Q Why invest in decarbonisation?
As we move to a low-carbon economy, companies that stand to benefit from decarbonisation should be able to grow revenues and earnings, and we believe they should outperform. There is also a positive environmental impact, because the products and the services that these companies sell are helping to address global warming.
Q What progress is being made in decarbonising the global economy?
I think we’re on the cusp of a move away from an unsustainable global economy towards a more sustainable one. But it hasn’t happened yet. 2018 was a record year for carbon emissions and 2019 emissions will be even higher. It is essential that the transition happens. It will be driven not just by governments and regulators, but also by technological change and consumer activism.
Q Let’s start with regulation. How might that impact investors?
There is increasing talk of an ‘inevitable policy response’ as the realities of climate change become ever more apparent. That is, we may get “forceful, abrupt and disorderly” regulation (in the words of the PRI) due to the delay in acting on climate change, which could have significant portfolio impacts. Regulatory action is beginning in different places around the world. But I don’t expect a globally coordinated climate policy, so investors need to monitor what’s happening in each region.
Q How do Europe and the US compare?
Europe’s policy acceleration is exciting, with a potential relaxation of fiscal constraints and the adoption of a pan-eurozone industrial policy centred on speeding up the energy transition. The new leaders of the European Commission and the European Central Bank have made this their priority. This is clearly important for investors in decarbonisation. But it will also affect investors more broadly, because a move towards carbon-based trade will have significant impacts on the global economy.
Q And the US?
The US is a wild card. I don’t think investors are yet thinking about what having someone like Elizabeth Warren or Bernie Sanders in the White House could mean, perhaps with Democratic control of both houses as well. That would usher in an environmental policy in the US that would make Europe look like a laggard. Sanders’ plan, for example, calls for US$16 trillion of investment over 15 years, which would move the decarbonisation sector into hyper-growth — even if, as the market consensus believes, a Sanders or Warren administration would be negative for equities generally.
Q How is technology driving this sector?
Technology change is continuing apace in all of the sectors we look at, but we expect 2020 to be the year of the electric car. 2019 has been torrid for the electric vehicle (EV) value chain, with Nio — China’s EV giant – on the cusp of bankruptcy and the prices of lithium, a key input into batteries, continuing to fall. But with European policy forcing automakers to sell more EVs, the pace of electric model launches is accelerating. Battery companies are also continuing to innovate, adding more nickel. That increases energy density, which reduces costs, making electric vehicles more cost competitive.
Advances in autonomous driving are a greatly under-appreciated accelerator of vehicle electrification. Waymo, Google’s autonomous driving arm, now averages more than 5,000 miles driven without human intervention. In 2014, that figure was just 500 miles. Companies like Didi – the Chinese Uber – are pushing hard to develop high-utilisation autonomous fleets and they are major buyers of electric cars. In fact, car fleets are buying over half of all EVs sold in China. This will drive EV adoption in countries where electric cars are more expensive than typical households can afford.
Q How are consumers driving the decarbonisation sector?
Greta Thunberg has done an extraordinary job in 2019 of increasing consumers’ focus on sustainability and climate change. A recent Accenture survey identified a 429% increase in consumer preferences for sustainably-sourced products, and a 107% increase in consumer desires for eco-conscious products. We expect consumer preferences to continue to evolve in favour of more sustainable, more climate-conscious products, which will be a powerful tailwind for decarbonisation companies.
Similar trends are taking place in the investment industry. We recently surveyed 2,000 investors to find out what investments they would like in their pension funds. Over 80% said they would like to invest in environmentally sustainable funds, even though only a small fraction of that number already had those products in their pensions today.
Q How should investors in decarbonisation approach 2020?
Investors need to remain selective and risk-aware, not least because regulation is moving at different paces in different countries. In China, the pace of environmental policy has slowed because of growth pressures arising from the trade war with the US. But from a medium-term perspective, we think the changes in consumer preferences and technology developments will drive growth for companies that are enabling the shift to a low-carbon economy. We think that’s an exciting opportunity for investors to tap into a major structural growth trend, while also making a positive environmental impact.
Emerging Markets: These markets carry a higher risk of financial loss than more developed markets as they may have less developed legal, political, economic or other systems.
All investments carry the risk of capital loss.