As the global economy transitions toward greater sustainability, the universe of stocks available to the nearly 10-year-old NEI Environmental Leaders Fund is expanding. Nevertheless, the portfolio manager’s approach remains laser-focused on companies that meet three specific tests.

First, says Sid Jha, a Portfolio Manager with the Impax Asset Management team that manages the fund, the company must be positioned to benefit from secular growth drivers related to the environment. Second, it must be equipped to capture value from those structural growth opportunities, with competitive advantages, a robust management team, a strong business model, and an ability to reward minority shareholders. Third, it must be attractively valued relative to the team’s understanding of the company’s growth prospects.

“The [fund’s] strategy is built on the idea that companies providing solutions to environmental challenges around the world are structurally attractive,” Jha says. “By definition, this means we’re focused on only about 5% or so of listed companies — and that means we participate in the investment landscape in a way that’s fundamentally different than most other equity investment managers.”

In their quest to populate the portfolio with high-quality companies that have durable competitive advantages aligned to long-term sustainability trends, the portfolio managers lean into sectors such as resource efficiency, clean water, clean energy, and sustainable food systems.

From niche to significant allocation

The fund’s long track record has proven to asset allocators that it can successfully navigate market cycles. For example, it has weathered the COVID shock and recovery, a significant rise in inflation, and the recent AI-driven rally. Now, Jha says, many think of it less as a niche holding and more as a solution that can hold its own as a primary sustainable equity solution.

“That’s driven, in part, by allocators underwriting the same thesis that we’re underwriting [and, in part,] by the fact that we’ve delivered strong long-term performance. We’ve also got a consistent process, [and] we’re focused on structural growth themes. That ‘North Star’ for the portfolio hasn’t changed.”

Even in an environment in which geopolitical and macroeconomic noise is loud, the fund is concentrating on the fundamentals of individual investment opportunities. That said, one advantage of all that noise is that it can be easier to find companies that are either misunderstood or mispriced because of short-term dislocations.

“We’re looking to pick fights with the market where we think we have the right to win — so, companies where we see long-term value despite near-term skepticism in the broader equity markets,” Jha explains.

Promising opportunities ahead

In the near term — say, six months out — Jha says the most significant opportunity for sustainability-focused stocks centres on the deployment of power efficiency improvements. The structural push for this is coming from the strong demand for AI, which is driving an exponential build-out of data centres around the world.

While that trend plays out, a normalizing interest rate environment should take pressure off residential markets and industrial production, allowing delayed or pent-up demand to release over the next few years — with benefits for investors in those sectors.

Looking five years out, Jha is seeing attractive opportunities in the healthcare sector. Many healthcare stocks are trading at 10-year lows against headwinds that include tariff and regulatory uncertainty in the United States, which is a major profit pool for the industry. This environment is indiscriminately holding back pockets of healthcare that are of interest to the fund, including companies that supply quality-control equipment used for both pharmaceutical and environmental (air, water, and soil) testing.

“We believe the earnings power of these holdings will continue to prove their resilience over the next five years, and we’re looking to benefit from what we expect will be a normalization of what is currently negative sentiment,” Jha says.

Overall, Jha adds, successful active investing is about balancing the big picture with individual idiosyncratic situations. It’s important to understand geopolitical and macroeconomic investment dynamics to navigate the markets on a daily basis, but generating investment performance depends on portfolio managers’ ability to narrow in on specific opportunities within the broader context.

“Our process is designed to do both — focusing on global high-level insights, but maintaining what is ultimately a 45-stock, high-conviction, concentrated portfolio.”