Thematic investing allows investors to support issues that are important to them while pursuing investment returns from evolving social and environmental trends

Aubre Clemens presenting thematic investing

Like other approaches to sustainable investing, thematic investing allows investors to support issues that are important to them while pursuing investment returns from evolving social and environmental trends. Specifically, thematic investing refers to investing in companies whose businesses focus on certain sectors and related innovations with respect to social or environmental issues as compared to industry peers.

In recent years, many of the environmental and social issues supported by thematic investors mirror actions and strategies suggested in 2015 by the United Nations in its Sustainable Development Goals (SDGs), a set of universal goals for governments, the private sector and individuals working to overcome environmental, political and economic challenges. Going forward, many observers expect SDGs to continue to gain momentum, especially among millennial, value and impact investors.

The UN’s Sustainable Development Goals provide a framework for many ESG themes

The UN’s Sustainable Development Goals provide a framework for many ESG themes
Generally speaking, sustainable investments include investments in businesses that embrace things such as renewable energy, water, health care, clean technology and waste management, as well as investments across broad sectors that may profit from social, economic and environmental changes. They may be made either through direct investments in the equity or debt of a specific company, alternative investments such as private equity, or by investing in pools of funds like mutual funds that focus on sustainability themes. 

Examples of typical green projects

Examples of typical green projects

Because thematic investments are directed toward meeting specific sustainability goals, thematic investing is one of the most transparent approaches to sustainable investing. This differs from other approaches to sustainable investing, such as ESG integration, that apply general criteria to an investor’s overarching investment framework without initially considering any particular industry or sector. Alternatively, investors’ guidelines for thematic investing are often set in the context of either clearly defined sustainability issues, such as clean energy, or a particular asset class, such as private equity. 

Through thematic investing, investors may not only strive to make a positive social impact, they also may improve the investment characteristics of their portfolios by factoring sustainable criteria into their decisions. As with all approaches to sustainable investing, thematic investors need to weigh the desire for returns and positive change against possible investment risks. This includes concentration risks that may occur as the result of an investor’s decision to direct substantial assets to a particular investment, sector or theme.

The increasing availability of information on the risks of sustainable investing makes it easier to identify potential volatility or drawdown risks that may occur because of concentrated investments in specific themes or sectors. For example, third-party sources such as Sustainalytics, MSCI, Thomson Reuters, RobecoSAM and Bloomberg are now gathering and reporting comprehensive data on companies’ business involvement and revenue exposures. In addition, organizations such as the Sustainability Accounting Standards Board have created tools such as a “materiality matrix” that may be used by companies to assess ESG criteria.

The Sustainable Investing Series

Investors around the world are increasingly interested in ways to use their capital to help support and achieve positive environmental and social outcomes. In this series, we outline the various approaches to integrate environmental, social and governance (ESG) considerations into your investment strategy.