Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 509

Aggressive climate targets spell opportunity for investors

Most countries are on a net-zero emissions crusade. Whether the goal is 2050 or later, there is no escaping the global push to reduce carbon emissions and combat climate change.

This transition presents a huge opportunity for investors to invest in those companies building or adapting the technology and infrastructure to reach this target. We believe there is $US50 trillion to be spent over the next 30 years in this transition across a diverse range of industries and companies.

The potential

As the chart below highlights, investment will not just be on passenger electric vehicles (EVs), but also on the infrastructure - such as charging stations - needed to support EVs. Likewise, investment also needs to be made in energy efficiency, renewable energy, battery manufacturers and the power grids to support the transition.

Ultimately this will translate to $US50 trillion in revenue to the companies that are going to enable the transition.

Figure 1: This is how much de-carbonisation is going to cost

Source: Goldman Sachs, Munro Partners Estimates (31 December 2020)

At Munro, we've been investing in this space for 15 years, but in the last few years we've seen momentum shift to the point where there is consensus around the need to decarbonize the planet.

Our focus is to find the solution providers for this transition. We seek to invest in these enablers because they are the companies positioned to secure the spending and therefore revenue, which will ultimately lead to earnings and share price growth.

The year ahead - three themes

1. EV penetration

EV penetration is accelerating for a number of reasons. Manufacturers have been cutting prices and Tesla is leading the market with price drops of between 15-29% in the US.

Importantly, the US's Inflation Reduction Act included a potential $7,500 tax credit for Americans cars that qualify, bringing the EVs in reach of many more potential consumers.

At the same time as price reductions, input costs for EVs are also decreasing. Lithium is down close to 70% from its peak, freight costs are also down, as are many other raw materials needed to manufacture these vehicles.

2. Gridlock

'Electrify everything' is an easy catchphrase but there is a potential bottleneck to this process when it comes to grid capacity and capability. Power grids need to be able to cope with the extra power that is being put on them. Whilst the grid is a solution to climate change because it enables electric vehicles and other things to be electrified, the grid itself is actually at risk because of climate change.

If we look at the US, 70% of the grid is now over 25 years old. Electricity demand is going to nearly triple by 2050 and grids need to be able to work in a more bi-directional way than they did historically. To do this, money needs to be spent on their development and advancement, an issue we believe is going to come to a head this year.

3. Globalisation reversing

Recent geopolitical conflict and tensions have put a question mark over the last 30 years of globalisation. This was highlighted with Russia's invasion of the Ukraine, when Europe quickly realised that the question of energy security and decarbonisation were more aligned than they originally thought.

China is also one of the main manufacturers of many of the components in solar panels and has increased its penetration in the production of these components over the past decade. As the geopolitical tensions between the China and the West intensifies, there are opportunities for companies to offer solutions to their governments around that industrial base to enable countries to continue that decarbonisation journey in a more self-sufficient way. This should help US and European companies in the clean energy space compete domestically after decades of losing share to China.

Under the hood - Waste Management

Recently we were asked why, if there is so much potential for growth, is the market not pricing transition companies accordingly. We believe that is because the market continues to price the companies we seek out - i.e., the solution providers - on what they are doing currently instead of what they could do in the future.

A good example of this is the waste management space and Texas-based Waste Management, the largest solid waste management company in the US.

Figure 2: Waste Management

Source: Bloomberg Finance L.P 24 April 2023

The market models Waste Management on its traditional business, which is going around the homes in the US and picking up the trash, sorting it and then sending it to landfill. It owns the landfill sites, the trucks, the transfer stations, and gets paid well for the services it offers. It's a good defensive company in a sector with high barriers to entry.

What the market is unable to currently price for because it's a new opportunity, is the increased EBITDA it can get from expanding into two new areas. The first one is recycling, which the US has been very poor at. The company is now putting in automation to be able to generate revenues from this recycling opportunity by selling the product back to consumer companies. But Wall Street analysts are not taking this into account yet because it's not yet visible in the next 1-2 years.

The other, even larger opportunity is the Landfill Gas To Energy (LFGTE) potential. Waste Management is trying to capture the renewable natural gas off its landfill sites and sell that back to other companies or use it in its own fleets.

These two activities offer a material upside to the EBITDA estimates in the market, which we predict are 10-15% too low versus what the company could generate 5 years out.

Hiding in plain sight

By looking beyond the headlines and delving deeper into some of the newer technologies that companies are exploring, investors can buy before share prices of many of these businesses take off.

 

James Tsinidis is a Partner and Portfolio Manager with Munro Partners, a specialist investment manager partner of GSFM Funds Management. GSFM is a sponsor of Firstlinks. Munro Partners may have holdings in the companies mentioned in this article. This article contains general information only and has been prepared without taking account of the objectives, financial situation or needs of individuals.

For more articles and papers from GSFM and partners, click here.

 

  •   17 May 2023
  • 3
  •      
  •   

RELATED ARTICLES

Electrification: Paving the road to emissions reduction

Four ways to capitalise on a forgotten investing megatrend

Four climate themes offer investors the next big thing

banner

Most viewed in recent weeks

Are LICs licked?

LICs are continuing to struggle with large discounts and frustrated investors are wondering whether it’s worth holding onto them. This explains why the next 6-12 months will be make or break for many LICs.

Retirement income expectations hit new highs

Younger Australians think they’ll need $100k a year in retirement - nearly double what current retirees spend. Expectations are rising fast, but are they realistic or just another case of lifestyle inflation?

5 charts every retiree must see…

Retirement can be daunting for Australians facing financial uncertainty. Understand your goals, longevity challenges, inflation impacts, market risks, and components of retirement income with these crucial charts.

Why super returns may be heading lower

Five mega trends point to risks of a more inflation prone and lower growth environment. This, along with rich market valuations, should constrain medium term superannuation returns to around 5% per annum.

Four best-ever charts for every adviser and investor

In any year since 1875, if you'd invested in the ASX, turned away and come back eight years later, your average return would be 120% with no negative periods. It's just one of the must-have stats that all investors should know.

The hidden property empire of Australia’s politicians

With rising home prices and falling affordability, political leaders preach reform. But asset disclosures show many are heavily invested in property - raising doubts about whose interests housing policy really protects.

Latest Updates

Shares

Four best-ever charts for every adviser and investor

In any year since 1875, if you'd invested in the ASX, turned away and come back eight years later, your average return would be 120% with no negative periods. It's just one of the must-have stats that all investors should know.

Our experts on Jim Chalmers' super tax backdown

Labor has caved to pressure on key parts of the Division 296 tax, though also added some important nuances. Here are six experts’ views on the changes and what they mean for you.        

Superannuation

When you can withdraw your super

You can’t freely withdraw your super before 65. You need to meet certain legal conditions tied to your age, whether you’ve retired, or if you're using a transition to retirement option. 

Retirement

A national guide to concession entitlements

Navigating retirement concessions is unnecessarily complex. This outlines a new project to help older Australians find what they’re entitled to - quickly, clearly, and with less stress. 

Property

The psychology of REIT investing

Market shocks and rallies test every investor’s resolve. This explores practical strategies to stay grounded - resisting panic in downturns and FOMO in booms - while focusing on long-term returns. 

Fixed interest

Bonds are copping a bad rap

Bonds have had a tough few years and many investors are turning to other assets to diversify their portfolios. However, bonds can still play a valuable role as a source of income and risk mitigation.

Strategy

Is it time to fire the consultants?

The NSW government is cutting the use of consultants. Universities have also been criticized for relying on consultants as cover for restructuring plans. But are consultants really the problem they're made out to be?

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.