Finding sustainable themes in the future
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Finding sustainable themes in the future
Thematic investing is reshaping the way investors think about portfolio construction. But how to identify and get access to genuine areas of secular growth as opposed to just short-term momentum? Aanand Venkatramanan, Head of ETFs, EMEA, explains the thinking that underlies the approach.

What does your approach to thematic investing look like?

We take a unique approach to thematic investing. We blend active research with actively designed investment strategies to get a purer, differentiated exposure to individual themes.

Our approach yields companies that are not traditionally found in market cap benchmarks. We create focused baskets that provide purer access to the theme and have the ability to evolve as the theme grows.

What are the long-term growth themes you’ve identified?

We look at themes in three broad buckets: technology, energy and resources, and changing demographics. Of these broad themes, each is at different stages of evolution and, interestingly, the fact that a theme is at a more advanced stage doesn’t generally mean there is a larger number of companies to choose from.

Within technology, we have robotics and automation, artificial intelligence, cybersecurity, emerging cybersecurity, photonics and digital payments. In energy, the funds focus on clean energy, the hydrogen economy and the battery value chain. Within resources we’ve got clean water. For changing demographics we have healthcare breakthrough and pharma breakthrough.

It’s very important to differentiate between a sustainable megatrend that can have consistent growth potential, and areas that might have a huge amount of short-term momentum and then die down. We look carefully at the cases, growth drivers, adoption rates and total addressable market as well as other factors to enable us to tell the difference.

What do you mean by sustainability risks and how do you take them into account?

That’s a very broad question because sustainability risk can be defined in many different ways. You can answer from a carbon perspective, or from a social or a governance perspective. The most easily quantifiable is the E – environment –because there are more evolved metrics around carbon emissions. And, clearly, for us it’s important because, first, if we don’t address that carbon risk it could actually bring companies down in the long run, and second, because the economics of clean energy have improved dramatically: solar is cheaper than coal in almost every part of the world today. So it makes a lot of commercial and economic sense to switch away from ‘dirty’ fuels.

At the same time, if you look from a governance standpoint, elements such as gender equality and diversity are also a material factor for an investor, because there are studies showing that a diverse board brings about beneficial change and a positive impact. So from that perspective, the risk becomes quantifiable.

So it’s varied, but within our thematic funds, a number of them are naturally aligned to the Sustainable Development Goals (SDGs), but we also go a couple of steps further and, depending on the fund, we have specific filters and screens. For example, within clean energy, we have certain thresholds for coal-powered producers and companies involved in thermal activities and so on.

And across the board, we incorporate ESG exclusions for things like United Nations Goal Compact (UNGC) violations, coal involvement and controversial weapons. So that’s another way in which we address those risks.

What types of companies does the L&G Battery Value Chain ETF invest in?

The battery storage market has grown in leaps and bounds over the past decade. Since the launch of *Tesla’s Roadster in 2008, electric vehicles (EVs) have expanded in number and in terms of the range they are able to travel. This has largely been made possible by a number of factors to do with batteries.

Battery prices have halved over the past five years. And at the same time, their capacities have increased – in some cases, doubled. With storage densities and charge cycles improving, safety parameters getting better, prices coming down, and a variety of other metrics, battery-powered electric vehicles have become far more affordable, and with a healthier range than they were even three or four years ago. As EVs become more affordable we are seeing a higher adoption rate: the market share of battery-powered EVs and plug-in hybrids is now around 20% in Europe, while in China it has passed that level.1 The other big growth driver for battery companies is the grid storage domain. Here, we have seen new installed capacity grow considerably over the past five to six years. Experts estimate that it will grow around 20-25% year-on-year on average over the next decade, in terms of new addition to capacity.2 These two key drivers are leading to higher demand for batteries. And as a result, we are seeing companies engaged in that area benefit from that growth.

“It’s very important to differentiate between a sustainable megatrend that can have consistent growth potential, and areas that might have a huge amount of short-term momentum and then die down.”

How does the L&G Clean Water ETF meet its sustainable investment objectives? How do you identify companies that positively contribute towards the achievement of the SDGs?

SDG 6 – to achieve clean water and sanitation for every human being – will require a lot of investment, which has to be channelled in the right way, particularly in water-starved regions. We focus on technologies such as desalination plants, as well as smarter water distribution networks, which will help to plug leakages and conserve some of the billions of gallons of water that are wasted every year. The third key area for us is the end user: smart water meters and better data management will also help us to manage this precious resource better.

Important Information: For professional clients only. Past performance is not a guide to the future. The value of an investment and any income taken from it is not guaranteed and can go down as well as up, you may not get back the amount you originally invested. Views expressed are of LGIM as at 25th August 2022. The Information in this document (a) is for information purposes only and we are not soliciting any action based on it, and (b*) is not a recommendation to buy or sell securities or pursue a particular investment strategy or fund; and (c) is not investment, legal, regulatory or tax advice. Legal & General Investment Management Limited. Registered in England and Wales No. 02091894. Registered Office: One Coleman Street, London, EC2R 5AA. Authorised and regulated by the Financial Conduct Authority, No. 119272.


2 Bloomberg New Energy Finance, Dec 2020

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