The drivers of environmental markets are deeply rooted and continue to gather momentum. Population growth, increasing urbanization, climate change, environmental policy and regulation, and inadequate infrastructure are profoundly shaping global markets. These trends are driving a transition towards a more sustainable global economy. Many are interested in making a positive impact on the environment and are increasingly concerned about climate change. One aspect of this is a growing motivation among investors to align their investments with their personal values.
Impact investing has a positive intention built into the investment process and ideally the extent to which the intention is fulfilled can also be measured. The primary objective of the Pax Global Environmental Markets Fund (PGRNX) is to provide strong financial returns by focusing on “environmental solutions providers” for the growing environmental issues we face. The Fund does not invest in fossil fuel companies but across resource optimization and environmental markets, which include the renewable energy, energy efficiency, water, waste/resource recovery and sustainable food and agriculture sectors. Only companies that generate at least 20% of their revenue from these markets are eligible for investment. In practice, this market exposure hovers around 50%.
We have developed a methodology for measuring the positive environmental impact for the Fund. We produce annual metrics for:
2016 Environmental Impact of the Pax Global Environmental Markets Fund
|Note that this is representative of the portfolio holdings and AUM of this fund as of December 31, 2016. This data is based on the most recently reported annual environmental data for all holdings. Methodology has been assured by Ernst & Young LLP. For further explanation of Impax’s impact methodology (which is based on equity value) please see www.impaxam.com/ about-us/impact-investing. MWh stands for megawatt hour.|
Total Impact of the Fund
Impact of $10m Investment
|Net CO2 emissions avoided||5,056 tons CO2||145 tons CO2|
|Renewable energy generated||56,648 MWh||1,627 MWh|
|Water provided/saved or treated||19.9 billion gallons||573 million gallons|
|Materials recovered/ waste treated||80,049 tons||2,300 tons|
We believe these metrics are more appropriate than carbon footprinting data, which only reports the carbon emissions from the manufacturing process of a product and does not take into account the CO2 emissions that the product could off set during its lifecycle. Accordingly, we report on net CO2 emissions.
For example, a company that manufactures high-efficiency insulation provides an attractive net carbon emission solution. However, the CO2 emitted during its manufacturing process may exclude it from “Low Carbon” portfolios.
Example of How Net Impact can be More Relevant than Carbon Footprint
CO2 Emissions (M Tons/Year)
|Company A’s high-efficiency insulation provides an attractive net carbon emission solution.|
Example of How Net Impact can be More Relevant than Carbon Footprint
|However, the carbon emitted by its manufacturing process would exclude it from many “Low Carbon” strategies.|
We collect impact data from investee companies. If the information we need is not disclosed, we engage with management to try to improve transparency. If the companies are unable or unwilling to provide this information, we use conservative estimates based on peer groups.
We always take a conservative approach to ensure that the lowest positive impact is used in our calculations. These numbers are assured by EY’s sustainability auditing service. One of our current largest holdings is JR East, the Japanese railway company. It is developing technologies to help reduce its CO2 emissions, including hybrid trains, and is also, among other projects, building its own solar panel plants. Renewable electricity generation displaces electricity generated from fossil fuels and therefore has a positive impact on CO2 emissions. The company has set aggressive emissions reduction targets for itself for 2030.
Another of our largest holdings, SUEZ Environment Co., is a French utility company, the business activities of which contribute a positive impact concerning water treatment and waste material recycled.
The environmental impact of our investments will always depend on the mix of underlying holdings in the Fund and is therefore subject to change. To understand the significance of this positive CO2 emissions impact, we have considered this CO2 avoidance metric in the context of the Paris Climate Agreement. This landmark agreement was signed by 195 countries and its objective is to limit the global temperature rise to 2°C above pre-industrial levels.
The chart below shows the impact of $10 million investment in the Fund in 2016. The left hand bar represents the CO2 produced from a $10m investment in the global economy as it is today, which is producing an unsustainable level of CO2 emissions. The middle column shows the impact of $10 million invested in a ‘2°C economy’, which still emits CO2, but at a significantly lower level than we produce today. Finally, the right hand column represents the impact of $10 million in the Fund. This clearly demonstrates that the Fund, with net positive CO2 impact, can make a meaningful contribution to CO2 emissions reductions as well as making a significant impact through the water saved and treated and waste recycled by investments in environmental solution providers.
We believe that the Pax Global Environmental Markets Fund is one of the first equity funds to provide quantitative evidence of positive environmental impact metrics. This, plus its focus on high growth companies, makes it a compelling opportunity for investors seeking long-term financial returns, while also investing in the transition to a more sustainable economy. The additional impact metrics are reassuring and confirm and quantify the Fund’s positive intention.
Pax World Management LLC, investment adviser to Pax World Funds, is a pioneer in the field of sustainable investing. Pax World integrates environmental, social and governance (ESG) research into its investment process to better manage risk and deliver competitive long-term investment performance. For over 45 years, Pax World has made it possible for investors to align their investments with their values and have a positive social and environmental impact. Today, its platform of sustainable investing solutions includes a family of mutual funds, as well as separately managed accounts.
Impax Asset Management Ltd. is the Sub-Adviser of the Global Environmental Markets Fund. The Sub-Adviser is a wholly-owned subsidiary of Impax Asset Management Group plc, with investment offices in London (UK), Hong Kong, and New York. Impax Asset Management Ltd. manages and sub-advises funds that invest globally in the stocks of companies that are active in environmental and resource optimization markets, particularly in the energy efficiency, alternative energy, water infrastructure and technologies, pollution control, waste management and technologies, environmental support services sectors and sustainable food, agriculture and forestry. For more information, visit www.impaxam.com.