Bumps on the Road to Decarbonisation

After challenging recent conditions, positive sentiment is returning to many sustainable sectors. Pleasingly, this sentiment is built on robust industry dynamics and looks to be a solid foundation for long-term structural growth.

In recent years, investors have been drawn to decarbonisation and broader environmental themes in public equity markets. Commonly targeted sectors have included renewable energy, electric transportation, water treatment, recycling infrastructure, green building and food alternatives.

Past challenges

Initially, many of these themes performed well. With investor imagination buoyed as the globe committed to ambitious ‘net zero’ emissions targets, capital to these sectors readily flowed. However, more recently, they have faced challenges. Rising interest rates and supply chain disruptions impacted margins, new themes such as artificial intelligence captured investor attention and enthusiasm for loss-making businesses waned.

Improving dynamics

While difficult to generalise (given the broad set of industries involved), several factors show that industry dynamics are now improving. Interest rate and supply chain issues are normalising, companies have adapted business models to suit the new operating environment, policy is increasingly supportive and valuations look attractive versus longer-term averages. We also remain strong believers in the long-term structural growth story that underpins demand for environmental focused product solutions.

Themes with decade-long growth runways

Renewable energy: Renewable energy is currently meeting 80% of new power demand globally. By 2030, renewables are expected to more than double their existing share of US energy consumption given industry trends leading to the ‘electrification of everything’.

Electric mobility: Globally, sales of electric vehicles (EVs) rose nearly 60% last year and, on that higher base, another jump of 30-35% is forecast for this year. By 2030, EV penetration rates are expected to reach 20%+ of total capacity as cost competitiveness is reached.

Energy efficient buildings: It is estimated that more than 75% of buildings in Europe are energy inefficient today and less than 10% of US commercial buildings comply with broad energy efficiency standards. To combat this, nations are increasing construction standards and retrofitting existing building stock.

Industrial processes: Many of the chemical transformations that create steel, cement and plastic have a significant environmental footprint. Driven by consumer and government demands, current manufacturing and end-of-life processes are being changed to improve circularity. In steel production, electric arc furnace use with scrap metal is expected to increase to 50% of global production. In packaging, plastic is being replaced with sustainable alternatives.

Food production: Food production and consumption has an outsized impact on the environment – half of the world’s habitable land is used for agriculture. To help address this, innovative food and agriculture practices are gaining momentum. One area of growth is the realm of ‘specialty ingredients’ – food additives that enhance efficiency and overall quality.

Investible thematics

When allocating to these thematics we prefer to allocate via ‘active’ managers. Skilled managers should be better positioned to navigate the macro and market environment while also staying abreast of technological advancements and changing industry structures.

Percentage of global installed energy capacity by type (2008-2022)

Forecast number of heat pumps installed globally (2020-2050)

Potential market size for global sustainable packaging industry (2022-2032) (US billions)