Why innovative companies are crucial to solving the world’s problems

It’s hardly news to say the world is facing numerous urgent challenges. The experience of the global pandemic highlighted how vulnerable we all are to transmissible illnesses. The effects of climate change became more obvious than ever this year, from wildfires in Canada to floods in Germany. Toxic emissions and weather patterns recently combined in India, forcing Delhi into a form of lockdown due to air pollution.

The challenges don’t end there. We could add protecting biodiversity, improving health and education, and spurring economic growth to the mix. All are crucial for sustainable development as the global population grows.

These are big challenges but they’re not insurmountable. The political will is there as we can see from the increasing emphasis policymakers are putting on the UN’s Sustainable Development Goals (SDGs).

This is an opportunity for the private sector to show its value in coming up with new products and solutions to make a sustainable future a reality.

Innovation will be crucial. And investors in innovative companies could benefit.

Innovation turns goals into reality

Governments and policymakers have an important role to play in helping to set the agenda. We saw this last month at COP26 as countries firmed up their climate change commitments. But setting a target is one thing; achieving it is another.

The development of Covid-19 vaccines is an illustration of this. Public sector support was an essential part of the picture but ultimately it was private companies who had the scientific expertise to turn their cutting edge mRNA capabilities into an effective vaccine against the virus. And then they needed to partner with other private sector companies to test, produce, and package these vaccines at scale.

The success of the mRNA vaccines shows the importance of innovation. If we, as a society, are going to meet the SDGs, we can’t simply rely on tried and tested solutions. This is where the private sector comes in.

To our minds, the Boston Consulting Group expressed it well: “Of all the forces that the private sector can bring to bear in attempting to advance the 2030 SDGs, by far the most powerful is its unique capacity to innovate quickly, attract capital to innovative solutions, and drive innovations at scale. That combination is hard to find in the public sector or the social sector, but it’s the private sector’s lifeblood.”

Once-in-a-lifetime opportunity for investors

Achieving the SDGs will require the development of entirely new technologies that don’t currently exist, or not yet at scalable levels. The climate crisis in particular, and the target of reaching net zero by 2050, means innovation is urgently needed right now.

Developing new technology and products always contains an element of risk but taking risk – in anticipation of potential future reward – is what equity investing is all about:

“When a social need can be tackled with a profitable business model, the magic of capitalism is unleashed. Answers to the many deeply rooted societal problems we face become self-sustaining and scalable.” (from Where ESG Fails, Porter, Serafaim and Kramer, Harvard Business School)

Investors can make a positive impact by using their capital to support companies who contribute to finding these answers. We see a huge commercial opportunity for innovative businesses as demand for solutions to global problems will only intensify.

Every sector needs to adjust to become more sustainable. Let’s take construction as an example. The UN’s Global Opportunity Explorer 2019 report said “Globally, buildings account for 30% of energy consumption and produce close to a third of human-induced carbon emission …. The sector can expect new policies and regulations, changes in investor demands for more certified buildings, increased energy and resource scarcity, new competitors putting circular building principles at the core of their business models.”

Investors can benefit by identifying the companies who are responding to these challenges by creating products which can drive the transformation of industries like construction.

Pivoting to sustainable solutions

In Europe, there are many companies across a wide range of sectors who put innovation at the very heart of their business and who are actively trying to support the UN’s SDGs.

One such company is Swiss firm Sika, a specialist chemicals company selling additives, adhesives and advanced materials into the construction industry.

Around 70% of Sika’s product portfolio already aids sustainability and the firm is aiming even higher. In fact, they have set themselves the goal that, by 2023, all new products launched will have to be part of a ‘sustainable solution’ offering their customers and the planet a tangible benefit from reduced CO2 emissions, energy and water consumption.

As well as incremental improvements to existing products, Sika is investing in completely novel processes. One example is their ReCo2ver cement recycling process, which re-injects CO2 back into the cement as it is being recycled. This means it doesn’t just reduce CO2 output but actually creates a carbon capture opportunity.

Another company example is nutrition specialist DSM. It has a network of 1,700 internal scientists seeking to create products that improve the health of people, animals and the planet.

One DSM product designed to address the planet’s health is Bovaer, a powdered feed additive for cows. This safely suppresses an enzyme that triggers methane production in the cow’s stomach. It therefore significantly reduces bovine methane emissions; this is crucial given methane has a greater global warming impact than carbon dioxide.

Such innovative products are born out of the ability to think differently about a problem. Cement is the most broadly used material on Earth and it is not feasible to simply stop producing it tomorrow. But how can we dramatically reduce its carbon footprint by using science to create alternative methods of production, using different materials, and enabling recycling? On a similar note, until the whole of humanity is willing and able to shift to an entirely plant-based diet, how can we address the negative effects of livestock farming?

For novel products to have an impact, they need to be developed, tested and turned into scalable, commercial propositions. The private sector can prove its value, taking these innovations from the laboratory to the customer. For investors, we see potential to share in the profitable growth such innovations can create, by backing the companies who have innovation at their core.

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