While the world has been preoccupied with a certain virus, another epidemic has emerged alongside it—the rush for nations and corporations to announce carbon reduction targets to address climate change. More than just policy, we see this shift as the biggest investment opportunity since the advent of the internet.
The decarbonization tipping point
Global momentum around climate change has been building for years. But we believe now is the tipping point whereby the decarbonization of the planet is inevitable. Virtually every European country has committed to eliminating net carbon emissions by 2050, with China announcing a 2060 target. U.S. President Joe Biden is reinvigorating the climate agenda, recently announcing that the U.S. will target a 50% reduction in net greenhouse gas pollution by 2030 and zero emissions by no later than 2050.
It’s important to note that the ‘zero carbon’ 2050 target does not mean emitting any more carbon—it means emitting no carbon.
These ambitious political commitments are being mirrored in the corporate world. Rather than taking a ‘wait and see’ approach, companies are transitioning to a low-carbon future independently of government mandates. Much of this is driven by the overwhelming demand for environmental, social and governance (ESG), and other socially responsible initiatives from customers, employees and shareholders. Virtually every company we meet is talking about their sustainability goals.
The biggest investment opportunity since the internet?
Last year, global investment in the transition to low-carbon energy broke the US$500 billion barrier for the first time and was more than twice the 2010 total, according to figures from BloombergNEF. We designated climate change as an Area of Interest (AOI) in our fund strategies in 2019 and then again in October 2020, seeing it as increasingly important in the COVID-19 era.
Climate-related investment is only likely to accelerate from here. In many ways we liken its current state to the early stages of the technology boom, with many climate change companies set to grow drastically. On top of this, funding the climate epidemic will be extremely costly—potentially surpassing US$30 trillion between now and 2050—given the ambitious carbon goals.
The chart below shows our estimated breakdown of where this huge investment will need to be made and which sectors are deemed to benefit. In Europe alone, we foresee investment as high as US$8.3 trillion across areas such as renewables, energy efficiencies and charging stations for electric vehicles.
Source: Goldman Sachs, Munro Partners Estimates (December 31, 2020).
The race to net zero
As your global growth investor, it’s our job to identify structural changes and find the companies we think will benefit in the months and years ahead. Climate is at the very start of its journey, with many new technologies still early in the adoption phase, and therefore have the potential for significant growth.
Of course, fighting climate change is about more than just clean energy and electric vehicles. We’ve identified four structural categories that could produce climate success stories in the decarbonization of our planet:
Companies at the forefront of renewable energy generation covering wind, solar and renewable diesel.
Companies benefiting from the growth of electric vehicles, battery technology and alternative transportation.
Companies at the forefront of insulation products, electrical switches, lighting and metering technology.
Companies most likely to benefit from efforts to improve recycling, alternative packaging materials and wastewater management.
While it’s important to formulate long-term thematic views, we also need to maintain our rigorous bottom-up analysis and valuation models on all positions within our portfolios. At the individual stock level, there will be only a handful of climate winners and a long trail of losers.
Many businesses—including corporate household names—will either adapt or perish. The established airline and automotive industries are particularly vulnerable, along with fossil fuel producers and the industries that rely on them.
In finding the companies that will benefit over the long term, we’re aware there is more than just a political will to address climate change. There is also an economic rationale. For example, renewable energy is now cheap enough to compete with fossil fuels. One of the main reasons we’re increasingly bullish on climate stocks is that so much of the sector is now less reliant on government subsidies.
Source: IEA, New Street Research, Munro Partners, May 31, 2021
With climate change now high on the agenda for governments, corporations and investors, it’s clear that huge investment opportunities will emerge in new technologies. Not only have governments set ambitious carbon reduction targets, but much of the corporate world is independently seizing on the opportunity.
Of course, there will be winners and losers, and some stocks may get ahead of themselves in the short term. Our aim with CI Global Climate Leaders Fund is to create a portfolio of those climate winners that are set to benefit from the structural change for years to come. All of us at Munro are positioned for the long haul to monetize and support this monumental shift in attitudes towards preserving our planet for future generations.