How the trends of tomorrow are today’s sustainable investment opportunities

Liontrust’s Peter Michaelis examines two trends with the potential to deliver strong growth and a better world for all.

Part of the art of investment management is the ability to identify businesses that hold the promise of longevity in a rapidly changing society. Trends in popular behaviour can create compelling investment opportunities for those able to spot them.

The fight against climate change is one such trend that has deeply penetrated the public consciousness. Movements such as Extinction Rebellion highlight a broad realisation of the contribution an individual’s actions can have towards an impending environmental catastrophe. We believe two themes in particular play an important role in avoiding this outcome.

In the UK, Veganuary is now a firm fixture on many people’s calendar. They observe this period of abstinence from the consumption of animal products for a range of reasons. Some choose a vegetable-based diet for ethical reasons, others as part of a healthier lifestyle.

However, one argument for removing meat from the dinner table that is gaining greater prominence is the environmental damage caused by rearing livestock. Food and farming are responsible for 25% of total global greenhouse gas emissions, and the livestock industry, primarily meat and dairy, makes up a significant proportion of this. 

A recent report from the independent thinktank RethinkX claims that we are on the cusp of the deepest, fastest and most consequential disruption of food and agricultural production since the first domestication of plants and animals some 10,000 years ago.

The driving force behind this seismic shift in behaviour is what is known as protein disruption. Alternatives to meat-derived protein currently fall into two camps – plant and insect. Figures from Mordor Intelligence predict the global market for these will hit $8.2 billion (£6.4 billion) and $1.1 billion, respectively, by 2023.

While carbon emissions from industry and transport dominate the headlines on climate change, we feel that addressing the impact of meat and dairy production can have a similar effect in this environmental battle.

We expect the same contribution from innovative companies working in livestock, meat and dairy as we have seen in sustainable energy. There are hurdles to overcome, but the direction of travel on meat production looks as clear today as it is on fossil fuels. Companies exposed to such structural trends shaping the economy of the future are likely to reward investors for years to come.

Another trend that has been centre stage during the Covid-19 global lockdown is the role of technology in communications. Video-conferencing is now seen as a very viable alternative to physical meetings and the environmental benefit of the avoiding business travel has been widely fêted.

The carbon footprint of data

However, while much attention has focused on the impact of travel and how we heat and power our homes, the way that we communicate and consume media is not without its environmental footprint. As people cannot see the pollution from their digital consumption, there is a perception that it does not exist.

But figures from The Shift Project, a thinktank, reveal that digital technologies account for 4% of greenhouse gas emissions, which is greater than civil aviation. This figure could double by 2025, as the energy required is increasing by 9% a year.

Rising data usage, and the amount of energy it requires, is something that we have been tracking for several years. Historically, companies tended to have on-site server rooms, often in traditional offices. These have evolved over time, but they were not purpose built, and their cooling and ancillary power requirements make them highly inefficient.

The technology industry in the US now emits more carbon than ever before, highlighting the importance of more efficient data centres. We, therefore, see considerable resource benefits coming from the trend towards outsourced storage and processing. The focus of this is on data centre operators with low power usage effectiveness and those that use electricity from renewable sources.

For the centres themselves, power is their biggest cost, giving further incentives to design and run them more efficiently. We believe these colocation centres are vital for the digital economy and will increasingly underpin the infrastructure necessary for a more sustainable world.

Rearing livestock, and data usage and storage are just two examples of industries that need to evolve if we are to be successful in the battle against climate change.

We believe that companies that can help deliver a more sustainable future have better growth prospects and are more resilient than businesses not prioritising environmental, social or governance (ESG) factors.

While many of these advantages remain under-appreciated by the wider market, investors who can tap into these developing themes can benefit from businesses that can deliver strong growth and profits, while at the same time improving the world for us all.

Peter Michaelis is head of the Liontrust Sustainable Investment Team.