234. How the energy crisis has accelerated our need for new infrastructure

12 January 2023 (pre-recorded 10 January 2023)

Below is a transcript of the episode, modified for your reading pleasure. Please check the corresponding audio before quoting in print, as it may contain small errors. Please remember we’ve been discussing individual companies to bring investing to life for you. It’s not a recommendation to buy or sell. The fund may or may not still hold these companies at your time of listening. For more information on the people and ideas in the episode, see the links at the bottom of the post.

[INTRODUCTION] 

Staci West (SW): Welcome back to the ‘Investing on the go’ podcast brought to you by FundCalibre. This week we’re discussing sustainable investing, including how the energy crisis is linked to climate change, water infrastructure and what problems the government faces when it comes to long term sustainability.

Joss Murphy (JM): I am Joss Murphy. Today I’ve been joined by David Harrison, manager of the Rathbone Greenbank Global Sustainability Fund. Hi David, how are you?

David Harrison (DH): Good, Josh. Good to speak to you.

[INTERVIEW]

JM: Great to speak to you as well. Maybe let’s start with the energy crisis, David. You said that you think the basis for this is climate change. Can you tell us what you mean by that and how it might influence the market and your investments going forward?

DH: Absolutely. Yeah, it’s a great question, Joss. I think if we look at the energy crisis, it’s linked to both climate change and being too dependent on certain forms of energy. So, certainly over the last 12 months, we’ve seen a move to really accelerate energy independence. And this means faster investment in renewable forms of energy. So, essentially, decarbonising your economy, investing in that renewable technology. 

We already know that about 80% of new investment is renewables based. And I saw a stat I think just after Christmas, that in the UK, for example, nearly 50% of the energy that’s produced on certain days is now renewable based. So, we know that we already have that strong basis, but what we’re seeing is that governments around the world, particularly Europe and the US, are realising the need to become fully energy independent, so, where you get the energy from clearly. 

But we’re starting to see an acceleration in the energy transition, so decarbonising away from existing fuel sources, and for us that that’s really exciting. You know, that opens up huge new areas of investment and we think it’ll be a very strong long-term sustainability theme.

JM: Very interesting David. Then thinking more generally about your area of investment, do you think the problems governments face at the moment will slow progress, or accelerate it when it comes to long-term sustainability themes?

DH: Well, yeah, we actually believe very strongly it will accelerate this. You know, when you think about the benefits of being energy independent or for example, think about electrifying the vehicle fleet. So, again, thinking about the UK; amazingly in December 2022, over 30% of all new vehicles sold were pure electric and over 50% were either electric or hybrid. 

So, whilst there is this kind of short-term noise, we’re seeing investment in these kinds of critical areas of infrastructure because you get the economic benefit – the sustainability benefit – but also, the really… the political benefit as well, which we think is really positive. 

In the US, for example, we saw the climate bill last year, which was significant with real investment in electrification, energy efficiency, and new areas of energy production, like hydrogen. So, we’re seeing evidence on the ground, but [I would] also argue very strongly that we’re seeing an acceleration in many of those sustainability themes, beneath the kind of the short-term noise.

JM: Yeah. Just on one of those points you made there David, do you think in that case that critical infrastructure is an area that that needs more attention?

DH: Yes. You know, without a doubt. I mean, I break it into kind of three areas. You’ve got the energy infrastructure, which I’ll talk about in a second. But you know, also thinking about the physical infrastructure, the buildings; we know that nearly 40% of global emissions come from buildings, but also the transport infrastructure. 

So, you know, thinking about the energy infrastructure, we know that we have to move away from carbon heavy sources of energy. So, essentially, just to give you a couple of examples, this means working with industry to make them more carbon light. So, we invest in a business called Linde [Linde plc] which is a global leader in industrial gases. They will work with customers to make their operations less carbon intensive. They’re leaders in hydrogen installations. And when you speak to the company, they’re seeing their opportunity set in this area expand very, very strongly. 

Another example in that space is a business called Schneider Electric [Schneider Electric SE], which we own, which is listed in France, but they are one of the leaders working with – if you think about the energy grid – as we move to more renewables, we need to think about updating that grid, we need to think about energy storage. So, in that space alone there’s huge need, but significant opportunity.

On the building side you know, I mentioned that we’ve got this huge challenge around emissions; we’re seeing pretty much globally a real step change in how we create commercial residential infrastructure, [and] how we make that more efficient. But we think we’re still at the relatively early stages of a long-term journey. 

On the transport side, I mentioned that stat from the UK that over 50% in one month of new cars sold were hybrid or electric. Yet, we’re still really early stages because if you look at the major automakers, they only really pivoted to full electrification a couple of years ago. 

So, we think that the opportunity in all those areas is really exciting. Yet, you know, we’re still in the relatively early stages.

JM: No, I’d agree that that does sound very exciting. And what about water infrastructure? I know you have some thoughts on this. Can you expand on them for our listeners?

DH: Yes. So, you know, if you think of the stat, that about 30% of water is lost in the system, particularly in areas such as the US which has ageing infrastructure, but also the UK, and you saw what happened last summer with … we had a very warm summer and really the issues around water availability. Now, if we keep having summers like that, it’s going to really exacerbate the problem. So, we see, you know, companies and investments and really businesses that are addressing this kind of challenge in two ways. 

So, firstly around, you know, efficiency in the water system. So, we’ve held in the fund a business since we launched four and a half years ago, the business called Badger Meter [Badger Meter, Inc.], which is US-listed, and they make kind of digital industrial water meters. So, they’ll work with a local city, for example, put in digital meters, which improves efficiency significantly. 

But also, one of the biggest challenges is how industries use water and deliver clean and safe water. So, another business we’re invested in is called Evoqua Water Technologies [Evoqua Water Technologies, Inc.], which is also US listed, will work with a client to deliver not only water efficiency, but improve the safety of that water. Because we’re seeing, as part of the US Climate Bill last year, much stricter regulation around something called PFAS [Perfluoroalkyl and Polyfluoroalkyl Substances, known as forever chemicals, do not easily break down in the environment and are difficult to destroy] which has been an issue in the US. So, when we think about water infrastructure, we know there’s a critical need. We know there are the solutions out there, and it’s something that we can make big strides forward and frankly, we need to, in the next few years.

JM: And where else are you finding opportunities today?

DH: So, I’d highlight two. I think the first one, which has been something we’ve been invested in for a number of years, but we’ve been increasing our exposure [to], is the circular economy. So, really, when you think about the circular economy, you think about the reuse of plastics, of waste, of everything, clothing as well. And this kind of trend was probably more developed in Europe, but we’re seeing the US really pick this up. 

So, we’ve been invested in a business for a little while called Advanced Drainage Systems [Advanced Drainage Systems, Inc.] Advanced Drainage will essentially use recycled kind of consumer bottles, consumer waste, to make storm drainage, to make that critical infrastructure for a building. And yet, you know, we’re still at the early stage of adoption, so we think that’s a really interesting area.

Another one, which was a recent purchase, was a business called Waste Management [Waste Management, Inc.]. When you think about landfill and how we recycle waste, this is a huge opportunity. Waste management is a very strong fundamental business, but they’ve invested significantly in their recycling capacity. And what we really like is that if you think about the kind of the landfill gas that comes off, they are using that gas and then selling it back to the grid. So again, a reuse of something that was essentially waste, has now kind of got a purpose, which is great. So, that’s one area. 

The other area which again, we think is a very strong long-term theme, is the healthcare space. I think, you know, what we’ve seen in the last couple of years has been a real step change in innovation and in drug discovery. You think about the vaccine. So, it was always a … from an awful situation how quickly the vaccine makers worked together, were able to develop a vaccine. We’re seeing that across the healthcare space in terms of next generation drug discovery. So, you know, we’ve held names like Thermo Fisher Scientific [Thermo Fisher Scientific, Inc.] in the fund for a long time, but we’ve recently added a couple of new names because we think this is … we really are at the … kind of another step change. 

So, a business called Lonza, which is listed in Switzerland [Lonza Group AG], but essentially, they do the outsourced drug discovery, particularly the next generation drugs. And also, AstraZeneca [AstraZeneca plc], which is listed here in the UK. They have a very strong oncology cancer treatment portfolio and a very strong pipeline.

JM: David, thank you very much for your time today.

DH: Thanks very much, Joss. Great to speak to you.

[CLOSING]

SW: Rathbone Greenbank Global Sustainability can invest in companies of any size but will have a bias towards mid-caps. The fund also has fully integrated sustainability analysis, undertaken in collaboration with the Rathbone Greenbank Investment team. This includes actively avoiding businesses involved in unethical or unsustainable practices, as well as each holding processing at least one positive environmental, social or governance attribute. To learn more about the Rathbone Greenbank Global Sustainability fund, visit fundcalibre.com – and don’t forget to subscribe to the ‘Investing on the go’ podcast, available wherever you get your podcasts.

Please remember, we’ve been discussing individual companies to bring investing to life for you. It’s not a recommendation to buy or sell. The fund may or may not still hold these companies at the time of listening. Elite Ratings are based on FundCalibre’s research methodology and are the opinion of FundCalibre’s research team only.