Investing in resource efficiency and environmental markets is good business, according to Bruce Jenkyn-Jones of Impax Asset Management. Tackling environmental challenges like air pollution, water shortages or climate change is increasingly recognized as economic necessity by a growing number of countries. Spurred by subsidies, or simply identifying new opportunities, businesses continue expanding in the field, making it attractive for investments.

Jenkyn-Jones is head of the listed equities division of Impax, a UK-based, London-listed company with offices in London, Hong Kong, New York and Portland. With US$4.6 billion in assets under management, it specializes in resource efficiency and environmental markets.

2015 may turn out to be pivotal for climate change. On November 12, US president Barack Obama and Chinese president Xi Jinping issued a joint announcement in Beijing laying out plans to curb greenhouse gas emissions. This sets the stage for next year’s United Nations Climate Change Conference to be held December 2015 in Paris. Its ambitious goal to achieve a binding and universal climate agreement looks more realistic now that the world’s two biggest emitters have made the commitment. It is hoped that the new accord would energize global efforts to curb greenhouse gas emissions. These efforts in turn would present a wide range of opportunities for new technologies benefitting not only the environment itself, but also investors smart enough to recognize them.

Environmental market leader
Jenkyn-Jones sees the best investment opportunities in the areas of energy efficiency, renewable resources, transportation infrastructure, water management and precision agriculture.

China recognized the need for growth in the renewable energy industry in the early 2000s with the government’s strategic sponsorship of the solar panel industry. “They now completely dominate the solar panel manufacturing market”, he tells The Asset.

Having achieved substantial decline in the cost of panel production, the Chinese government is now focusing on investing in solar power plants to support its “new energy” priority set out in the 12th Five-Year Plan in 2011. At the end of 2013, China had about 19 gigawatt of solar capacity, which constituted just over 1% of the country’s total power generation, reveals Jenkyn-Jones. This is projected to grow four-or five-fold by 2020, to reach an estimated 100 gigawatt or 6.5% of total capacity.

For global investors, the renewable energy sector has been, historically, quite volatile due to the uncertainty and changes in the governments’ policy. With China’s solid support of solar cell technology, the sector carries a lot of promise, in particular for low-cost solar panel manufacturers and operators of solar farms.

Although China’s wind technology is not as well known since the country does not export much wind equipment, most of it is produced and used in the mainland. China Longyuan Group pioneered wind power in China in the 1980s and its capacity has reached 92 gigawatts, according to a report by the Renewable Energy Policy Network for the 21st century.

As China moves away from using coal for powering its electricity generation towards cleaner fuels, exploitation and distribution of natural gas emerges as a very promising area, Jenkyn-Jones says. One has only to look at Chinese cities, where traditionally coal was used for heating, to realize the full scope of the opportunity.

Energy efficiency is a large and varied sector with many opportunities, from energy-efficient glass panels through insulation materials to more efficient lighting. LED technology, in particular, deserves attention as it appears to be reaching a “tipping point”. “In five years’ time, the only lighting products you’ll be able to buy will be LEDs”, forecasts Jenkyn-Jones. “The economics is much more compelling, the efficiency is much better, they’re much more robust.” In addition to the leading manufacturers of LEDs, it is also worth looking at businesses working towards the integration of LEDs into efficient lighting solutions, he says.

Modern information technology, notably “big data”, is making its contribution to energy efficiency by enabling electricity grids to become smarter. “Wherever energy is being used, data is being collected and then integrated with the internet to improve energy management and to optimize energy use,” says Jenkyn-Jones. “The more everything is connected, the better we can optimize use of energy, and utilities can manage supply and demand much better,” he adds. A number of Chinese companies are active in the areas of smart electricity metering and optimized grid solutions.

The use of big data can also improve agriculture. The modern “precision agriculture” approach makes use of GPS data on farm machinery location, data on weather and soil condition to optimize planting regimes and the use of irrigation, fertilizers and pesticides.

Transportation is another area with far-reaching prospects and opportunities. China continues to expand its high-speed train network, investing into engine technology and efficient rail networks. Conversion of cars from diesel fuel to much cleaner natural gas and the inevitable adoption of hybrid and fully-electric cars in a more distant future create plenty of opportunities. Jenkyn-Jones prefers to invest in suppliers of energy-efficient technology rather than car manufacturers themselves.

Water management has for a long time been a focus of many large-scale projects in China. “The water sector is very interesting,” he notes. “The spending between now and 2020 in China could be as high as US$330 billion.”

Managing environmental portfolio
Although the environmental market is relatively new, Jenkyn-Jones has a global investable universe of around 1,000 names, up from 300 when he started in the business 15 years ago. The market is quite fluid, with substantial M&A activity in 2014. Large global players like Siemens, GE, Schneider or Emerson have been making acquisitions in the space, but smaller players have also been consolidating to create a significant global presence in the industry.

The main challenge of an investment manager specializing in environmental markets is understanding of the strategic importance of its various sectors. The manager takes a long view and needs to understand how technologies evolve when they become commoditized and how companies will adapt.

Environmental regulations also play a significant role, and the investors must be aware of government policies and barriers. “Subsidies can be very disruptive,” says Jenkyn-Jones, “but generally, regulation can be positive because it is stable and ever-tightening”. He adds: “It is quite a good market for businesses to sell products that help other businesses meet these targets.”

As long-term environmental effects of burning fossil fuels are better understood, such considerations may affect valuation of companies in the energy sector. According to Carbon Tracker, a non-profit organization, not all fossil fuel reserves currently on the books can be used. Climate models limit the amount of carbon dioxide (CO2) that can be released into the atmosphere before 2050 for the average temperatures to increase by no more than two degrees. This amount is only 20% of all fossil fuel reserves. The models assume that the rest will never be used either due to lowering of consumption (an optimistic scenario) or to catastrophic effects of unchecked climate change (a pessimistic scenario).

These considerations, when applied to the reserves of oil and gas companies, may significantly change their valuation. This point of view has found traction with certain investment managers in Australia, New Zealand, Scandinavia and California, where universities and endowments used it as basis for the decision to divest from fossil fuel exposures. For those who do, environmental stocks focusing on energy efficiency and alternatives provide means to maintain exposure to the natural resources sector.

Investments in resource efficiency and the environmental market fit in the portfolio of an ethical investor, but environmental and ethical considerations are not at the forefront of Jenkyn-Jones’s mind. “We’re all about making money,” he comments. “Our investment hypothesis is based on the inevitable requirement for the world to use resources more efficiently and minimize the environmental impact.” From that point, he uses a bottom-up approach to find companies with right business models designed to profit from the broader trends and initiatives.

“It’s a mistake to separate the environment from the economy,” he says. The notorious air pollution in China’s large cities is not only a health threat but also an economic one. People are reluctant to move to the big cities, and those who live there are eager to leave. “You can’t have a growing economy in the long term, unless you have a healthy environment.”