What are sustainable ‘Smart Cities’? Our view on a key investment theme for the years ahead

Investors have talked for years about ‘megatrends’ – the technological, environmental, social and economic shifts reshaping the world.

Megatrends are a way to conceptualise the major themes of our age, including climate change, technological innovation and shifting economic power.

Today, as the world grapples with the coronavirus pandemic, more people are coming to recognise that global forces can transcend national borders. For some investors, this has raised questions about which approach is best to stay one step ahead in a changing world.

In this article, we will highlight one of the global megatrends whose importance has grown during the current crisis, which represents an important sustainable investment theme for the years ahead.

From megatrend to investment theme

Urbanisation refers to the millions of people moving from rural areas and small towns to cities around the world each year, and the impact this has on the environment, public health and infrastructure.

It’s hard to overstate how important cities are in the modern world. They house half of all people on earth¹, consume two-thirds of the energy, and generate 70% of the greenhouse gas². Cities are also much more population-dense than rural areas and towns, with implications for the public health impact of pollution and disease.

As they grow in size and environmental footprint, cities face a huge challenge to stay sustainable and safe for residents. Companies who develop innovative solutions to urban challenges are likely to grow rapidly, especially given that there are already 33 megacities of over 10 million inhabitants around the world³.

The urbanisation megatrend will increase the importance of all kinds of smart urban technology - from adaptive traffic management and street lighting to temperature testing and bike sharing - in the quest to make city life cleaner and safer in the years to come. 

1 McKinsey Global Institute, June 2018, Smart Cities: digital solutions for a more livable future
2 C40 Cities, https://www.c40.org/why_cities
3 United Nations, The World’s Cities in 2018, https://www.un.org/en/events/citiesday/assets/pdf/the_worlds_cities_in_2018_data_booklet.pdf

Smart cities: taking on the urbanisation challenge 

There’s a great deal of scope to improve urban infrastructure to meet new challenges. For instance, smart environmental, water and waste solutions can use sensors and analytics to track consumption, detect leaks, manage waste and monitor water quality.

Smart energy can improve sustainability by reducing urban power use with smart meters, dynamic electricity pricing, automated streetlights, as well as tools to monitor and change human behaviour in response to external risks.

Technology can also help city residents live safer and healthier lives. In early 2020, the Chinese government deployed drones to monitor the streets of Wuhan, epicentre of the initial coronavirus outbreak, and asked citizens to wear protective masks to help limit its spread⁴.

South Korea, already known as a global leader in smart-city technology, has been using a system called the Smart City Data Hub for contact tracing and the country has had great success in managing the coronavirus too.

According to Lukas Neckermann, author of ‘The Mobility Revolution’ and ‘Smart Cities, Smart Mobility’, urban authorities all over the world will look to the cities which dealt best with the turmoil of 2020 and learn from them for the future⁵.

4 Wall Street Journal, May 2020, https://www.wsj.com/video/china-deploys-drones-citizens-and-big-data-to-tackle-coronavirus
5 Comments made during Lyxor ETF’s live Thematic ETF Virtual Masterclass, 6 May 2020

How Smart Cities could improve our quality of life

Chart source: McKinsey Global Institute, June 2018, Smart Cities: digital solutions for a more livable future

Investing to stay one step ahead

We have looked at how a broad global shift such as urbanisation can be translated into an investment proposition by identifying the companies which address the challenges it poses.

For smart cities, that means more than just technology. To capture the theme’s full potential, it must include the entire value chain that emerges from the theme. In this case, that means the traditional industrial firms, transport companies and utilities embracing the principles of smart cities and adapting their products and business model to match.

Lyxor took on the challenge of creating a scientifically-rigorous investment product to invest in the smart city value chain – as well as all of the other most important investment themes coming from megatrends.

We have built and just launched a range of different thematic ETFs, with MSCI indices that use data-science techniques known as natural language processing (NLP) to help identify the relevant companies within each theme and capture the full value chain. A thematic expert panel retained by MSCI also offers input on the evolution of each theme on an annual basis. We also include an Environmental, Social, and Governance (ESG) filtering screen so we can build the future together, sustainably and responsibly.

The investment themes that come from megatrends don’t rely on the next quarter of results and or the latest GDP figures – they are structural shifts that will play out over years and decades.

Learn more about Smart Cities and the rest of our unique Thematic ETF range

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