A number of technologies have emerged to help make the world we live in more sustainable. More are on the horizon. Many are the result of innovations and will likely enjoy secular growth, perhaps for decades.
This report looks at the importance of sustainability from an investment perspective. It highlights some of the technologies and innovations that could help curb the greatest threats to the sustainability of the global economy. In our view, companies at the forefront of developing technology solutions to sustainability issues may offer compelling long-term investment opportunities.
Why sustainability as an investment theme?
Sustainability has become a key concern for companies and investors alike in recent years. It is understood that both can benefit if growth and profits are sustainable—not earned at the cost of the depletion of natural resources and the deterioration of human living conditions, nor at the expense of future generations. For companies, sustainability has ramifications beyond their main business activities—it may also encompass the way offices and places of business are located or configured, or the manner in which products are distributed.
A large majority of companies are now using their annual reports to speak to their progress on this front. The KPMG Survey of Sustainability Reporting 2020 found that out of a survey sample of the largest 100 companies by revenues in 52 countries, 80 percent reported on sustainability. Interestingly, the U.S. leads with 98 percent of its 100 largest companies reporting on sustainability, compared to 92 percent in Canada, 85 percent in Western Europe, and 84 percent in Asia-Pacific.
Investors approve. According to Morningstar, assets in sustainable funds hit a record high of $1.7 trillion at the end of 2020, up from just under $1 trillion a year earlier. The rapid growth was driven by a combination of record inflows, existing funds repurposed to make sustainability a major decision factor, and rising markets.
Making the world sustainable
In the March edition of Global Insight, we explored how climate change is one of the biggest threats to the sustainability of the global economy. Several other pressing challenges also need to be addressed to ensure we can continue to enjoy economic growth for decades to come. Among the most preoccupying threats to sustainability being discussed at the government and agency level are diminishing access to fresh water, the massive proliferation of waste from human activities, and the lack of social progress.
Access to fresh water has diminished greatly over recent decades. Agriculture consumes more water than any other activity, while inefficient manufacturing processes, storage, and transportation often result in waste. Climate change and industrialisation have also played their part.
According to the World Wildlife Fund, 1.1 billion people globally lack access to fresh water and as many as 2.7 billion experience water scarcity during at least one month of the year. The disastrous UK floods of 2015 and 2019, recent severe flooding in France and Italy, the prolonged disruption to shipping resulting from record-low water levels on Germany’s Rhine River in 2018, and the crippling flood in Houston, Texas in 2019 (one in a string of three “once-in-500-year” floods in the same region) all serve to remind us that this is not solely an issue confronting emerging markets.
Water scarcity is also an acute problem for China’s growth. The country is home to 20 percent of the world’s population but contains just seven percent of its fresh water. Moreover, pollution limits the amount of available fresh water as 70 percent of lakes and rivers in China are polluted, according to the World Economic Forum (WEF).
The huge amount of waste the world generates each year is another growing threat to sustainability and global prosperity. According to the World Bank, two billion tonnes of solid waste, enough to fill over 800,000 Olympic-sized pools, was generated in 2016, the last year for which global figures are available. Of this, a mere 16 percent was recycled, with 46 percent disposed of in a manner which threatens the environment. Rich countries burn their waste, releasing greenhouse gases (GHGs), while others dump it in rivers and oceans. At the current rate, the WEF estimates that by 2050 plastics will outweigh fish.
Waste generation is set to increase in all regions by 2050, though at an accelerated pace in some
Projected waste generation, by region (millions of tonnes/year)
Source - World Bank
Finally, there is a growing appreciation that a lack of social progress could also inhibit the global economy from realising its growth potential. Annual global GDP growth slowed from an average of 3.8 percent over 1960 to 2000 to just 2.9 percent in the most recent decade. A March 2021 study by Bloomberg economists suggests that global GDP could see a $20 trillion boost by 2050 if women were to enjoy the same levels of education and employment as men, relative to a baseline scenario of persistent gender inequality. Meanwhile, a Goldman Sachs study indicates that closing the 35 percent pay gap suffered by Black women in the U.S. could add $300 billion to U.S. GDP per year, or 1.3 percent of the country’s $21.4 trillion economy.
Technology can help
Our recent climate change article argued that tackling these challenges requires the dual involvement of governments (via regulation, incentives, and funding) and the private sector. Innovation and technology will play critical roles in creating solutions to make a more sustainable global economy. In our view, companies at the forefront of developing such solutions potentially offer compelling long-term investment opportunities.
We group these opportunities in five overarching themes:
- GreenTech (green technologies)
- AgriTech and FoodTech (agricultural technologies and food technologies)
- FinTech (financial technologies)
- HealthTech (health care technologies)
- Smart Cities
The table below shows how each can help tackle the threats outlined above.
Source - RBC Wealth Management
Environmentally-friendly technologies which aim to reduce GHG emissions
Our climate change article looked at several emerging technologies used in buildings to dramatically cut fossil fuel consumption. We highlighted geoexchange technology, which takes advantage of constant subterranean temperatures to heat and cool structures.
GreenTech also encompasses electric vehicles (EVs) and the ecosystem around them, including batteries, parts, and semiconductors. According to a Deloitte Insights report released in 2020, EVs accounted for 2.5 percent of new car sales globally in 2019. It expects EV sales to grow by an average of 29 percent per year over the next decade, with EVs constituting just over 30 percent of new car sales globally by 2030 thanks to a broader model offering, a reduction in battery costs, and greater access to affordable public and home charging infrastructure. Regional differences will emerge depending on governments’ commitments to investing in EV infrastructure and offering cash and tax incentives. Deloitte expects EV sales in 2030 to account for 48 percent of domestic new car sales in China, 42 percent in Europe, and a more modest 14 percent in the U.S.
Other GreenTech industries include wind farms and solar power, and the development of batteries to store the power generated by these intermittent sources of energy—the wind doesn’t always blow and the sun doesn’t always shine—while comparatively the demand for electricity is more constant. Wind energy accounted for some 8.8 percent of total electricity generation in the U.S. in 2020, according to the U.S. Energy Information Administration (EIA), while solar energy contributed a lesser 2.3 percent. Together they provided some 10 percent of all electricity generated in the U.S. The EIA predicts the share of all renewables (i.e., including hydro) in the U.S. electricity generation mix will double from the current 21 percent to 42 percent by 2050, with wind and solar driving much of that growth.
Hydrogen, another key aspect of GreenTech, could potentially help meet a non-negligible 14 percent of U.S. energy demand by 2050, according to the Fuel Cell & Hydrogen Energy Association. While much of the attention garnered by hydrogen has focused on transportation applications—cars, heavy trucks, locomotives, ships, even planes—a number of technological hurdles to realise that potential still need to be cleared. However, there are currently feasible applications in oil refining (as a substitute for natural gas) and steelmaking (as a substitute for coking coal) that are already attracting considerable investment by industry majors.
Cement manufacturing and steel production are the two largest industrial sources of GHG emissions. Engineered wood, another GreenTech product, is being used to replace both of these materials in the construction of larger buildings—one built in Norway rises 18 stories.
Some GreenTech solutions, such as recycling robots, also tackle waste management. These have become increasingly popular after China banned the import of plastic waste in 2018 following three decades of importing close to half of the world’s recyclable plastic waste. This ban has provided the impetus for innovations elsewhere in the world that can efficiently process this waste in place of China. For example, artificial intelligence robots are able to not only sort rubbish but also extract recyclable components from it, and assess their purity—valuable data to have in order to recycle these materials efficiently.
AgriTech and FoodTech
Food development and delivery solutions spanning a range of activities from farm to table
Agriculture has already benefitted from the growing adoption of soil-friendly techniques such as no-till farming and cover cropping. GPS technology has enabled more precise land management and reduced input usage (fertilizers, pesticides, and fuel). But the industry remains one of the largest sources of GHG emissions.
Technology solutions in this field can potentially address all four of the threats outlined above while tackling the challenge of feeding a growing world population. Since the 1950s, consumption of protein in China has grown by five times while the country’s population has doubled. AgriTech and FoodTech can be leveraged to produce protein foodstuffs in a sustainable manner.
Agricultural innovations, such as the development of vertical farming, a reengineered farming process using stacked production systems, may permit the same or greater production of some foodstuffs on drastically less land. Moreover, this type of farming can be employed in closer proximity to cities, reducing the need for transport. Technologies that enable cultivation with less water can also help to mitigate water scarcity, while hydroponics use little to no soil.
FoodTech has fostered the development of plant-based products, which directly reduce GHGs (cattle produce a significant amount of methane), as well as the creation of protein sources via processes that use much less water. The United States Geological Survey estimates that the production of a hamburger weighing a quarter-pound (113 grams) requires 460 gallons of water (some 1,750 litres). Alternative sources of protein can require only half as much.
Other aspects of FoodTech such as food traceability for just-in-time delivery can lower inventories, thus reducing waste and GHG emissions. The World Wildlife Fund estimates that one-third of food ends up as waste, and as it rots, it produces methane.
AgriTech can also foster social progress to the extent that more efficient farming practices can help raise farmers’ standards of living, particularly in developing countries, and in the process enable family planning and reduce the pressure to migrate.
Development of applications that can empower economically “unbanked” populations
According to the World Bank, in 2017 just over 1.7 billion people in the world were unbanked, i.e., no access to financial services. While that number most likely has come down, the issue is particularly acute in low-income countries. But richer nations are not spared entirely. According to the Federal Deposit Insurance Corporation, as of 2019, 7.1 million households remained unbanked in the U.S., representing a non-negligible 5.4 percent of the country’s households.
Nearly half of all unbanked adults live in seven countries, though this is not exclusively an emerging market phenomenon
Global distribution of adults without a bank account, 2017
Source - Global Findex database
FinTech solutions, including blockchain and emerging digital payment systems, are among the new technologies that can improve access to banking and credit. One example is the M-Pesa text message-based payment system initially launched in Kenya in 2007. The service allows the user to send and withdraw funds via basic mobile phones. By its 10-year anniversary, the service was used by 30 million customers across 10 countries, with over 95 percent of households in Kenya having at least one M-Pesa account. According to the World Bank, M-Pesa has advanced the financial empowerment of women, helping them gain control over their income, and fostered start-up businesses.
Development of devices, medicines, and systems to improve the quality of life
Ageing societies, rising health care costs, and unequal access to health care are widespread problems. Where access to proper care is inadequate, it is often due to the lack of reliable diagnosis, and substandard equipment, medication, and/or doctors. By reducing costs and improving efficiencies, telemedicine and digital diagnostics can make some of these services more widely available.
The ability to remotely collect, read, and interpret data, and provide an expert diagnosis to a patient in an underserved community or rural area can go a long way to improving the living conditions for many, in both emerging and developed regions. In the latter, telemedicine practitioners are able to not only diagnose but also prescribe medication to patients due to the increased popularity of smartphones and wearables.
Remote surgery can improve access further to those living in remote areas. This involves using an internet-connected robotic system to perform increasingly complex surgical procedures. This technology can circumvent lengthy and costly transport by ambulance or helicopter, and in doing so may also speed up treatment.
Tackle climate change, fresh water shortages, waste management, and even foster social progress
Smart Cities can help reduce the detrimental impact of urbanisation on the environment and improve the quality of urban life. These are cities in which infrastructure, utilities, services, homes, and more are connected via the Internet of Things and 5G and use artificial intelligence technologies to optimise the flow of goods and people. This connectivity enables cities to optimise waste management and water consumption. It can also facilitate more efficient traffic flow to enhance public safety.
For example, many cities today already employ sensors on trash receptacles to alert authorities when capacity is reached, allowing the refuse collection fleet to be deployed more efficiently. And while artificial intelligence is already being used to manage traffic, with greater connectivity more progress is possible on this front.
Sensors in sewage systems can monitor water levels and alert managers to a potential leak, enabling them to redirect wastewater if necessary to prevent floods. Such technologies can prevent economic losses and help protect livelihoods.
Parking management solutions is another area that can bring added productivity. Some cities offer the option for people to reserve a parking spot at the same time as when they make an appointment/reservation, so they don’t have to waste time—and gas—looking for a parking space. If they see that no spot is available, they can adjust their plans accordingly to make more efficient use of their time.
Asia is leading the global race to create Smart Cities, with a number of high-tech hubs in China including Shenzhen, Shanghai, and Guangzhou, but the technologies are being increasingly adopted in the West. Singapore also ranks very highly on this front, thanks to integrating the Internet of Things into mobility and transport, health care, and public safety, combined with a highly digitised public administration.
Over the next several months, we will cover each of these SusTech themes in more detail. As technologies emerge that make the world more sustainable, companies at the forefront of developing technology solutions to sustainability issues may offer compelling long-term investment opportunities, in our opinion.
The companies and industries that revolve around innovations and new technologies can make for volatile investments. Implementing these themes can carry higher-than-average risk and should thus be viewed within the context of a well-diversified portfolio.
We believe that for investors who can withstand such a higher level of risk, the secular opportunities that emerge out of these themes should contribute to portfolio performance in the long term.