Impact and sustainable investing
Sustainability: Interconnected challenges and what we’re doing about them
10 min read 15 Nov 23
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Sustainable and impact investors can use the power of investment to help create positive change and tackle the world’s biggest challenges. This could be by investing in companies and projects driving the transformation towards a more sustainable world, or those innovating in their fields to create better outcomes for people and the planet. In this special report, Michael Rae, Rana Modarres and Philip Kemp, zero in on the inextricably intertwined challenges of our times and potential solutions across four interconnected areas, namely: halting climate change, improving efficiency, embracing a circular economy, and promoting greater social inclusion.
1. Halting climate change
United Nations Secretary-General António Guterres described climate change as “the biggest threat modern humans have ever faced”. Rising temperatures increase the likelihood of a host of climate risks, such as more frequent and extreme heatwaves, heavy precipitation, droughts, tropical cyclones and reductions in Arctic sea ice. These, in turn, pose a huge range of societal risks, from the destruction of businesses to the displacement of communities.
According to the Intergovernmental Panel on Climate Change (IPCC), the United Nations’ official body on climate change, human activities have already caused more than 1°C of global warming above pre-industrial levels, and this is set to continue over the coming decades if immediate action is averted1. In fact, recent research from the World Meteorological Association suggests that we are likely to breach 1.5°C of global warming, at least temporarily, before 20272.
Emission reductions are essential
The concentration of greenhouse gases (GHGs) in the earth’s atmosphere is directly linked to global temperatures. The most abundant greenhouse gas is carbon dioxide (CO2), comprising approximately two thirds of GHGs3. GHG levels have been rising in tandem with global temperatures since the industrial revolution, due to unsustainable resource use, lifestyles and patterns of consumption and production.
“Fossil fuel energy production accounts for 40% of global emissions.”
The best chance of halting global warming is through deep, rapid and sustained GHG emission reductions. Encouragingly, the IPCC concluded that reaching net zero CO2 emissions would halt global warming over a multi-decade timescale, although a net-negative emissions approach may then be required to prevent any further warming over the longer term, considering the cumulative GHGs which are already present in the atmosphere.
Successful global emission reductions will require coordinated efforts from governments, industry bodies, companies and individuals across the world. We believe the three areas below have the potential to be particularly impactful for climate efforts: clean energy, carbon capture solutions, and science-based emission reduction targets.
The role of clean energy
Fossil fuel energy production accounts for 40% of global emissions4, so the transition to a clean energy system will be essential for any successful attempts to halt climate change, especially as global energy consumption continues to rise. The share of renewable energy in the wider mix has grown steadily in recent years, but progress has been set back by geopolitical disruption to global energy systems, as many countries ramped up highly pollutive fossil fuel power generation to limit price increases and ‘keep the lights on’.
Encouragingly, investment in clean energy technologies also reached $1.1 trillion last year, matching fossil fuels for the first time. There was also positive progress within the regulatory landscape. Massive infrastructure packages from the US and EU have earmarked billions of dollars of investment in clean energy, while regions have also increased their near-term targets for renewable energy capacity.
Many companies are making positive contributions towards the transformation of the global energy economy. One such company is Ørsted, a company M&G invests in, which primarily focuses on wind energy production. With 15.1 gigawatts (GW) of installed renewable energy capacity, the company estimates that its contribution to the global energy mix helped to avoid 18.2 million tonnes of CO2 emissions in 2022.
Alongside increasing its renewable energy capacity (Ørsted aims to reach 50GW capacity by 2030), the company is also encouraging its transport and manufacturing partners to switch to renewables, and investing in innovative solutions such as floating offshore wind farms. These will bring renewable energy production to locations that were previously unsuitable due to deep waters.
Climate technology solutions
Carbon capture is a novel solution for industries where emissions are currently hard to abate, such as steel and cement. It involves capturing CO2 from the air or at source, and storing it in a way that will not contribute towards global warming, such as by injecting it into underground rock formations where it becomes mineralised. With this technology, CO2 removal can be monitored, measured and audited, which poses advantages over other methods of sequestering carbon, such as planting trees.
The IPCC states that emission reductions must be accompanied by carbon dioxide removal in order to reach a net zero emissions scenario5. While the technology is currently available, the next challenge is to scale up to the required capacity.
One company working to scale up carbon capture technology is M&G Catalyst investee company, Climeworks, which specialises in direct air capture, where CO2 is captured from ambient air before being stored underground. Climeworks launched the world’s first commercial direct air capture plant in Switzerland in 2017, followed in 2021 by the launch of its Orca facility, which runs on geothermal energy and can store up to 4,000 tonnes of CO2 per year. The company is currently developing a larger facility which will capture up to 36,000 tonnes of CO2, with ambitions to scale up to millions of tonnes by 2030.
Science-based targets
Successful climate change mitigation will require steep emission reductions from companies across all industries. Science-based targets can play a vital role in these efforts, by providing companies with a framework to measure their ambitions (and actual reductions) against what is required.
Science-based targets are emission reduction targets that are consistent with the pace recommended by climate scientists to achieve the goals of the Paris Agreement, thereby limiting the worst effects of climate change. In other words, they are in line with the reductions required to keep temperature increases below 1.5°C compared to pre-industrial times.
M&G manages a range of investment funds which aim to invest in companies contributing towards the goals of the Paris Agreement on climate change – either by taking steps to reduce their own emissions, or by providing solutions that enable others to do so. Science-based targets have been the subject of numerous company engagements within these investment funds in recent years, and we encourage investee companies to implement targets, regardless of the carbon intensity of their operations.
2. Improving efficiency
Emission reduction efforts go hand in hand with improved efficiency – another area where we see significant potential for sustainable and impact investors to encourage transformation and innovation. Over the coming decades, greater efficiency will be needed to reduce energy usage (and the associated emissions), to make the most of dwindling natural resources, and to support future livelihoods as the global population continues to grow.
“Greater efficiency will be needed to reduce energy usage, make the most of dwindling natural resources and support future livelihoods.”
Keeping the lights on…efficiently
Energy efficiency was a key theme of 2022, in the face of rising energy costs and continued geopolitical disruption to global energy systems. Investment aimed at improving the energy-efficiency of buildings, transport and industry reached more than $560 billion in 2022, a 16% increase on the previous year, according to the IEA. Under current policies, this figure is expected to increase to around $840 billion per year between 2026-2030 – an encouraging increase, but still less than half of the level currently needed to reach a net zero scenario6.
Managing what you measure
Buildings are responsible for around 40% of global energy consumption7, and are therefore a logical target for efficiency improvements. Encouragingly, a range of companies offer innovative solutions to make new and existing buildings more efficient, both in the commercial and residential spheres.
One such company is Schneider Electric, which specialises in energy management and automation systems, and is held in several M&G funds. The company’s flagship EcoStruxure platform enables the control, monitoring and management of buildings. It is used in homes, commercial buildings, data centres, infrastructure and industry. Integrating with Schneider’s vast array of sensors, controllers and other electrical components, the software connects with subsystems such as electrics, lighting, security, fire and power, bringing real-time data streams together in a single platform. With this knowledge, energy use can be monitored, optimised and ultimately reduced.
Another example is M&G Catalyst investee company, Greencore Homes, which targets improved efficiency in the construction and running of residential buildings.
Efficient engineering
There are also efficiency gains to be made during the design and development of products. Across all industries, making this stage more efficient can help to minimise the use of natural resources, reduce product carbon footprints, speed up the time to market and ultimately reduce costs.
“Engineering simulation…enables engineers to virtually test operational performance and predict how product designs will behave in real-world environments, without the need for physical prototypes.”
One option in this area is engineering simulation. This is the application of physics-based software solutions across the product lifecycle, from idea stage to design, manufacturing and operation. It enables engineers to virtually test operational performance and predict how product designs will behave in real-world environments, without the need for physical prototypes.
A pioneering company in the field is Ansys, an investee of several M&G funds. The company’s powerful simulation software integrates various branches of physics, such as thermodynamics, electromagnetism, quantum, optics and atomic, allowing customers to test products against thousands of real-world scenarios in the time it took to build one physical prototype previously.
3. Embracing a circular economy
The shift to a circular economy is inextricably linked to improving efficiency, and can play an important role in efforts to halt climate change and limit biodiversity loss. In short, it is the decoupling of economic activity from the use of finite resources, by eliminating waste and reusing or recycling products and materials.
Currently, unsustainable production patterns have seen us overshoot five of the nine ‘planetary boundaries’, which measure environmental health across land, sea and air. Furthermore, the global economy is only 7.2% circular, meaning that materials cycled back into the global economy at the end of their life form just 7.2% of all material inputs. Alarmingly, this figure has decreased steadily over the past several years due to increases in material extraction8.
However, the good news is that there are companies providing innovative solutions to reduce waste and reuse materials across a host of industries. Below, we look at examples in two high-profile areas: plastic packaging and food waste.
The plastic problem
The plastic waste problem is one of the most high-profile consequences of our linear consumption model, and #BeatPlasticPollution was the focus of World Environment Day on 5 June 2023. As a versatile and particularly enduring material, plastic is used widely across most areas of our day-to-day lives. But these properties also create problems when it comes to disposal, with mismanaged plastic waste contaminating land and oceans worldwide.
However, there are impactful companies helping to address the plastic problem by facilitating the collection and recycling of plastic waste. One example is Tomra, an M&G investee company that supplies reverse vending machines and waste sorting machines. Tomra’s 80,000 reverse vending machines can be found in supermarkets across Europe and elsewhere, allowing consumers to conveniently return beverage containers, after which they can be sorted and recycled. With deposit return schemes mandated to cover all of Europe by January 2029, these machines will become increasingly important for recycling efforts.
Once plastic packaging is collected, Tomra’s innovative waste sorting machines can also play a valuable role. As waste travels along a conveyor belt, advanced sensors scan for characteristics such as different materials, colours, shapes, and the presence of contaminants, while blasts of air are used to remove offending items.
Another company in this area is M&G Catalyst investee, UBQ Materials. The company collects mixed solid waste, ranging from plastics to food residues, which would otherwise have been incinerated or sent to landfill. Through a chemical process, the organic matter in the waste is broken down into its component parts, which combine with residual plastics to form a composite thermoplastic material. This material can be substituted for oil-based resins in the manufacturing of a huge range of plastic products, such as clothes hangers, shipping pallets, rigid packaging and office furniture. Therefore, the company not only helps to prevent plastic waste going to landfill, but also reduces the reliance on fossil fuels for new plastic materials.
Reusing food waste
A second high-profile example of the pitfalls of our linear consumption model is that of food waste. More than 930 million tonnes of food is wasted every year, 61% of which is thrown out by households9. The negative social and economic impacts are clear, especially when we consider that nearly 10% of people globally are undernourished10. However, there are also climate ramifications, as food waste releases methane and other greenhouse gases when it decomposes in landfill. In fact, it is responsible for 8-10% of global greenhouse gas emissions11.
“Decomposing food waste is responsible for 8-10% of global greenhouse gas emissions.”
While there is a clear need to throw away less food in the first place, we must also increasingly look to ‘close the loop’ by using food waste for other purposes. Food waste is commonly recycled to produce compost or biogas, but one M&G public equity impact investee company, Darling Ingredients, takes this a step further with a host of innovative solutions.
The company collects a broad range of animal by-products from slaughterhouses, grocery stores and butchers of all sizes. Darling Ingredients also collects food waste from commercial bakeries producing the likes of bread and cereal, and used cooking oil from approximately 120,000 restaurants and other food outlets. These materials are used to produce an even broader range of products, including pet food, non-food grade oils, organic fertilisers, and collagen, which is used in nutritional supplements, sweets, and even skincare products. Darling Ingredients also recycles rendered animal fats and used cooking oils to create renewable diesel, which is interchangeable with regular diesel but releases up to 85% less emissions.
4. Levelling the playing field
While there have been encouraging developments in many areas of inclusion in recent years, a lot more still needs to be done. Globally, 22% of adolescent girls are not in education, employment or training, compared to 12% of boys.
In the adult population, 72% of men participate in the labour force, but only 47% of women. Furthermore, only 30-50% of people with disabilities are likely to be employed in developed countries, dropping to 10-20% in emerging countries.
Furthermore, Covid-19 and the subsequent cost of living crisis have reversed the recent progress across many facets of social equality and inclusion, having disproportionately affected the most vulnerable communities. According to The World Bank, income losses from the pandemic were twice as high in the world’s poorest countries than the richest, pushing more than 70 million additional people into extreme poverty and widening global income inequality for the first time in decades. The poorest communities also faced large setbacks in health and education, including premature mortality and disrupted learnin12 .
However, against this backdrop there are opportunities for investors and companies to contribute towards greater inclusion for underserved groups. Below, we highlight a number of solutions across three areas – improving female workforce participation, enabling digital communication in remote areas, and bringing banking to the unbanked.
“Income losses from the pandemic were twice as high in the world’s poorest countries than the richest, widening global income inequality for the first time in decades.”
Enabling greater female workforce participation
Businesses from all industries can help to promote more inclusive workplaces for females and other underserved groups by setting clear targets and policies in areas such as minimum gender representation, flexible working and adequate parental leave, while reporting on their progress regularly. However, certain companies are also providing impactful solutions to actively empower women in the global workforce.
One such company is M&G investee Progyny, which specialises in high-quality fertility benefit schemes for the employees of its corporate clients. Progyny’s solutions help to increase the likelihood of women successfully having children later in life, meaning that those who wish to pursue their career goals aren’t disadvantaged. With fewer women sacrificing their professional ambitions to have children, there is greater potential for increased female representation in leadership roles, which are often male-dominated. Furthermore, Progyny contributes to greater equality for non-traditional family units (such as single parents and LGBTQ+ couples), by providing alternative options on the road to parenthood.
Another solutions provider held in our public equity impact funds is Bright Horizons, which primarily provides childcare facilities for corporate clients and local communities. See opposite for more information about the company.
Connecting remote areas
Mobile telecommunication is becoming increasingly important to our day-to-day lives, and is often a prerequisite for access to other essential services such as healthcare, banking and education. Despite strong advances in recent years, just 55% of the global population currently has access to mobile internet connectivity13, and coverage is much lower in developing nations. The provision of reliable mobile connectivity is therefore a powerful tool in improving inclusion for underserved groups, especially within remote areas.
“A range of companies offer innovative solutions to make new and existing buildings more efficient, both in the commercial and residential sphere.”
One company providing a solution to address this challenge is Helios Towers, an M&G investee company that builds, acquires and operates telecommunications towers in Africa. These towers are capable of accommodating and powering the needs of multiple mobile network operators who, in turn, provide wireless voice and data services to end-consumers and businesses. The company uses a geographical information systems tool to find locations that maximise the transmission signal and improve coverage for operators, helping to bring connectivity to the greatest number of potential users.
Bringing banking to the unbanked
More than 1.4 billion people are currently without access to a bank account. They are more commonly women, poorer, less educated, and living in rural areas14. This prevents them not only from sending and receiving money, but also hinders their ability to access other financial services, such as credit and insurance, and even start a business.
We have identified several companies focusing on providing banking services to underserved populations. One investee company is Bank Rakyat Indonesia, one of the largest Indonesian commercial banks. The bank specialises in microlending, where it provides small loans and financing for entrepreneurs who are often at the lower end of the income spectrum, or considered to be at or below the poverty line. The company has also invested heavily in its digital offering, and maintains a large network of branches across the country (including the world’s first sea-floating banking service), helping to reach people in remote areas and across the islands of the archipelago.
Another example is Bank of Georgia, a large national financial institution providing banking services to customers that were previously grossly underserved, with little banking infrastructure left after the end of communism in Georgia. Alongside retail and business banking services, the company also provides mortgages in an economy which has among the highest number of people per household in Europe, where young people have tended to live at home far into adulthood given financial constraints.
Driving transformation
The world continues to face a host of environmental and social challenges, yet progress across a host of areas has stalled or even reversed in recent years. However, as this report highlights, investors and companies alike are well poised to create a positive virtuous circle to address the challenges of our times, and help drive a transformation towards a more sustainable world that delivers positive outcomes.
Michael Rae is a Public Equity Impact Fund Manager, Rana Modarres is an Impact Director and Philip Kemp is an Investment Writer.
This article was first published in the inaugural edition of Ampersand, our bi-annual thought leadership magazine.
1 Intergovernmental Panel on Climate Change (IPCC), “AR6 Synthesis Report: Climate Change 2023”, (ipcc.ch), March 2023.
2 World Meteorological Organisation (WMO), “WMO Global Annual to Decadal Climate Update (Target years: 2023-2027)”, (wmo.int), May 2023.
3 IPCC, “AR5 Climate Change 2014: Mitigation of Climate Change”, (ipcc.ch), February 2015.
4 International Energy Agency (IEA), “Global energy-related CO2 emissions by sector”, (iea.org), July 2020.
5 IPCC, “AR6 Synthesis Report: Climate Change 2023”, (ipcc.ch), March 2023.
6 IEA, “Energy Efficiency 2022”, (iea.org), December 2022.
7 World Economic Forum, “Why buildings are the foundation of an energy-efficient future”, (weforum.org), February 2021.
8 Circularity Gap Reporting Initiative, “The Circularity Gap Report 2022”, (circularity-gap.world), June 2023.
9 UNEP, “UNEP Food Waste Index Report 2021”, (unep.org), June 2023.
10 Action Against Hunger, “World Hunger Facts & Statistics”, (actionagainsthunger.org), June 2023.
11 UNEP, “UNEP Food Waste Index Report 2021”, (unep.org), June 2023.
12 The World Bank, “Poverty and Shared Prosperity Report 2022”, (worldbank.org), October 2022.
13 GSMA Association, “The State of Mobile Internet Connectivity Report 2022”, (gsma.com), October 2022.
14 The World Bank, “COVID-19 Boosted the Adoption of Digital Financial Services”, (worldbank.org), July 2022.
The value of investments will fluctuate, which will cause prices to fall as well as rise and investors may not get back the original amount they invested. Past performance is not a guide to future performance. The views expressed in this document should not be taken as a recommendation, advice or forecast.
