As the threat of climate change grows, the race is on to power low-carbon economies through energy efficiency, innovation and infrastructure. At the core of this drive toward sustainability is the engineering of future mobility. In the following insight, Tim Crockford, Portfolio Manager of the Hermes Impact Opportunities Fund, identifies four key areas of innovation in future mobility creating a sustainable direction of travel for transport and long-term investment opportunities.
Rapid urbanisation, decaying infrastructure, population growth and the effects of climate change continue to challenge our world’s cities. While government must play its part in addressing the problems we face by providing much-needed resources, we are now seeing public markets awaken to the innovative role they can play in creating more efficient and resilient low-carbon economies.
The sheer scale of public markets makes them powerful agents of change in generating a positive impact on society and the environment. At the forefront of impact investing, is the philosophy of moving beyond traditional screening methods to capture those companies that are the sustainable leaders of tomorrow. This is the process of driving long-term portfolio returns by unearthing purposeful companies with innovative solutions to meet society’s needs.
This provides investors with the ultimate active edge: finding systematically undervalued companies that create long-term solutions to the challenges societies face. As part of our investment process, we align each of our investments with eight key impact themes – one of which is future mobility. This theme illustrates where sustainability trends in transport are unearthing compelling impact opportunities through efficiency, safety and intelligent technology.
With 25% of CO2 emissions produced by transport and the health implications of diesel fuel becoming broadly understood only in the last few years, vehicular decarbonisation is one of the clearest opportunities to reduce our carbon count.
Electric vehicles (EVs) now offer a viable alternative to those powered by either petrol or diesel. The cost of lithium-ion batteries used to fuel these vehicles has dropped 65% since 2010. This is set to fall further, dropping below $100kwh in the next decade. Lower battery costs should help drive EV usage to about 700gwh by 2030, enabling EVs to help prevent further climate change and air pollution.
To access this theme, we invest in Umicore. The company produces cathode material, a critical component for EV batteries. However, it also manufactures emissions control technologies, which help reduce the environmental impact of internal-combustion engines. It is this dual-impact of Umicore, combined with strong financials reflected in 15% profit growth year-on-year in 2017, which makes the company particularly attractive as an impact opportunity.
Making vehicles more intelligent can unlock new efficiencies and enhance safety. Core to realising these objectives is in sensor usage. Sensors can improve powertrain and engine management, including oil and petrol-tank pressure, throttle and torque, which contribute to a lower aggregate fuel requirement. The social benefit of sensor technology comes through improvements to vehicle safety, achieved by employing dynamic braking, side airbags and rollover sensors.
To capitalise on this opportunity, we invest in Valeo, which manufactures sensors related to safety and vehicle comfort. These include ultrasonic sensors, radars and cameras that can detect obstacles; rain, light and humidity sensors that can, for example, prompt the car to switch headlights on; and finally, blind-spot sensors, that reduce risks during parking and turning manoeuvres.
Sharing the burden
By 2040, shared mobility is expected to account for about 80% of miles driven in the US. This explosive forecasted growth underlines the potential of this theme to transform lives.
The primary long-term drivers for innovation in shared mobility are urbanisation and the need for environmentally-friendly transport, as well as flexibility for the consumer and lower costs than those associated with car ownership.
We believe an exponential rise in vehicle sharing will reshape cities. With fewer private vehicles, land currently used for parking will be available for other uses, such as housing. Furthermore, a reduction in vehicles on the road reduces the environmental impact of transportation.
Shared mobility also plays into the rise of EVs. For example, in China, 95% of the estimated 30,000 shared vehicles currently in operation are either electric or plug-in hybrid cars.
Technology is accelerating the development of connected vehicles, enabling them to understand their global position and communicate with the surrounding environment.
From a safety perspective, improved technology has enabled systems to provide live information about road, traffic and weather conditions helping drivers anticipate risks and consequently preventing accidents.
Perhaps most notably, innovative technology is also fuelling the development of autonomous driving. In this brave new world, technological innovation will be key in avoiding accidents and preventing passenger and pedestrian injuries as semiconductors and sensors replace eyes and ears.
We invest in both technology and shared mobility through German systems manufacturer Hella. The company develops smart lighting systems for vehicles, which helps them to process and communicate information, thereby improving safety and reducing energy consumption. It also develops innovative camera and radar products, helping to increase the safety of autonomous vehicles.
The multiple sources of innovation driving shared mobility has created a rich seam of companies succeeding in their core purpose: to generate value by creating positive and sustainable change. These impactful businesses are directly exposed to sources of enduring demand by meeting society’s unmet needs – and we believe will be powerful agents in driving long-term investment outperformance.