Decarbonisation will be one of the most important themes for investors, as well as the economy and society in general, over the next decade and beyond. 
It is a supercycle supported by strong political and economic tailwinds – such as Europe’s multi-trillion euro ‘New Green Deal’, announced in 2019. This deal is more than just a vision, decarbonisation is policy in motion. The €4trn commitment over the next decade includes a legally binding target to cut emissions by a minimum of 55 per cent by 2030, versus 1990 levels. It is equivalent to an incremental investment of more than 2 per cent of GDP per annum over the next decade – which could create an additional 20 million jobs.
China has also become increasingly vocal about its concerns with greenhouse gas emissions, in a bid to reduce city-based pollution. China is looking to become a global leader in electric vehicles and could account for as much as 40 per cent of worldwide electric vehicle sales by 2025.
Moving to the US, despite the lack of recent headlines, the US has been going greener. For example, the southwest of the country has one of the richest solar resources globally, with more than 10,000 gigawatts of utility-scale solar plants. Meanwhile, the Midwest has tremendous wind resources throughout the entire year. While the US, unlike Europe, does not have hard emission targets in place, we expect see similar amounts of incremental investment – similar to 2 per cent of GDP over the next decade.
Our global equity portfolio exposure to the beneficiaries of decarbonisation and infrastructure investment has recently grown to about 15 per cent and is diversified across three key groups – capital providers, materials companies and enablers.
Capital providers
We have a 5 per cent exposure to capital providers, the power companies deploying renewables and greening the grid. One of our key holdings is EDF, Europe’s largest low carbon electricity producer. It owns world-scale nuclear, hydropower and renewable assets.
EDF is also well-advanced in its discussions with the regulator to not only increase the price it receives for regulated nuclear power output, which would materially boost returns, but also undertake a potentially value-creating company split – which could see the company separate its nuclear and renewables business into a separate entity. This entity will likely become one of the largest owners and operators of renewable assets in Europe and is materially undervalued within the larger group.
Materials companies
We have about 3 per cent in materials companies, primarily global aluminium producer Norsk Hydro. Aluminium smelting might often be thought of as an old-world industry, but usage is increasingly new world, given its light-weighting and recyclable properties. Producing aluminium is incredibly energy-intensive, which has typically meant a reliance on cheap coal. However, Norsk Hydro produces its aluminium from predominantly hydropower, resulting in an approximately 80 per cent lower carbon footprint than coal-based producers.
Demand for lower-carbon aluminium will have a profound effect on the supply side too, and autos are a great example. The average car today uses around 180kg of aluminium per vehicle. Larger electric vehicles, in a bid to offset battery weight, are increasingly replacing steel with aluminium. For example, the Tesla Model S and the Audi 8 Tron use 700-800kg of aluminium per vehicle.
Enablers
Finally, about 7 per cent of our portfolio is invested in decarbonisation ‘enablers’. The Siemens group is a great example. Siemens is a global leader in factory automation and is the only company globally providing the hardware to make a plant run efficiently and the software to control and optimise processes. As we move into a low carbon world, manufacturers will need to re-tool. On the hardware side, this will include robots, or energy-efficient drives and motors, to reduce energy consumption. On the software side, amongst other things, Siemens’ software allows a company to build a ‘digital twin’ of its product. Rather than having to produce endless prototypes, products can be built and stress-tested in the virtual world. This is incredibly efficient.
In addition, while the market and media are obsessed with Tesla, Volkswagen is on the front foot of electrification and will likely produce more electric vehicles than Tesla when electric vehicle adoption begins to properly ramp up. Only VW is valued at single-digit multiples.
With major tailwinds such as Europe’s ‘New Green Deal’ and the continuing rise of renewables in the US, we expect to see many corporate beneficiaries of the global decarbonisation drive. As climate change awareness intensifies and momentum builds, investors simply cannot afford to ignore this multi-year megatrend.
Graham Hay is deputy portfolio manager at Antipodes Partners. The views expressed above are his own and should not be taken as investment advice.