Three investment themes for 2023
It’s that time of year when everyone reaches for their crystal balls to predict what sectors could...
The journey to a net zero world was never going to be a cheap one. And while governments are now committing to reductions, the scale of the effort required and the cost to both the state and individual households is only starting to become clear.
Britain’s goal is for net zero emissions by 2050 and we were the first major industrialised country in the world to sign this into law in 2019. To achieve our goal, the UK is working towards a 68% reduction by 2030 and 78% reductions by 2035, by way of initiatives such as a ban on new petrol and diesel car sales by 2030 and new gas boilers by 2035.
But the sheer cost of some of these projects is already seeing some pushback. After the press reported that it is going to cost most households as much as £20,000 to replace their gas boilers with electric heat pumps, I read this weekend that Boris Johnson is looking to push the gas boiler ban back to 2040 to give more time for alternative heating methods to come down in price.
And in an open letter to the Prime Minister, climate change sceptic and former chancellor, Nigel Lawson, also stated that British households are “still threatened with a burden of net zero costs that is simply unaffordable: an additional cost of £10-12,000 for buying an electric vehicle and an estimated £7,000 per household for upgrading the electricity distribution grid. And that is just to scratch the surface of what will be necessary.”
It’s a lot of money, I’ll agree, and not money that every UK household will have. But when you think about the consequences of not doing anything, I personally believe it is money we need to spend. Analysis published in Nature Communications recently drew on several public health studies to concluded that, for example, the lifestyles of 3.5 average Americans would create enough planet-heating emissions to kill one person. It also concluded that the emissions from a single coal-fired power plant were likely to result in more than 900 deaths.
So, if I want to trade in my diesel car and gas boiler for electric alternatives, how can I go about ‘finding’ this extra money? Investing in net zero opportunities today could be one way.
Graeme Baker, co-manager of Ninety One Global Environment fund, says that because the transition has barely begun, investment opportunities are significant. “The latest IEA report says that by 2030 we need to see a 4-fold increase in wind and solar capacity, 18-fold increase in electric car sales, 41-fold increase in annual battery production for EVs and $4trn per annum spending on the energy system alone,” he said. “The 2050 numbers are even bigger. It’s an exciting – and perhaps once in a life-time – long-term structural growth opportunity.”
Watch our video on how your investments can help tackle climate change
The Ninety One Global Environment fund is an obvious option to invest in net zero opportunities. It’s a global equities fund that includes emerging markets, but which has a unique approach of only investing in companies that are contributing to the decarbonisation of the world economy. It is set to benefit from the massive tailwind of the some $2.4 trillion of annual spend required to meet global temperature goals and, as well as avoiding firms creating carbon emissions, companies also have to have at least 50% of their revenues from three sectors: renewable energy; efficient use of resources, and electrification.
There are other less obvious ways to tap into this theme, however. The insurance sector is one such example. Nick Martin, manager of Polar Capital Global Insurance fund, told us recently: “Insurance companies take on the risk that you and I don’t want to. They absorb the volatility that we as individuals or companies can’t handle, and obviously climate change is a huge source of volatility that’s increasing over time.
“The industry has got a very critical role in helping to manage that associated volatility and promote behaviours that help address the climate crisis. When I started out in this business 20-odd years ago, talk in a natural catastrophe context was really around hurricanes and earthquakes. But in recent years there’s been the emergence secondary perils like flood, drought and wildfire. And it’s indisputable that those are closely linked to climate change. Insurance is a very big part of how you manage that risk. So now it should be a very strong tailwind to the sector for many years to come.”
You can hear more about the role insurance has to play in the climate crisis, and the emergence of natural-based solutions as a risk prevention partner, in this podcast:
Another option is via infrastructure investments. While moves to decarbonise the world’s economy are reducing the need for some infrastructure assets, they are underpinning strong structural growth for others.
“It is hard to overstate the scale of the implications that these developments have for the global listed infrastructure opportunity set,” said Peter Meany, manager of First Sentier Global Listed Infrastructure. “The two largest sources of carbon are the electricity and transportation sectors. The consumption of fossil fuels by utilities to generate electricity accounts for between 30% and 40% of the world’s carbon emissions. Transportation (primarily cars and trucks) accounts for a further 15% to 20% of global emissions. The changes required from these industries during the transition to a net zero world will bring some stranded asset risk – but also present substantial growth opportunities.
“The process is already well under way. Cheap wind and solar power are being rolled out to replace uneconomic coal plants. Existing transmission grids are being expanded in order to connect new solar and wind farms with population centres where the energy is needed. The next leg of growth in wind and solar build-out is likely to be sparked by advances in battery storage technology (where cost curves are on a sharp downward trajectory) to combat renewables’ intermittency. And electric vehicles volumes reaching critical mass, likely later this decade or early in the next, will drive further material increases in electricity demand and further renewables build-out.”