Thursday, 24 March 2022 16:12

Investors can profit from the race to go green

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If the world is to achieve the targets from the 2015 Paris agreement, the level of spending required is estimated to be over US $40 trillion.  Decarbonisation of the planet is the biggest investment opportunity for a generation. 

Decarbonisation put simply is the transition towards a world powered by renewable energy.  

When many investors think of decarbonisation they are immediately drawn toward owning renewable energy businesses producing solar, wind and hydrogen and manufacturers of electric vehicles.  But decarbonisation of the world has many more layers than that.

Alasdair McHugh, a director of Baillie Gifford says that no market segment will be immune to the effects of climate change as companies will all be impacted to a greater or lesser extent.  This is especially true when (not if) we see a proper price put on carbon emissions.  This seems inevitable if countries are to achieve the goals of the Paris agreement.  A carbon tax north of US $100 per tonne looks likely in his view and one recent study estimated that a US $50 carbon tax on scope I-III emissions would see 8% of US companies lose their entire profits.  A carbon tax of $150 results in 21% of US companies losing their profits.  McHugh stresses that being invested within the profitable 79% of companies will be critical.

Jodie Bannan, a senior analyst from Platinum Asset Management thinks it is important to look beyond the obvious beneficiaries of decarbonisation.  If contemplating investing in the wind farm sector she believes it is important to also consider that every wind turbine requires several tons of copper and towers made from steel.  While resource extraction and processing generally contributes to carbon emissions, the use of the product may result in the overall reduction of emissions.  Bannan believes that copper has a long term demand profile for this reason as well as its importance in the electrification of the economy.

Bannan follows with another example of electric cars.  She believes that not only should vehicle manufacturers be considered, but also the companies providing electric motors, charging equipment and those involved in the battery supply chain.  

Other areas that will contribute to decarbonisation, to name just a few according to Bannan, include electronic systems for the control and moderation of power delivery and use, robotics, automation to make industry more efficient, recycling companies and sustainable material industries.  

McHugh adds that a lesser known fact is around 15% of global greenhouse gas emissions come from the agriculture sector, primarily through the methane excreted by cattle being raised for beef production.  A likely step is for humans to consume less meat which explains the rapid growth in the alternative protein market.  Beyond Meat is a portfolio holding of Baillie Gifford due to its ambition to reach parity with animal meat across the key areas of taste, health and cost.  Beyond Meat is targeting meat eaters and uses 95% less land than traditional meat, and it emits 90% fewer greenhouse gases and uses half the energy.

Bannan says paper and pulp are an unlikely source of decarbonisation.  While paper has been in decline for well over a decade, pulp raw material is a sustainable (carbon neutral) and degradable resource which is increasingly being used to replace plastic packaging.

Australian investors have limited opportunity to invest in the decarbonisation theme via the ASX, but can gain exposure through owning recycling companies such as Cleanaway, copper and other materials through the resource sector as well as a number of listed lithium mining companies. 

Alternatively Australian investors can seek exposure to decarbonisation through global managed funds and listed investment companies.  Platinum is looking to launch a dedicated Carbon Transition Fund later this year, subject to regulatory approvals.

McHugh says the main risk of investing in decarbonisation is that the world’s leaders continue to talk a good game but fail to put their plans into action.  Bannan highlights the risk that returns from new technologies required for energy transition can be long dated as the market demand will take time to develop.  Many of these companies will remain loss making for 3-4 years and there will also be many that do not survive.

Decarbonisation is one of the greatest opportunities of our time, investors need to ensure their portfolio’s are prepared.



Each month, Mark Draper (GEM Captial) writes for the Australian Financial Review.  This article featured in the 23rd March 2022 edition of the Financial Review.

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