Global financial markets present a wide range of opportunities for thematic investing—an approach that targets themes underpinned by secular megatrends set to structurally change the way we live, how society operates, and how business gets done. Examples of such megatrends include sustainability, the network economy, and globalization.
Thematic investing approaches attempt to leverage these and other megatrends by seeking to identify companies that are successfully adapting by creating innovative products and services that meet the new demands of this changing world. We believe these companies are well positioned to benefit from strong growth potential, creating long-term investment opportunities.
Catalysts for a thematic investing approach to environmental opportunities
As investors focused on the megatrend of global environmental change, we’ve observed an acceleration of this change in recent years—and especially in 2021—as the world experiences more extreme weather events and as we see an increased urgency on the part of global leaders to more aggressively address the threats we face from environmental destruction.
These recent developments come against a backdrop of three enduring characteristics of global environmental change that we believe will continue to provide abundant opportunities for a thematic investing approach.
1 We believe that the environmental theme is characterized by secular growth, unlike some areas of the economy that are prone to cyclicality and boom-and-bust cycles. Our research shows that companies that directly address environmental change, on average, have generated annual revenue growth of around 6% to 7% per year in recent years. That’s significantly higher than global annual GDP growth average of 2% from 2001 to 2020, according to World Bank data.
These companies provide products and/or services that help address environmental challenges such as climate change, air pollution, and a lack of clean water—the types of issues that we see as enduring in nature and that are likely to continue to be a source of demand for those firms that can create real solutions to these challenges.
2 The environmental theme is transversal, as it touches most sectors of the economy. By now, it's clear to us that the global economy needs to fundamentally change to address the myriad of environmental challenges we face, from biodiversity loss to ocean acidification to chemical pollution. We believe the world is in a decades-long period of economic transition, and the companies at the forefront of environmental change will offer potential investment opportunities over a long time horizon.
3 Given that this economic transition is still in its early stage, much work remains to understand and define which companies may be best positioned to become environmental solution providers. This evolving situation creates opportunities for specialized, active investment managers seeking to identify companies that are providing environmental solutions.
The challenge of finding true environmental value
Today, many gray areas remain, and a company that’s developed a potential solution addressing one dimension of environmental change could have a negative impact in another realm. For example, we view biofuels as having a potential positive impact from the perspective of reducing emissions of carbon dioxide, a greenhouse gas that’s a major contributor to climate change. However, biofuels may harm biodiversity, as land used to grow biofuel feedstock crops creates the risk of displacing forests, grasslands, peatlands, and wetlands, potentially leading to habitat loss for vulnerable species. From an investment perspective, the many trade-offs involved in addressing today’s environmental challenges call for a science-based approach to evaluate companies providing potential solutions.
Key areas of focus for sustainable investing
As investors, we’ve identified seven segments of the global economy where we see the potential for an abundance of environmental opportunities.
1 Renewable energy
2 Energy efficiency
3 The dematerialized economy
4 Sustainable forestry and agriculture
5 Pollution control
6 Water supply and technology
7 Waste management and recycling
Within each segment, we can identify investable areas in which growth is being driven by multiple catalysts and emerging technologies; for example, in renewable energy, we can invest in companies developing smart devices for solar power generation as well as offshore wind technology. Within energy efficiency, we can invest in technologies that have multiple applications to enhance value chains in electric vehicles, semiconductor manufacturing, and controls that make buildings more energy efficient.
These seven segments represent a combined market opportunity that we estimate at more than US$2.5 trillion, and we believe that these areas will continue to grow at a faster pace than the global economy.
Key drivers behind the environmental theme's growth potential
Source: John Hancock Investment Management, 2021.
Drivers of change, from the ground up
The growth of investment opportunities in these segments stems from the convergence of powerful trends driven by sharply rising global awareness of environmental issues at a time when we’re seeing more extreme weather events.
Globally, young people in particular are mobilizing out of concern about climate change and environmental degradation. They’re pushing older generations to move beyond vague pledges and to instead act swiftly and decisively to protect our planet. The potential for this youth-driven activism to bring about meaningful change shouldn’t be underestimated, in our view.
At the corporate level, the number of companies adopting science-based targets for reducing greenhouse gas emissions to net-zero levels has recently increased exponentially, and shareholder pressure on public companies has also grown. In our opinion, for the most part, these corporate initiatives don’t amount to greenwashing (i.e., attempts by companies to present themselves as virtuous from an environmental perspective, despite having records that suggest otherwise). While greenwashing may have been common several years ago, most of today’s initiatives appear to us to be genuine. Taken as a whole, these trends point to the important role that capital markets can play in being a potential agent of positive change.
Finally, from the governmental perspective, we’ve welcomed new environmental commitments made by countries in discussions at two global conferences held this past fall: the climate conference in Glasgow, Scotland, and a United Nations Biodiversity Conference. We’ve also seen a convergence of environmental policies across major economic blocs represented by the United States, China, and Europe.
These trends continue to gain momentum and, as investors focused on environmental change, we’re confident that there will be no shortages of environmental thematic opportunities to invest in for many years to come.