This form of investing enables investors to gain exposure to both megatrends — structural shifts that are reshaping our economy and way of life, and themes — groups of securities with similar properties that support or benefit from those megatrends. These stocks, which often span traditional sector classifications, may offer investors a differentiated way to diversify their equity allocations. Finally, while sustainable themes are relevant for both developed and emerging markets, we believe the economic development opportunities in emerging markets today have the potential to provide substantial tailwinds for these stocks. The risks to sustainable thematic investing include macro and market volatility, and uneven progress toward economic development goals.

There is a great deal of thematic overlap between impact and sustainable theme investing, as both focus on generating competitive investment returns alongside positive social and economic outcomes. Impact investors, however, have specific investment thresholds of materiality (a certain percentage of an investee’s revenue must be generated from impact activities), additionality (the investee’s impact must have a low probability of being addressed by other means), and measurability (a theory of change must be clear and an investee’s progress toward impact must be quantifiable).

The sustainable thematic investment universe is characterized by disruption and dispersion. Many companies are disrupting sectors, industries, and business models. This creates significant dispersion among potential long-term “winners” and “losers,” which, in turn, results in alpha opportunities for active managers. We believe that fundamental, bottom-up research coupled with deep understanding of the macro and geopolitical environment strengthens the investment case for this approach.