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Investors eye decarbonisation opportunities as part of last week’s World Earth Day

For this years World Earth Day – which was designed to drive transformative change for people and the planet – the theme was to ‘Invest In Our Planet’.

Asset managers have a key role in the world’s path to net zero, as capital increasingly moves towards solution providers at the forefront of positive change. 

Below, four professionals discuss the importance of decarbonisation, as well as the investment opportunity within this multi-year megatrend.

Anu Narula, head of global equities at Mirabaud Asset Management

Decarbonisation has become one of the most important themes among investors, both in recognition of the risks arising from the transition to a low-carbon economy and the enormous investment opportunities available from decarbonisation strategies and emerging technologies.

The costs of renewable technologies have plummeted to the point new fossil-based electricity is no longer an attractive option. Certain renewable energy technologies, such as wind and solar power, are becoming cost-competitive with conventional energy generation.

While the costs of renewables will decrease progressively, the cost of thermal generation is likely to remain volatile and dependent on commodities. Geopolitical events are also encouraging more countries to consider ways to become energy independent.

For example, in response to the invasion of Ukraine by Russia – which is the main supplier of crude oil, natural gas and solid fossil fuels to European Union countries – the EU announced a plan for achieving energy independence ‘well before 2030’ through greater use of liquefied natural gas (LNG) and energy storage, and swifter adoption of renewables.

We have been carefully selecting companies with leading technologies within the long-term structural theme of decarbonisation. For example, hydrogen is a key enabler in the move to carbon neutrality, with forecasts it will account for 12% of global energy use by 2050.

The next stage of the story is efficiently scaling up green hydrogen production. Linde currently has the largest liquid hydrogen capacity and distribution network globally, with 1,000km of pipeline to supply customers and 200 hydrogen refuelling stations.

The engineering company aims to quadruple its annual sales from hydrogen in the next 10-15 years.

Geeta Aiyer, president and founder of Boston Common Asset Management

As we rely on burning fuel to create mechanical energy, using heat engines like fossil-fuel burning electric power plants and gasoline powered cars wastes heat energy. Data from 2019 shows only 32% of energy is used and 68% wasted.

But solutions are at hand. Electric cars, for example, ensure that most of the energy drawn upon is used for motion even after transmission losses. Replacing gas boilers with heat pumps and electric water heaters is another plus.

Integrated design has potential for dramatic energy savings from industry, transport, and buildings. Many other benefits would follow. Almost 50% of our transition to a low-carbon future can come from reduced waste and better models for a shared and circular economy. Renewable energy can more easily power our total needs if demand becomes half of what it is today.

Hundreds of net-zero carbon commitments, big and small, have been made, but those plans often have multi-decade timelines. Recent events have once again shown that depending on countries with repressive regimes lacking internal accountability poses a high risk to investors and citizens alike.

There is now a geopolitically driven urgency to pivot immediately – to cut energy demand in pursuit of energy independence. Demand reduction, the other energy solution, will disrupt current practices, unleashing design, technology, and organisational creativity. 

Megan Brennan, portfolio manager of the Sarasin Tomorrow’s World Multi-Asset Fund

The need to tackle climate change is disrupting the investment landscape as we know it, leading to the creation not only of innovative technologies but also policy tools.

One market we see as attractive in the race to reduce emissions is European Carbon Credits, where we think the EU policy commitment to reduce emissions will lead to a higher carbon price over time.

The European Carbon market works on a cap-and-trade system, which means a maximum amount of emissions is set by the scheme and a corresponding number of carbon permits is either auctioned or freely allocated to mandatory participants – such as utilities.

This incentivises emitters to reduce their carbon footprint, as they have to pay for excess emissions, and in turn a higher carbon price makes decarbonisation technology more commercially viable.

While the price of carbon can be volatile, we estimate it needs to be well above today’s price to encourage European producers of chemicals and steel to adopt abatement technology.

As European households have been impacted by rising gas prices, there has been political pressure to intervene in the market to control the cost of carbon. In reality though, when compared to gas prices, carbon prices are a small contributor to electricity prices and we do not think this is significant enough for policymakers in Europe to undermine their key tool for achieving their climate ambitions.

Jacob Mitchell, CIO at Antipodes Partners

While markets have understandably been fixated on short-term drivers, we are also looking at the bigger picture, with broader trends towards more efficient buildings and electric vehicles set to continue for years to come.

These trends create opportunities for some innovative industrial businesses, which can be found at appealing valuations due to short-term macro factors.

One such business is Norsk Hydro, one of the largest aluminium producers in the world. Despite impressive share price growth over the last year, we believe the market is yet to fully appreciate the wider supply and demand dynamics for aluminium and Norsk Hydro’s unique position in the market.

Aluminium is lighter than steel and stronger for its weight, yet also more recyclable. Demand for the metal predominantly comes from the construction and transport sectors, where reducing emissions is an increasingly significant driver of decision-making.

In this context, what sets Norsk Hydro apart is it produces its aluminium using hydroelectricity, instead of the traditional coal. Its carbon emissions per tonne of aluminium are around a quarter of the average producer, and the company continues to invest in R&D with a view to producing carbon-free aluminium in the future.

Despite being ideally positioned to benefit from the unstoppable trend towards decarbonisation, the stock is currently valued at 18x earnings. This is a reasonable discount to the replacement cost of its unique assets, making it a compelling option for investors looking for innovative industrial businesses for the long-term.

 

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