2022’s most important sustainable investment themes.

As investment managers, we have a huge responsibility to our clients to invest their capital in opportunities that will provide a return, but we also have a responsibility to make sure that we have as positive an impact as possible on the world we live in. The fascinating part of this work is getting to understand the visions and aspirations of founders across so many different technological frontiers, scientific fields, business models and segments of our life. Whilst all founders are passionate, I find those in the sustainability space particularly committed to their business, and to their values. 

We see clear trends and themes emerging – partly based on the broad direction of public (and corporate) sentiment, and also because of the science and regulatory environment. For example, the Paris Agreement has set off a cascade of net-zero pledges, which are creating challenges for large organisations and subsequently opportunities for small ones. Global schemes to reduce emissions in ‘hard-to-abate’ sectors, such as cement, steel, and long distance air and maritime transport have kicked off a wave of innovation in new fuels, materials and efficiency technologies, and the war in Ukraine has created huge momentum around the search for alternatives to natural gas and oil – as well as raising important questions around the price (both financial and moral) we pay for the things we take for granted. 

Public sentiment is playing a very influential role too. Customers have started crying foul of blatantly unsustainable practices, and Covid has exacerbated trends towards more sustainable ways of living such as working from home, reducing air travel and ditching our cars. Corporations are having to listen and take action, to ensure a robust brand, products that appeal to this new mentality, and a loyal customer base. Whilst incumbents need to keep up, it’s often more difficult for them to innovate quickly – and as a result, we’re seeing an exciting array of challenger brands upend the status quo.

Given these headwinds we’ve summarised what we believe are the most important Sustainable investment themes so far this year. 

1.Supply chain transparency

A key part of our march towards sustainability, and the accountability that comes with it, is demonstrating to customers, employees, investors and communities that we properly understand the impact that our organisations are having. As we look further towards the horizon, and specifically into our supply chains, this is increasingly difficult to do. Supply chain governance, working standards, environmental impacts, carbon emissions and counterparty reputational risk are all considerations that are high on the agenda.

Fortunately, with the advent of ever more accessible data platforms, systems integrations, tracking, internet of things, and distributed ledger technology, a swathe of solutions are coming to market that enable executives to gain visibility over the long tail of their supply chains.

Whilst many of these technologies remain nascent, their existence means that ignorance is no longer an acceptable response. We’re seeing exciting breakthroughs from companies like Qflow, who are helping the construction industry map their supply chains and ensure compliance with materials regulations, and Mondra and Aklimate, who are using ‘cascading’ (where customers insist suppliers across their entire supply chain use a specific platform) to drive reporting throughout their supply chains.

As more and more companies embrace this level of reporting, our hope is that it becomes less about capturing data, and shifts towards how we make more intelligent decisions based upon the data we have. This will enable us to reduce supply risk and environmental impact whilst improving resilience, governance, working conditions and efficiency.

2.Web3 meets carbon reduction

Web3 is otherwise known as the collection of technologies that make up the Metaverse and Augmented Reality. Whilst you could debate definitions well into next year, what’s important, and exciting, are the applications. 

We are seeing distributed ledger (blockchain) technologies increasingly being applied to environmental challenges, such as verifying carbon offsets and supply chain data, to ensure the integrity of the systems we need to hold ourselves accountable to.

The applications of augmented reality (AR) can reduce the likelihood of customer returns by visualising things before we buy them, such as trying clothes on virtually, or placing furniture in our homes. We’ve also seen start-ups like Carbon Re use the concept to help energy intensive industries, like cement and steel plants, develop and test efficiency improvements virtually before applying them in the real world. Whilst the energy used by these platforms is considerable, the savings and process improvements are greater still.

3.Startups supporting transition

One of the less controversial successes from COP 26 was the step up in tempo for climate discussions, emissions reductions and disclosures. Whilst these talks were at a government level, corporations, with their more concentrated constituents, are often steps ahead and seek more clarity from governments on regulation, not less.

But that doesn’t mean hitting these targets is easy. Often large organisations don’t have the expertise, systems, data, nor analytics capability to be able to identify and implement the steps needed to transition to a more sustainable ‘net-zero’ future. 

We’re seeing two types of start-ups that are capitalising on this trend. Firstly those who are building exciting businesses by helping companies to understand this transition. For example, Sust Global, which Vala invested in last year, helps financial services companies to better understand the climate risks associated with their portfolios and transition to more climate resilient portfolios. 

Secondly, we’re seeing start-ups that are fundamental to their customers’ post-net-zero way of life, and who are attractive acquisition targets. Examples are clear across the globe, with the likes of Shell’s acquisition of Sonnen batteries, BP’s acquisition of ChargeMaster, and Amazon’s sizeable investment, and order, into Rivian Trucks

Whilst we would never advocate climate change as a ‘get-rich-quick’ scheme, it is presenting a fascinating exit opportunity for many entrepreneurs and their early-stage backers. As it gets increasingly difficult for organisations to cut those more hard to abate emissions, you can see how some of these acquisitions will become more attractive in the face of growing investor pressure for firms to implement their net zero strategies

4.Smart homes and heating 

The UK Government has recently announced a new housing strategy, which is aiming to leverage up to £90m of private investment by 2030 by changing the way we heat, insulate and power our homes.

It’s a huge challenge; the UK has some of the oldest, and least energy efficient housing stock in Europe. Our quaint Victorian townhouses and Georgian terraces need major renovations to not only become more energy efficient, but also to adapt to the changing nature of our energy supply to run on electricity and potentially hydrogen, rather than natural gas, especially given the sky-high prices we are currently experiencing. 

Equally as monumental will be the way that we use electricity in our increasingly ‘smarter’ homes. Not only are we seeing the wide scale innovation and deployment of roof-top solar and in-home batteries, but electric vehicles are adding both costs (potentially costing £30 per day to charge) and storage challenges. When you combine this change with the increasingly intermittent renewable generation capacity, then what we’re seeing is a huge change to the way the grid operates and as a result – some tremendously innovative business models that are turning homes, and their batteries and electric vehicles, into virtual power plants! Watch out for businesses like MyGlobalHome and Switchd who are innovating and disrupting what it means, and costs, to power our homes and keep the lights on.

5.The continuing march of truly green CPG + retail 

Whilst ‘green’ credentials have become increasingly prevalent since the 2015 Paris Accord, there is no doubt that since the pandemic there has been a huge acceleration in the importance of a brand’s sustainability credentials. Whilst many have stepped forward with real integrity and impact, a huge number of brands have been caught out for their ‘sustainability fails’, with consumers becoming increasingly wise to a brand’s true sustainability credentials. 

One of the more ironic examples recently was McDonald’s decision to remove recyclable plastic straws with non-recyclable paper straws, with many asking how many trees it was taking McDonald’s to save the ocean. 

Thankfully we are seeing a slew of genuinely groundbreaking businesses who have sustainability at their core, and are building formidable companies as a result. Notable ventures Vala has invested in include HomeThings, the zero water home cleaning products business, GoodClub, the zero waste online supermarket, and FlexSea, who are creating a seaweed-based bioplastic with particular relevance to fashion, beauty and ‘dry’ goods. 

As consumers get increasingly savvy, and supply chain behaviour becomes increasingly transparent, we expect exciting, high quality breakthrough brands that put sustainability at their core to become both high impact disruptors and attractive acquisition targets to incumbent FMCG businesses.

If you would like to find out more about the sustainability opportunities that Vala is targeting through it’s Sustainable Growth EIS then please get in touch with the team by emailing invest@valacap.com 

Jake Wombwell-Povey, Investment Manager.

 

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