In recent years, some investors have turned to “thematic” investing to seize opportunities created by global structural trends. Does this strategy provide a useful lens for sustainable and impact investors?

What Is Thematic Investing?

Thematic investing refers to an emphasis on long-term macroeconomic trends in an attempt to capitalize on major technological, societal, and other changes expected to take place around the world. The underlying premise is that more capital will shift to companies and industries involved in such changes, potentially resulting in better investment performance. The CFA Institute notes that major recent themes for investors include the rise of China and new technologies like artificial intelligence.

This approach differs from conventional portfolio construction. For example, while traditional sector investing focuses on companies in certain parts of the economy, such as healthcare or energy, thematic investing cuts across sectors, pinpointing opportunities aligned with a specific theme. Although thematic funds differ in focus from one another, they all differ from standard exchange-traded funds that track benchmark indexes such as the S&P 500 or Nasdaq Composite.

McKinsey suggests that a thematic approach may bring varied benefits. Beyond targeting competitive returns by investing in “hot spots or discontinuities,” thematic investors may improve their understanding of value and risk through the rigorous research the discipline requires; they may also enjoy a “dynamic and flexible way to validate and express their hunches.” Still, the CFA Institute notes that while the “narrative” around certain themes or trends can be compelling, evidence-based definition and measurement may pose challenges.

Thematic and Sustainable Investing

In some ways, thematic investing and sustainable investing are a comfortable fit. By targeting a particular environmental, social, and governance (ESG) theme, investors can harness their resources to invest in relevant solutions to urgent but long-term problems. For example, investors interested in the transition to a low-carbon economy can invest in industries and companies best positioned to benefit from that trend and to help mitigate the effects of climate change. They might look for opportunities in renewable energy technology, carbon capture and storage, or sustainable agriculture, among other areas.

In fact, some investors view thematic investing as a way to specifically target environmental or social impact outcomes as part of every investment decision. For these thematic impact investors, it is critical to benchmark each investment against both a financial return and an impact return.

One theme of particular relevance to many impact investors is sustainable development—particularly investments that help address the United Nations’ Sustainable Development Goals (SDGs). For example, investors who want to align with technology-related SDGs could consider opportunities created by the introduction of 5G, such as optimizing service delivery and boosting the use of Internet of Things. Investors focused on water scarcity and ensuring the supply of clean water might look at enterprises involved in water treatment and management, as well as agricultural technology such as improved irrigation.

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