By Ian Simm, chief executive, Impax Asset Management
We can no longer take a secure supply of energy, water, food, materials and other resources for granted. Evidence is building that we have reached a tipping point beyond which the availability and/ or price of resources such as energy, water, food and materials is likely to restrict access, and curtail global economic growth, unless there are significant improvements in efficiency.
The time has come for pension funds to incorporate this theme of resource scarcity into their overall portfolio and asset allocations. So what are the key drivers? The global population is currently estimated to be 7 billion, but is expected to exceed 9 billion by 2050, with most of this increase in developing countries and becoming concentrated in urban centres. New sources and patterns of consumption are emerging. We are witnessing an unprecedented rate of wealth creation in China and India where the emerging middle class now exceeds 200 million. In many developed countries the infrastructure is antiquated and inefficient, with 47% of the world’s population likely to live in areas of high water stress by 2030. So much for the numbers, what are the investable solutions and how can investors access them? The solutions fall into two basic categories. The first is the traditional approach of increasing the supply side where the market for these scarce resources inevitably rises. The investment response to this has been to allocate incremental capital to commodities, through increased investment in resource equities. However, investors now need to look down the other end of the telescope – at increasing efficiency. Higher resource prices are increasingly encouraging the development of innovative efficiency solutions. We see real investment opportunities offering strong long term growth prospects in strategies focused on energy, water, food and agriculture and materials. This sector of the economy continues to grow considerably faster than most other sectors. It now includes some 1,400 companies with a combined market capitalisation in excess of £1.8trn. The key to successful investing is to understand not only the industries in which these companies operate, including the full value chain, but also the mis-pricings that occur because of the inherent complexity of technologies, changing regulation and that the fact that many of these companies are not well researched by the wider investment community. Those pension funds which ignore these fundamental economic drivers and assume that incremental efficiency improvements will continue to ensure that the supply markets of energy, water, food and materials and other resources will expand to meet demand without dislocation could miss out on an enormous opportunity for value creation.
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