Investing with disruption and sustainability in mind

Sustainability is a powerful disruptive force, presenting opportunities for investors to contribute to positive real-world outcomes

Disruption is not just about slow-to-adapt incumbents being overtaken by more relevant newcomers. Nor is it solely the domain of the technology sector, intent on automating manual processes or reimagining how we hail taxis or book holiday rentals. Issues such as climate change, population growth, threats to biodiversity and pressure on natural resources are intrinsically disruptive. They are forcing companies to evolve and reprioritise – including by applying disruptive technology throughout their operations – and to do so urgently.

In other words, disruption and sustainability are more inextricably linked than ever. Companies are aware that advancing technologies and new business models will pose a threat to their business if they fail to respond – the “disrupt or be disrupted” argument – but they also recognise that sustainability issues are in themselves disruptive.

Because of the increased focus on sustainability, we now have higher expectations of our governments, hold the brands we favour more closely to account and make more conscious choices as consumers. A recent Capgemini report revealed that 79% of people are changing their purchasing behaviour based on sustainability-related factors. In response, companies are investing in multiple emerging technologies to drive forward their sustainability initiatives. The consultancy found that organisations already leveraging these technologies for sustainability purposes are benefiting from cost savings, increased profitability and higher revenues.

In just five years, global renewable energy capacity has grown by 50%, UK sales of meat substitutes have risen by more than 85% and global electric vehicle (EV) stock has increased by more than 900%. Meanwhile, global sustainable debt issuance increased by more than 1,000% in 2014-19, reflecting greater interest in projects that combine financial returns and real-world impact.

New technologies play an important role in supporting sustainable ideals, according to Allianz Global Investors head of thematic equity Andreas Fruschki. “Disruptive technology and innovation are so important for us to accelerate sustainability in principle, because nobody will adopt a sustainable lifestyle if it’s complicated, cumbersome and more expensive.”

Disrupting the unsustainable status quo

Charles Darwin taught us that it is not the strongest species, nor the most intelligent, that survive, but the most adaptable. In the current era of digital Darwinism, similar rules apply. Countries, sectors and companies that are able to employ strategies to thrive amid the biggest environmental challenges witnessed in our lifetime, keep up with technological advancements, and innovate to create positive real-world outcomes will be the inevitable winners in this age of disruption.

Sustainability is fundamentally a disruptive force. Knowing how to land on the right side of that disruption is about looking to the consumers, investors and business leaders of the future, adds Mr Fruschki. “We have a good window into the future by observing how millennials or Gen Z tend to do things: embracing technology, being digital natives, with an intrinsic understanding of sustainability-focused behaviour that is not going to reverse.”

Robbie Miles, portfolio manager at Allianz Global Investors, points out that it is interesting to consider which is really the driving force when it comes to disruption and sustainability. “I think the traditional understanding is that sustainability drives disruption because society, regulators and consumers are changing their preferences, which drives innovation.”

However, he argues that the relationship between disruption and sustainability is more complex and interesting. Using the Paris Agreement as an example, Mr Miles says that the collective global pledges at COP21 in 2015 were realistic only because of advances in the semiconductor industry at that time.

“Because semiconductors had become so much more efficient, clean energy in turn became much cheaper, and making bold commitments was much easier to do politically, because it was more affordable,” he explains.

Just as EVs have shaken the entire automotive sector into action, Mr Miles sees a similar opportunity in agriculture. As the world population is expected to grow to nearly 10bn by 2050, global food demand is increasing rapidly. There is therefore an urgent need to intensify production, but in a sustainable manner.

According to Mr Miles, the biggest disruption taking place currently is in the development of microbial alternatives to nitrogen fertilisers. Acknowledged to be one of the US’s most widespread, expensive and challenging environmental problems, chemical fertiliser pollutants are under increased scrutiny, and using biological alternatives could completely transform farming. Furthermore, these microbial approaches, in combination with gene-editing, can help crops to tolerate drought and hot temperatures that have become increasingly prevalent as a result of climate change.

“In farming, nitrogen fertiliser has been an essential technology to support a rapidly growing global population. Yet nitrogen fertiliser releases a lot of carbon dioxide in its production and, when applied to the field, it releases a far more potent greenhouse gas, nitrous oxide. When fertilisers leach into waterways, they cause eutrophication, whereby a profusion of algae eventually deprives the water of oxygen,” warns Mr Miles.

Much in the same way that the oil and gas majors were once sceptical of EVs, there is clearly resistance from the farming community to emerging techniques. But as the environmental risks of the status quo are better understood, it is little surprise that start-ups in the agricultural sector have attracted an estimated $1bn in new investments in just one year, according to specialist venture capital firm AgFunder.

Efforts to achieve net zero and other sustainability objectives require a pragmatic approach. Compromises are needed, with most companies ranging across a spectrum of sustainability. For instance, Mr Miles points out: “We are very good at seeing the negatives in oil and gas, and we’re very bad at seeing any positives. Conversely, we’re really good at seeing all the positives in renewables, without seeing any negatives. The truth is more nuanced.”

As an example, he describes the mineral extraction required to create solar panels and wind turbines. “These are not always recyclable, they can be toxic, and they often come from geopolitically sensitive areas.”

But disruptive technology can alleviate such tensions. Certain engineering companies involved in the mining sector are now using battery-powered, automated equipment. Mr Miles explains that this is improving effectiveness, safety and environmental credentials in equal measure – neatly connecting concepts of disruption and sustainability.

Looking to the thematic approach

We have described how today’s disruptive sustainability concepts span multiple industries. From the clean energy transition to food scarcity, or from water security to digitisation, investment opportunities abound. Looking at this more sustainable world through a disruptive lens warrants a change in tack. Classifying investments in traditional ways – such as by geography, industry sector or company size – can be limiting. By contrast, thematic investing is unconstrained, potentially allowing the investor to be nimbler.

For Mr Fruschki, the benefits are clear. “Thematic investing approaches may be the only way of participating effectively in those specific aspects of change where investors need to screen for new business models, especially those that aren’t well captured by traditional sector definitions established over two decades ago. Applying a thematic lens to investment ideas allows one to invest in a more targeted way, unconstrained from sectoral or otherwise traditionally defined static universes of companies.”

As the themes welcoming such disruption touch so many potential opportunities, accessing them requires an equally expansive approach. This means the difference between investing not just in hydrogen solutions, but in broader renewables; not just in social media, but in the digitisation of everyday life; or in a water security strategy that encompasses industry, utilities, healthcare and smart technology. In diversifying the opportunity and the risks, while finding solutions to our shared problems, everyone could be a winner.