The real-world investment case for resource efficiency

This year World Environment Day falls on June 5th, with its focus aimed towards plastics pollution and the circular economy. It comes at a tricky moment, as investors, companies and governments are wavering on their environmental commitments. However, we still believe that environmental protection is a long-term growth theme and find plenty of fund managers with exposure in their portfolios. 

The environment has become a cultural football. Yet amid the uncomfortable headlines, it is easy to forget that it remains both a risk that needs to be managed for companies and a source of opportunities for investors. Companies that do not manage their resource usage effectively have long-term risks. Equally, companies that can help deal with resource scarcity have a natural pipeline of growth. These are realities that businesses cannot ignore. 

For fund managers with a long-term sustainable view, this will run through their whole portfolio. For example, the Liontrust Sustainable Future Global Growth fund looks at companies through the prism of three key mega-trends – better resource efficiency, improved health and greater safety and resilience. This leads them to companies offering pragmatic solutions to deal with real-world problems.

Manager Simon Clements says one of their key themes is around improving the management of water. He adds: “Water shortages are a huge problem across the globe and none more so than in the US, the world’s largest economy. US water infrastructure is made up of more than two million miles of underground pipes which need upgrading. The average age of this infrastructure is 45 years and the US loses $2 trillion gallons of water a year, which is around 15% of total drinking water which is treated.” 

Companies that are plugged in to this trend can expect buoyant end markets some way into the future. Simon says: “Core & Main is a new idea in the fund, and it is the leading distributor of pipes, valves and fittings to help control the flow of water. We expect these markets to recover into 2025, as the new Trump administration enacts policies which aim to stimulate growth in both residential and non-residential construction.”

These types of opportunity are not just found in sustainably-focused funds, but make sense for generalist fund managers as well. For example, the Fidelity European fund invests in Legrand*. This is a French industrial company that makes electrical equipment for buildings, including data centres. Its data centre business is giving it a strong pathway of growth, but its efficient use of resources is also supporting its profit margins.

For example, it is embracing circularity in its product design and then publishes its methodology so it can be used more widely by its peers. It has created an Eco-Design Index, which assesses factors such as a product’s repairability, how much certified recycled metals and other renewable content it contains and how the life might be extended. It is working to eliminate single-use plastics through smart product design.

The group also holds Total Energies*, which is a generalist energy company that has been a major investor in renewables and clean energy. Unlike other energy giants such as BP or Shell, it has not pulled back from its renewables commitments in recent years. It invests around $4 billion annually in its integrated power division, which focuses on producing and supplying electricity through wind farms, solar farms and gas-fired power stations. It has just completed a €1.6 billion acquisition of German wind and solar developer VSB Group, plus deals on hydropower and renewables in Uganda and Canada**.

Another generalist fund, Stewart Investors Asia Pacific Leaders, holds Japanese consumer goods company Unicharm***, a manufacturer of disposable nappies and other hygiene products. Consumer goods companies are some of the worst offenders in terms of single use plastics and products ending up in landfill. Disposable nappies are one of the biggest contributors to plastic waste, with 300,000 sent to landfill every minute****.

Unicharm has been a pioneer in nappy recycling, using techniques it has been developing since 2015. This includes an ozonation technique to reclaim and sanitise pulp from used nappies for re-use in new nappies. This offers real hope for a “circular economy” solution for the use of disposable nappies. By reclaiming and re-using the pulp in this way, Unicharm says it should be able reduce or even eliminate the deforestation associated with traditional disposable nappy manufacturing, as well as reduced water consumption and a 26% reduction in greenhouse gas emissions.

Environmental considerations are particularly important for certain sectors. Infrastructure assets are vital in the efficient use of resources and to enable the energy transition. For example, without changes to national grids (such as the installation of batteries), renewable energy cannot get where it is supposed to go at a time when people need it. With this in mind, infrastructure funds always need to incorporate environmental factors in their decision making.

The VT Gravis UK Infrastructure Income fund is an investor in areas such as water utilities and the UK’s National Grid. It also has holdings in many of the renewable infrastructure investment trusts, including the SDCL Energy Efficiency and Sequoia Economic Infrastructure funds***. The fund has no formal ESG constraints, but environmental considerations naturally shape where it invests. Manager William Argent says the continued focus on net zero under the current UK government should continue to support areas such as onshore and offshore wind.

The news emerging on the environment is still mixed. However, the pressures on resource usage remain unarguable. This creates a significant pathway of growth for companies that are innovating and creating solutions to difficult environmental problems. Both sustainable and generalist investment managers are capitalising on these trends.

*Source: FE Analytics, full portfolio listings, 30 April 2025

**Source: Financial Times, 16 April 2025

***Source: fund factsheet, 30 April 2025

****Source: World Economic Forum, 23 August 2023