The 715 billion dollar impact-investing market is poised for rapid expansion driven by surging investor demand, government green-growth initiatives and supportive regulation, according to a recent analysis by NN Investment Partners (NN IP).
While impact investing is still a niche compared with the broader 35.3 trillion dollar sustainable-investment market, momentum has built since the adoption of the UN SDGs and the signing of the Paris Climate Agreement in 2015. However, the asset manager points out that investors need to be wary of ‘impact washing’ as the sector grows.
“From a fundamental point of view, looking at the type the companies our impact funds invest in, the outlook has never been better. There can always be cyclical headwinds, but structurally there’s tremendous growth”, says Ivo Luiten, Lead Portfolio Manager Impact Equity at NN IP, who believes there are three sectors to watch: healthcare, technology and ‘green’ industrials.
Healthcare
The US spends about 18% of gross domestic product (nearly 4 trillion dollars a year) on healthcare. Companies that can help reduce that bill are in demand: for example, innovative high-tech medical devices can improve patient outcomes and cut treatment costs; the life-sciences segment (firms that develop and manufacture pharmaceuticals, biotechnology-based medicines and a range of other products) is also growing fast because of the increasing focus on the prevention of disease.
The firm admits that picking winners in the drug-development space can be tough, but it highlights that many suppliers to this market, such as clinical research organisations and life-science equipment manufacturers, offer “interesting investment opportunities”.
Technology
Another sector turbo-charged by the pandemic in NN IP’s view is information technology, with digitalization accelerating around the world: “Software producers have high operating leverage and rapid revenue growth, alongside strong competitive advantages such as pricing power and a loyal customer base. They tend to have a high percentage of subscription revenues”.
Companies that service physical infrastructure also present “substantial opportunities” as governments roll out plans to spend as much as 10 trillion dollars to upgrade or replace decaying and obsolete facilities and systems, and green development plans bring long-term spending on new types of infrastructure.
The analysis points out that the cybersecurity sector is also expanding rapidly, as companies race to protect themselves against the sort of high-profile breaches that have accelerated in recent years. The shift to remote working and transition to the cloud are changing the way companies protect their digital assets, with an ongoing transition to a multi-location approach capable of covering employees who work from home. NN IP believes that this challenge requires new solutions such as the zero-trust or perimeterless security model predicated on the concept that devices shouldn’t be trusted by default, even within a corporate network
“The skyrocketing popularity of digital payment apps and decentralized finance will also create plenty of investment opportunities. Agile, disruptive payment processors are on course to create so-called closed-loop payment and loan networks (payment ecosystems that circumvent the traditional banking system and enable users to get loans that wouldn’t be possible through standard channels)”, they add.
‘Green’ industrials
The urgency behind efforts to tackle climate change is intensifying in the run-up to 2030, the target date for the UN’s 17 Sustainable Development Goals. Companies building solutions to reduce emissions and speed the transition to sustainable energy are “particularly well placed” to benefit from ongoing global policy and regulatory changes, such as China’s drive to decrease pollution and the EU’s waste and recycling initiatives. “The industrials sector is a good place to look for firms that are helping companies and consumers to shrink their carbon footprint”, the asset manager says.
In its opinion, innovative companies are also contributing to the drive for a more circular economy, which involves extending the lifecycle of products, reducing waste and reusing materials wherever possible to create further value.
“Companies tackling the proliferation of plastics are a key area of opportunity, with new technologies such as chemical recycling being developed to complement traditional mechanical methods. Firms that are helping lower emissions and develop recycling solutions in heavy-emitting industries such as steel and cement are also making strides”, Luiten comments. In this sense, hydrogen power and carbon capture and storage are in their early stages, “but remain sectors to watch”.
Aware of impact washing
NN IP notes that impact washing (misleading marketing claims about a company’s actions or a financial product’s real-world impact) is something “to be aware of”. The related issue of how to measure impact also looms large, and more robust key performance indicators, as well as a standardized reporting framework, will be essential to addressing this issue.
According to Luiten, while these challenges remain, they also create opportunities for asset managers and banks to boost transparency on how they measure the real-world impact of their investments. “True impact funds that seize this opportunity will set themselves apart as the market develops over the next five years”, he concludes.
For Funds Society, Madrid
