pace of climate policy.
This is further boosting demand for solutions in areas like energy efficiency, electrification, and water infrastructure which are already benefiting from strong secular growth drivers.
Efficiency can translate directly to the bottom line
For investors, however, the attraction is not simply that these companies are exposed to an environmental theme. It is that the efficiencies they sell can have a measurable financial benefit for their customers.
When the cost or availability of a resource comes under pressure, technologies that reduce consumption become more economically valuable. Higher energy prices, for example, can shorten the payback period for investments in energy efficiency.
Similarly, greater pressure on water supplies can strengthen the economic case for technologies that reduce consumption, leakage or waste.
In each case, the environmental benefit is accompanied by a financial one. Customers can lower operating costs, improve productivity or make their businesses more resilient to future disruption.
We believe companies able to deliver those savings consistently can therefore benefit from structural demand that is not dependent solely on climate policy or environmental targets.
Finding where the market is mispricing the opportunity
This is fundamentally an investment strategy. Environmental Markets help us identify the supply and demand imbalances that can create long-term growth opportunities.
The investment challenge is determining which companies are best positioned to translate those imbalances into durable earnings – and where the market may be underestimating their potential.
Not every company providing an environmental solution will be an attractive investment and we look for profitable businesses with differentiated products, pricing power and the ability to demonstrate clear savings for their customers.
As the physical consequences of climate change become more visible, demand for greater efficiency and resilience is likely to receive more attention.
For investors, the opportunity is not simply to identify that demand, but to find the businesses capable of capturing it profitably before that potential is fully reflected in valuations.
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