James Sym, Head of European Equities at River and Mercantile, explains why decarbonisation is an important investment theme in his portfolio for 2022:
“The decarbonisation of energy intensive sectors will be a big theme within my portfolio in 2022. For example, if we do not decarbonise the steel and cement industries, we are not going to reach our climate change goals as a society. Avoiding the issue, by just investing in an advertising agency or a branded goods company that happens to have low carbon emissions, whilst you are sat in your steel and cement building is, in a way, quite hypocritical. We should really be thinking about how we can help the steel and cement industries decarbonise. Going forward, we will need more steel because there is still strong demand for it – particularly in emerging markets where billions live in steel buildings. And that’s where European equities can get interesting.
A standard ESG approach may exclude a steel business from a portfolio. However, there are companies, such as the Italian company Danieli, that have technologies and a roadmap to achieve zero carbon steel. The predominant technology globally is currently a blast furnace and basic oxygen process, which produces about 2000kg of C02 per ton of steel. However, if you use an electric arc furnace developed by a company like Danieli, it’s about one-third of that, therefore producing lower carbon steel. Danieli is out of favour at the moment, and they have struggled to grow over the last decade. For me, as a contrarian investor, investing in this sort of company represents a fantastic opportunity. Ultimately, my team and I are trying to find improvers – companies which are improving their business models to lower their carbon footprints – and enablers – companies that are making these improvements or reductions happen – rather than just ‘good versus bad’. I believe that the way we approach ESG, and the stocks that are highly rated from an ESG perspective today, are going to be very different in 10 years’ time.”