Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 436

Four climate themes offer investors the next big thing

The ability to find the ‘next big thing’ - that is, the next big long-term structural growth trend, before anybody else does - is a key component of investing, especially in global markets.

Identifying and understanding these big technological and structural changes in society are an integral part of our investing process. We call these trends 'Areas of Interest'.

It should come as no surprise, particularly in the wake of COP26, that climate is a major Area of Interest. While many governments continue to drag their feet on de-carbonising their economies, private enterprises see the potential and are acting quickly to develop the technology that consumers are increasingly demanding.

Money is backing into the climate theme  

In 2020, global investment in the transition to low-carbon energy exceeded $US500 billion for the first time ever. Given the ambitious carbon goals now being announced around the world, we forecast the transition to decarbonisation will require an investment of over $US30 trillion between now and 2050.

The below chart shows where we believe the investment opportunities will lie in this transition.

Finding tomorrow’s winners: Climate

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

In climate, there are four structural categories that will be outliers in the decarbonisation of the planet.

1. Clean energy

Companies at the forefront of renewable energy generation know clean energy is not just good for the planet, but it is now cheap enough to compete with fossil fuels and is less reliant on government subsidies to succeed.

A focus for us in renewable energy is wind generation. Onshore wind production may receive a lot of media attention, but offshore wind is the faster growing segment in this industry. To highlight the potential in this space, the amount of offshore wind capacity auctioned in 2020 equalled the amount that has been built in the entirety of its existence.

Denmark-listed Orsted commissioned the first offshore windfarm back in 1991. This extensive experience and head start is part of what makes Orsted attractive and what will see it continue to develop as an ‘offshore major’ as the industry matures and despite oil companies entering.

2. Clean transport

Electric vehicles will be an integral part of any future transport strategy, something governments are slowly realising. Currently, less than 1% of Australian cars on the road are electric vehicles but this will grow rapidly as infrastructure, affordability and range are improved.

The problem for investors is identifying which companies are looking outside the box in the move towards clean transport. Battery technology is a critical, but often overlooked, component of this transition.

Korean-listed Samsung SDI is a leader in large energy storage batteries and electric vehicle battery manufacture. Although barely profitable today, with more governments around the world making announcements similar to Australia’s designed to boost electric vehicle uptake, we expect companies producing energy storage batteries to grow and prosper.

3. Energy efficiency

A more efficient energy future includes the best use that energy, for example, through more efficient insulation or metering.

We forecast this category of energy efficiency to account for a quarter of all global decarbonisation spending. Companies in heating, ventilation, and air-conditioning (HVAC), insulation products, electrical switches, lighting and metering technology will offer the best prospects in this category as offices, commercial buildings and households increase focus on their energy ratings. HVAC retrofitting represents a potential $US350 billion investment market.

Another potential tailwind is the role of air quality in reducing the risk of COVID-19 transmission. More companies and buildings are retrofitting existing systems, or installing new ones, that are able to monitor air quality instantaneously.

HVAC Emissions

Source: Bloomberg Finance L.P as at 15 April 2021

Governments are also expected to introduce stricter air quality rules that will mandate the use of these newer technologies in new builds.

US-listed Trane Technologies is a HVAC business that targets sustainability benefits through the increased energy efficiency of their systems. They have spent a decade repositioning their brand to be more sustainable and have pledged to reduce their customer carbon footprint by one gigaton by 2030.

4. Circular economy

Consumers are increasingly aware of the waste their consumption can produce, with supermarkets, for example, reducing their plastic packaging over recent years in response to consumer demand. Councils are labelling general rubbish bins as ‘landfill’ to make their constituents more aware of where their waste ends up, and primary schools are encouraging an awareness of recycling and the global effects of too much waste production from a very young age.

Unfortunately, just 14% of plastic is currently recycled, compared to 60% of paper and up to 90% of steel. We expect this to increase as consumers continue to become more aware of the true cost of the ‘convenience’ of plastics. The ‘true’ cost of the oil and gas required to produce plastics is also expected to rise, and become more understood, which will further increase the demand for plastics recycling.

Norwegian listed Tomra Systems started off manufacturing reverse vending machines for used beverage containers in 1972 and today provides advanced collection and sorting technology that enables the circular economy and helps minimise waste. They estimate this underpenetrated addressable market to be between $US50 and $US80 billion.

The bottom line

Climate-related companies in the four categories outlined above will experience exponential growth over the years and decades to come. This will be driven by increased consumer demand for more climate conscious solutions and by governments, corporations and investors setting ambitious climate reduction targets.

By identifying and investing in these companies at the beginning of a very long S-curves, we can profit from their prescience and deliver those benefits to investors. We have established the Munro Climate Change Leaders Fund to capture this opportunity. 

 

James Tsinidis is a Portfolio Manager and Co-Lead of the Munro Climate Change Leaders Fund. Munro Partners is a specialist investment manager partner of GSFM Funds Management, a sponsor of Firstlinks. Munro Partners may have holdings in the companies mentioned in this article. This information is general in nature 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.

 

RELATED ARTICLES

Aggressive climate targets spell opportunity for investors

Electrification: Paving the road to emissions reduction

Ignore solar parity at your investing peril

banner

Most viewed in recent weeks

16 ASX stocks to buy and hold forever

In his recent shareholder letter, Warren Buffett mentions several stocks he expects Berkshire Hathaway will own indefinitely, including Occidental Petroleum. We look at ASX stocks that investors could buy and hold forever.

The best strategy to build income for life

Owning quality, dividend-producing industrial shares is key to building a decent income stream. Here is an update on the long-term performance of industrial stocks against indices, listed property, and term deposits.

Are more taxes on super on the cards?

The Government's broken promise on tax cuts has prompted speculation about other promises that it may consider breaking. It's widely believed that super is lightly taxed and a prime candidate for special attention.

Lessons from the battery metals bust

The crash in lithium and nickel prices has left companies scrambling to cut production, billionaires red-faced, and investors wondering how a ‘sure thing’ went so wrong. There are plenty of lessons for everyone.

Welcome to Firstlinks Edition 545 with weekend update

It’s troubling that practical skills like investing aren’t taught at schools as it leaves our children ill-equipped to build wealth, and more vulnerable to bad advice. Here are some suggestions to address the issue.

  • 1 February 2024

For the younger generation, we need to get real on tax

The distortions in our tax system have been ignored for too long, and we're now paying the price. It's time Australia got real and addressed the problems to prevent an even greater intergenerational tragedy.

Latest Updates

Shares

16 ASX stocks to buy and hold forever

In his recent shareholder letter, Warren Buffett mentions several stocks he expects Berkshire Hathaway will own indefinitely, including Occidental Petroleum. We look at ASX stocks that investors could buy and hold forever.

Investment strategies

Clime time: 10 charts on the outlook for major asset classes

The charts reveal that interest rates can't rise much further as Australian mortgage holders are under stress, bank dividends look solid, and the bond market is in flux because yields are being manipulated.

Strategy

Phasing out cheques, and what will happen to cash?

Cheques and bank service, or the lack of, were major topics when I addressed a seniors’ group recently. The word had got out that the government was phasing out cheques, and many in the audience were feeling abandoned.

Retirement

What financial risks do retirees face?

Treasury's consultation into the retirement phase of superannuation is generating a lot of interest. This submission to the consultation outlines the key financial risks to an individual’s standard of living in retirement.

Shares

Recession surprise may be in store for the US stock market

Markets are partying like it's 1999, but history suggests that US earnings and economic growth are vulnerable following an interest rate tightening cycle. Investors should prepare their portfolios accordingly.

Investment strategies

3 under the radar investment opportunities

The Magnificent Seven are hogging the headlines, yet there are plenty of growth opportunities elsewhere, at a fraction of the cost. Here are three stock ideas riding key areas of structural and cyclical change.

Shares

Why a quant approach can thrive in the age of passive investing

The rise of passive investing is unlikely to derail the value of quantitative strategies. Passive investing hasn’t eradicated the irrationality of crowds, leaving pockets of opportunity to outperform indices.

Sponsors

Alliances

© 2024 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.