Investing in our environment through private markets

We live in a rich environment. One bountiful in natural resources, awe-inspiring beauty and even investment opportunities. Environmental investment opportunities enable investors to preserve these planetary riches, while at the same time growing the long-term value of their investment portfolios.

The innovative environmental solutions currently under development present a diverse set of opportunities across multiple investment subthemes, including reducing greenhouse-gas emissions, pollution control, the circular economy, sustainable consumption and enabling technology.

Reducing greenhouse-gas emissions

Governments and corporations around the world have committed to reducing net greenhouse gas emissions to zero in order to limit global warming to 1.5°C above pre-industrial levels. This will involve the electrification of the many aspects of modern society that are currently dependent on fossil fuels. Efficient batteries with large storage capacity powered by renewable energy will be more heavily relied upon to power our transportation networks. At the same time, we will need carbon-removal technologies to get us the rest of the way to reaching net-zero emissions. These are all existing technologies but they need heavy investment over the next decade to become sufficiently scalable to meet the world’s current energy requirements.

Pollution control

We often think of pollution in terms of air quality, but less visible is the pollution in our water and soil, which we have contaminated with everything from carcinogenic pesticides to antibiotics and microscopic plastics. To save and restore our fragile ecosystem, innovators are developing solutions around everything from water reclaiming and reusing[i] to ai-enabled waste optimisation[ii].

The circular economy

The circular economy, one in which ideally all waste is eliminated, will be a necessary foundation to maintaining a carbon-neutral, pollution-free future. Our planet cannot sustainably support our current linear system of consumption and production.

Sustainable consumption

Recycling as we know it is a starting point, but even more effective is reusing and sharing in order to optimise the production of new goods and extend their utility. Consumers will be presented with more such solutions as we have already seen in the rapid rise of the sharing economy. New goods will be increasingly made with bio-based materials and food sourcing solutions will reduce the burden of feeding the 7.9 billion mouths on our planet.

Enabling technology

Driving all of this innovation will be enabling technologies that span everything from new software to advancing green chemistry. Thanks to such technological innovations, we will not only be able to transition to a sustainable economy without sacrificing current living standards – but we will enhance them.

Accessing innovation: the environmental opportunity

Because many of these solutions required to solve today’s environmental problems necessitate rethinking our current methods of operation, these innovators are often starting from a blank sheet of paper. While this has many advantages, one of the drawbacks is that for a new idea to reach scale, much more investment is needed than for other types of innovation. For example, when the novel mRNA innovation was first commercialised through covid vaccines, new syringes for inoculation and retraining of medical staff were not required, but rather existing vaccination infrastructure could be used for its distribution. In contrast, for electric vehicles to replace internal combustion engine ones in prevalence, it is not sufficient to perfect the development of the eV alone, but requires readily available charging stations, re-trained maintenance technicians, etc. That means for a single idea to take off, high innovation is required simultaneously across multiple industries. Because companies at the high-innovation stage tend to be relatively young and privately held, investors may best access them through private-asset markets. Doing so typically requires committing capital for longer time periods, making this asset class a natural fit with the longer timelines associated with making revolutionary change.

Why now: a megatrends crossroads

The momentum behind greater environmental awareness has been building across multiple facets, including regulation, investment markets, innovation and society at large.

Climate change is now a key priority among policy makers and business leaders around the world. Indeed, today there are 2,671 climate laws and policies around the world[iii]. At the same time, the companies committed to cutting emissions in line with the climate science reached usd38 trn of the global economy, or one-third of global market capitalisation, at the end of 2021[iv].

By the same date, the Net Zero Asset Managers Initiative, which commits signatories to supporting the goal of net zero greenhouse gas emissions by 2050, represented usd57.5 trn in assets under management[v]. Such commitments suggest that the direction of public policy makers, big business and capital allocators has converged behind tackling climate change in a meaningful way.

New solutions with a positive environmental impact are proliferating even if many require an extra shot of capital investment to reach scalability. Over the last four to five years, a number of such success stories have already emerged. There has been a strong rise in new companies, including 46 climate-tech unicorns (privately-held start-up companies valued at over usd1 bn[vi]), that are largely focused on energy, agriculture and transport, but also including sustainable packaging and carbon measurement companies.

And finally, there is the force of growing demand from individuals around the world – through both their voting and consumption behaviours. In the us, President Biden was elected on a strong climate platform in 2020, when an astonishing 52% of Americans polled said protecting the environment should be a top priority for the government . And most recently in Australia, voters elected a pro-climate prime minister, Anthony Albanese, as well as a host of Greens and pro-climate independents in May’s federal election. At the same time, consumers, particularly the Millennial and Gen Z cohorts, increasingly demand brands that promote sustainability and the circular economy, putting pressure on retailers to respond accordingly.

A healthy environment is critical for a healthy economy

Cleaner air and water mean less disease and a lower burden on global health systems, while more efficient energy consumption translates to higher corporate margins and household savings. The transformation to a more environmentally friendly and sustainable future will create new sectors and jobs even as it replaces old ones and yield a multitude of investment opportunities in the process. For investors, we believe that companies providing environmental solutions will deliver a persistent return premium over the long term

[i] https://www.epa.gov/water-innovation-tech/examples-innovation-water-sector#market4

[ii] https://www.weforum.org/ agenda/2021/12/fight-plastic-pollution-innovations/

[iii] Source: Grantham Research Institute on Climate Change and the Environment

[iv] Source: SBTi, 2022

[v] Source: Net Zero Asset Managers, 2022

[vi] Source: HolonIQ, 2022