This growing movement is addressing environmental woes, helping corporations become better citizens and providing wide-ranging investment opportunities. Here’s how you can get involved.
Efficiency is helping to fuel the future
One of the biggest, and oldest, resource challenges across all sectors of industry has been dependence on fossil fuels. Current patterns of energy consumption aren’t likely to be sustainable, and one important solution is simply to make better use of what we have. “Energy efficiency is absolutely key to controlling growing demand,” says Sarbjit Nahal, head of thematic investing at BofA Merrill Lynch Global Research. He notes that, despite great improvements in fuel-efficient cars and energy saving appliances, “around two-thirds of the economic potential of improving energy efficiency remains untapped.” (For more on this topic, see “Solving the Energy Challenge.“)
Innovation could play a big role here. “Smart” electrical grids, for example, reduce energy consumption by offering utilities real-time data on power usage, which allows them to fine-tune distribution and increase efficiency. The U.S. Department of Energy estimates that 65 million smart meters will be installed in homes and businesses by the end of 2015, accounting for one-third of all electricity customers.
Similar technology will help drive more sustainable energy use across many industries, Nahal believes. For example, fuel accounts for about one-third of airlines’ operating costs. Sensors added to jet engines can deliver vital data that helps the airlines increase fuel efficiency, and Nahal estimates that each 1% improvement could translate into industry savings of $30 billion over 15 years.
Yet as much as conservation can achieve, any plan for sustainable energy also needs to involve alternative, renewable sources. In the U.S., the number of installed solar panels that convert the sun’s rays into electricity increased by 418% between 2010 and 2014, according to the U.S. Energy Information Administration. That increase came about, in large part, because “solar is getting more and more cost-effective,” says Krish Sankar, semiconductor capital equipment & alternative energy analyst at BofA Merrill Lynch Global Research. A drop in materials costs for solar panels has coincided with a rise in rates for conventionally generated electricity, meaning that in many parts of the U.S., solar-generated electricity is now cheaper per kilowatt-hour than electricity purchased from a utility.
“Around two-thirds of the economic potential of improving energy efficiency remains untapped.”
—Sarbjit Nahal, head of thematic investing, BofA Merrill Lynch Global Research
What to do about water and waste?
Among the most pressing sustainability challenges is water. Some 768 million people worldwide lack clean drinking water, and the problem is getting worse. And while available water shrinks, waste is expected to double between 2005 and 2025, and double again by 2050. The market for companies addressing the world’s water problems could top $1 trillion by 2020, Nahal estimates, while waste management could become a $2 trillion business.
Source: World Resources Institute
Short-term solutions, Nahal says, will focus on existing technologies that can be more widely applied. For example, China recently spent $66 billion to upgrade pipes and water-treatment plants to deliver clean drinking water to more of its citizens.1 Next, the country will need to clean up its water sources (nearly half of which are polluted) and increase water recycling. (To learn more about how companies, governments and investors are tackling the world’s water problems, read “The Coming Water Crisis…And What We Can Do to Solve It.”)
Similarly, today’s technologies offer potential to turn “trash to cash,” according to Nahal. While three-quarters of all global waste is sent to landfills, some countries are changing that equation. Denmark, for example, buries only 4% of its refuse. Of the remainder, 42% is recycled and 54% is converted into energy. Although challenges remain in developing environmentally friendly methods to make that conversion, “waste-to-energy is going to be an evolving area,” says Nahal, who notes that one ton of waste can produce up to 750 kilowatt-hours of power.
Footnote 1 “Public health: A sustainable plan for China’s drinking water,” Nature, July 30, 2014. http://www.nature.com/news/public-health-a-sustainable-plan-for-china-s-drinking-water-1.15619
The material presented in this article is based on information obtained by BofA Merrill Lynch Global Research as of July 2015.
Energy and natural resources stocks have been volatile. They may be affected by rising interest rates and inflation and can also be affected by factors such as natural events (for example, earthquakes or fires) and international politics. Impact investing is a new and evolving investment opportunity which may involve a high degree of risk.
Any information presented in connection with BofA Merrill Lynch Global Research is general in nature and is not intended to provide personal investment advice. The information does not take into account the specific investment objectives, financial situation and particular needs of any specific person who may receive it. Investors should understand that statements regarding future prospects may not be realized.
Bank of America Merrill Lynch is a marketing name for the Retirement Services business of Bank of America Corporation (“BofA Corp.”). Banking activities may be performed by wholly owned banking affiliates of BofA Corp., including Bank of America, N.A., member FDIC. Brokerage services may be performed by wholly owned brokerage affiliates of BofA Corp., including Merrill Lynch, Pierce, Fenner & Smith Incorporated (“MLPF&S”), a registered broker-dealer and member SIPC.