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Isabel Kwok is an investment manager who specialises in ethical fund picking at financial services firm JM Finn.
How we extract, manufacture, use and dispose of finite resources is becoming increasingly critical to the survival of all life on earth.
As investors, it is important to consider how to support innovation which can provide solutions to what are major and complicated global resource challenges.
The economics are starting to shift here, and many interesting companies are part of the transition towards a more circular economy, whether that is through the development of more environmentally-friendly materials or innovative recycling methods.
How we extract, manufacture, use and dispose of resources is becoming increasingly critical to the survival of life on earth, says Isabel Kwok of JM Finn
What sectors offer promising investment opportunities?
Plastics: Some materials are obviously easier to manufacture than others. Plastics are notoriously problematic due to their complex chemical structures.
Plastics are so useful that they have often proved difficult to replace. However, we have started to see a big shift in some areas such as in food packaging, where biodegradable plastic alternatives made from materials like cornstarch, mushrooms and even seaweed are being introduced.
However, these sometimes pose other problems such as deteriorating quickly or reducing the shelf life of food, thereby potentially and inadvertently increasing food waste.
Lithium ion batteries: These are used in electric vehicles and contain valuable components such as cobalt, which can be recycled.
Isabel Kwok: Recycling can be a difficult area to invest in as it requires a more active approach given the level of research required
However the process, which involves either smelting or high temperature melting, is both complex and energy intensive, making it less commercially viable to do.
The lithium ion battery industry therefore lacks a large-scale economic recycling solution.
Currently, only about 5 per cent of lithium-ion batteries are recycled globally. With the huge shift to electric vehicles already underway, we need to find a solution to this problem urgently.
Metals: Extractive industries can have huge detrimental environmental impacts.
So, for investors that do not wish to invest directly in mining companies, for example, investing in businesses engaged in metals recycling can provide a more appetising way to ‘play’ the often highly volatile commodities story.
This approach supports businesses providing solutions to resource scarcity without directly investing in companies involved in raw material extraction.
Recycling aluminium and zinc reduces carbon emissions by up to 90 per cent and 40 per cent respectively compared with primary production, so there are clear advantages from a climate perspective as well.
Robotics: The development of robotics will also continue to be instrumental in the safe and efficient management and processing of waste, especially as the cost of robotics continues to decline and automated processing becomes more financially viable.
How much of your portfolio should you risk in this sector?
Deciding how much exposure you want to this sector entirely depends on your risk appetite and investment objective.
Some of the technologies in this space are well established, but many are quite new and so it is probably advisable to look at accessing this story through collective investment funds rather than direct investment in shares.
This allows investors to benefit from the expertise of managers in this field and also to manage the risk.
But recycling continues to be a difficult area to invest in as it requires a more active approach given the level of research required to evaluate the impact of the investment.
It would be useful to look for more generalist funds which actively identify or encourage companies which can move in that direction to provide some exposure to promote reduction of waste, but also to ensure diversification is maintained.
Investors may wish to seek out managers who align with their values and trust that their process will reap the rewards.
As an example, where there are investments in retail, look at whether a fund manager assesses the level of waste reduction where possible, or actively votes correspondingly as a shareholder.
What funds and trusts might you consider for your portfolio?
Impax Environmental Markets (Ongoing charge: 0.85 per cent)
Impax is a specialist asset manager, investing in the opportunities arising from the transition to a more sustainable global economy.
It has developed a range of funds, including this one, which is 20 per cent invested in resource efficiency and waste management businesses providing solutions to some of the key challenges around waste and recycling.
Importantly it also invests into energy efficiency and water management, which are key components in this story.
Pictet Nutrition (Ongoing charge: 0.8 per cent)
One of its focuses is waste reduction in farming practices, food and packaging throughout the ‘farm to fork’ journey.
The managers have identified companies which can increase efficiency through innovation and careful examination of the materials and supplies to help reduce waste. This is a relatively defensive fund.
JLEN Environmental Assets (Ongoing charge: 1.24 per cent)
This fund has invested in biomass projects based in the UK and an energy from waste project in southern Italy.
As an example, the investment in Codford Biogas Ltd can generate 3.8 MWe (Megawatts electric) of electricity by processing up to 100,000 tonnes per annum of both liquid and solid food waste. This translates to supplying up to 4,000 homes.
RobecoSAM Smart Materials (Ongoing charge: 0.96 per cent)
A thematic fund which invests globally in companies that provide innovative materials and process technologies, it integrates sustainability criteria as part of the stock selection process, including metals recycling, industrial robotics and smart packaging companies.
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