The issues raised by global warming and environmental questions more broadly require new technologies and sources of energy. The solutions are tied to the gravity of the current pandemic in the sense that there are many calls for the stimulus measures taken to support the economy to be directed at sustainable solutions.
In other words, a consensus is emerging for the money earmarked to address the economic fallout of the health crisis to be associated with measures to tackle climate change and other challenges such as pollution, water shortages, flooding and electrification.
Indeed, dealing with coronavirus has on the one hand served as a reminder of other global and existential problems. The global population is forecast to grow by 2 billion to reach 9 billion by 2035, and population growth together with rising incomes will be increasing demand for energy, food and water by 35-50% by that year, with all the additional emissions that go with it. These are issues that have not gone away, COVID-19 or no COVID-19.
On the other hand, and that is encouraging, the pandemic has shown that it is possible to take far-reaching measures fairly quickly and to act in a coordinated, even global, way in the face of a threat. Such an approach is also needed to deal with interconnected climate issues such as demand for resources and the need for decarbonisation that will involve tens of billions of dollars.
Also encouragingly, the push for measures to tackle these environmental challenges is broadly supported by announced and planned government regulation as well as the public.
It is obvious that governments have woken up to the need to deal with the virus in tandem with stimulus pending. This is the largest and most important investment theme I have come across during my career.
Going deeper into the opportunities, it is worth noticing that there is a broad set: in energy, materials, agriculture and industrials. We would look to invest in companies that provide solutions to decarbonise such segments and markets.
The investment universe ranges from solar and wind energy to batteries, electrification, green buildings, biofuels, and pollution control and testing. I am quite excited about the opportunities in green and cleaner shipping and ocean freight.
I should point out that in these areas, it is possible to both take long positions in well-placed companies, those that are best in sector, and to short companies that look set to lose out.
As an example and perhaps surprisingly, we are long steel companies because we believe their input is vital to the ‘green resolution’, such as making cars greener or producing wind turbines. So, we would invest in a company that buys scrap steel, and not iron ore, and thus saves on input costs. Or a company using renewable energy, not coking coal, for smelting. Such efforts result in higher margins and a lower carbon intensity. It is not just about being green, but it is also about returns
Talking about returns, it is important to note that this is a clear growth opportunity. While the global policy response is becoming more unified, the problem is also becoming bigger, as I said earlier. The response has to grow accordingly.
To take an example, the global offshore wind market is set to expand significantly over the next two decades. The International Energy Agency is forecasting 13% growth per year and a 15-fold increase in capacity by 2040. This is expected to become a USD 1 trillion industry over the next two decades.
The European Union has set hydrogen – a source of clean energy – as a key instrument for its Green Deal objectives for 2050, indicating that cumulative investments in renewable hydrogen in Europe could be up to EUR 180-470 billion by 2050. Separately, it is estimated that turnover in the hydrogen economy will jump to EUR 140 billion by 2030 from EUR 2 billion currently.
So, these are long-term opportunities and the solutions to the environmental challenges require large-scale investments: tens of billions of dollars are needed.
It should be obvious that we are talking not only sustainability, but also sustainable returns.
There is a considerable body of evidence that investments in companies with strong environmental scores outperform those in companies with weak scores over time, that companies that can take advantage of the environmental challenges will outperform those less prepared, with stranded assets or inferior technologies.
Investing in such companies adds alpha to investment portfolios, while reducing risk. The performance of such companies has been more stable over time – they suffer less in market downturns and they are less susceptible to swings in market trends.
This has been reflected in investor attention: money has been flowing into sustainability themed investments, even in the first half of this year when the coronavirus outbreak and the subsequent pandemic disoriented many investors.
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