This article is from the latest Good Investment Review, which you can download free here.
Urban expansion – 68 per cent of the world’s population is estimated to be living in cities by 2050 – has many benefits, but it also brings substantial sustainability challenges. Here, Ed Phelps, Investment Manager at Liontrust Asset Management, looks at the companies working on the solutions.
It is estimated that 68 per cent of the world’s population will live in cities by 2050 compared to 55 per cent today. Of this expansion, 90 per cent is expected to be in Asia and Africa, of which 35 per cent will be in three countries: China, India and Nigeria.
The benefits of higher urban density include greater productivity and innovation for service industries, better access to and utilisation of goods and services, and more energy efficient construction and transportation.
It does bring substantial sustainability challenges, however, including through urban sprawl. This is the low-density physical expansion of cities that occurs when land-use growth exceeds population growth and urban planning. It can lead to greater environmental impacts from increased land use and forms of transport, as well as social issues such as income inequality between localities.
Even when sprawl is avoided, cities face significant challenges such as minimising construction and operating emissions, providing affordable housing for those on low incomes, avoiding poor air quality, and climate change adaption to cope with heat island effects and surface water flooding.
There are a number of solutions emerging to deal with the challenges around cities, such as modern methods of construction, digitisation of buildings (to create efficiencies in construction and maintenance), HVAC (Heating, Ventilation and Cooling) and BACS (Building Automation and Control Systems).
Building Better Cities
One of the companies we hold in our Building Better Cities theme is Swiss group Sika, which produces specialist construction chemicals for the building industry. Sika has five core technology competencies: thermoplastic systems; adhesives; mortars; coatings; and concrete systems. Construction accounts for around 80 per cent of Sika’s revenue and its positive impact comes through its ability to reduce the environmental impact of products.
Firstly, 45 per cent of group sales and 70 per cent of sales in developed markets are in renovation, which is increasing the efficiency of buildings through measures such as better insulation or sealing. Secondly, its products improve durability and longevity – for example, by making a structure more resilient through water-proofing.
Currently, cement production is estimated to account for up to 8 per cent of global carbon emissions. Yet with increasing urbanisation leading to rising demand for infrastructure – and ultimately, cement – the environmental impact of this key material looks set to rise sharply. Cement emissions are difficult to reduce because there are no other materials available at the required scale.
Sika has a range of innovative chemical admixtures that enhance the properties of concrete, such as its ViscoCrete and Sikament products. Its cement additive Sikagrind reduces the attraction of fine particles during grinding in the production process of cement, reducing the carbon-intensive clinker content of concrete and the environmental emissions that come with it. Sika estimates that ViscoCrete, Sikament and Sikagrind save 100 million tonnes of cement annually and prevent 65 million tonnes of carbon dioxide emissions.
Many of Sika’s products improve the performance of materials and so either reduce the amount used or prolong the lifespan of a building. Extending the useful life of a building reduces the frequency of demolition and reconstruction, thereby reducing resource demand and emissions.
Sika has also developed a novel process that can recycle concrete waste from demolition and reuse it as building material again, rather than downcycling it to be used as road tarmac, which is the standard today.
Moving closer to net zero
Construction typically contributes five per cent to 10 per cent of economic output for the global economy. With cement production accounting for between six per cent and eight per cent of global carbon dioxide emissions, even a quarter reduction could move us noticeably closer to net zero. Because Sika generates 80 of its sales from construction, it has a significant ability to contribute to sustainable development.
Demand for Sika’s chemicals should grow at a faster rate than the overall construction market as its products achieve greater penetration within an industry seeking to reduce embodied carbon emissions.
Sika targets average annual revenue growth of between six per cent and nine per cent; we think this is very achievable through a combination of organic and acquisitive growth. Organic growth should be supported by Sika’s significant R&D investment, with market share gains accruing as it creates or enters new product spaces. In 2021, Sika filed 90 patents and increased its R&D workforce by over 10 per cent to 1,240.
In addition, considerable organic growth has also come from expansion to under-penetrated regions. Sika gained a significant first-mover advantage in terms of brand and customer relationships ahead of some peers in Asia and, more recently, Africa and Latin America.
Sika has the opportunity to further consolidate a very fragmented construction chemicals market. Sika is one of the larger players with 11% market share, with the top 30 in the industry only representing 45 per cent. Sika’s scale and relatively low cost of capital allows acquisitive growth to form a key part of its strategy – by acquiring smaller companies on lower valuation multiples, earnings enhancing growth can be readily achieved.
Risk warning: The value of an investment and the income from it can fall as well as rise as a result of market and currency movement, and you may not get back the amount originally invested.
