This article is from the latest Good Investment Review, which you can download free here.
The transition to clean energy could be ‘the most important investment theme for the next 30 years,’ says Guinness Global Investors.
This major investment theme offers investors seeking growth an opportunity to align their capital with climate progress.
The energy transition – the global shift from carbon-based energy to a sustainable energy system – is a multi-decade transformation. Fossil fuels still account for 83 per cent of the global energy mix and despite a substantial ramp-up in global spending, the world is falling materially short of the $4.5 trillion (£3.57 trillion) annual spending that the International Energy Agency (IEA) estimates is required to reach net zero.
But while we are still in its foothills, events of recent years have caused the energy transition to ramp up in earnest. Russia’s invasion of Ukraine and growing geopolitical tensions with China have reminded the Western world of the importance of energy security. Alongside net zero commitments, improving green economics and a means of rejuvenating a stalling industrial base, this has given policymakers all the impetus they need to forge ahead.
And forge ahead they have. The Inflation Reduction Act (IRA) in the US earmarked $369 billion (£293 billion) in incentives for clean technology deployment, and private capital is enthusiastically following. In February 2023, the European Commission announced the Green Deal Industrial Plan, aiming to boost low-carbon manufacturing in Europe in response to the IRA.
Although policy is becoming more supportive, economics is still the key driver of the energy transition over the long term. By 2050, the population is expected to grow by 25 per cent and GDP is expected to double.
More people with more money demanding more goods and services are expected to drive a 40 per cent increase in global energy demand, and renewable energy sources will be able to meet this more cheaply than conventional energy sources.
Although we prioritise returns for investors, we estimate the positive impact associated with our investee companies (per dollar invested) to illustrate the extent to which the strategy is investing in companies which help facilitate the low-carbon transition.
‘The most important investment theme for the next 30 years’
Companies that sell products and services which reduce or displace conventional energy demand are set to play an outsized role in arguably the most important investment theme for the next 30 years. By delivering concentrated exposure to companies playing a key role in global decarbonisation, the Guinness Sustainable Energy strategy provides a means for investors to align their capital with this positive impact, while targeting capital appreciation as its investment objective.
A key metric is carbon dioxide emissions displaced through use of a company’s products and services, while also taking into account a company’s carbon dioxide emissions. In our portfolio, the leaders are companies in the installation sector – those installing low-carbon infrastructure or manufacturing finished products such as wind turbines or key components like solar glass. One significant contributor (on 2022 data) is Canadian Solar, a leading provider of solar modules and battery storage solutions, and developer of utility-scale solar power and battery storage projects.
Global electricals giant Schneider Electric was the second largest contributor via its business in efficiency and the electric grid.Xinyi Solar, a Chinese company in the solar module supply chain, also provided a good contribution. As Xinyi is fairly energy-intensive, and as China’s grid is still reliant on coal power generation, the company has relatively high carbon emissions from its activities, but we expect this to improve over time as China decarbonises its grid.
In renewable electricity generation, we hold two Chinese wind power producers (China Suntien and China Longyuan) which achieved some of the highest carbon emissions displacement per dollar of investment, due largely to low valuations of Chinese stocks relative to the scale of their electricity generation. Companies making components for electric vehicles (EVs) such as Aptiv also contributed, but at lower levels per dollar of investment, since their products still account for a small portion of the cost of an EV. However, EV supply chain companies are growing their impact quickly thanks to the growth in EV sales.
Our portfolio holdings, and their valuation, change over time and we adjust for these factors in order to understand the underlying performance of each individual company. In doing this, we find our portfolio companies in aggregate improved their carbon emissions avoided by 9 per cent in 2022 versus 2021. We see this rate as encouraging when we consider that it includes a mix of larger companies growing out the electrical grid as well as smaller companies with fast growing impact.
For investors, it is encouraging that real progress in implementing the energy transition necessary for a low-carbon future is already occurring profitably and with year-on-year improvement, presenting ways for investors seeking capital appreciation to align their investment with climate progress.
For further details and our methodology, please see the Guinness Sustainable Energy Impact Report, available at guinnessgi.com.
Risk warning: The value of an investment and the income from it can fall as well as rise as a result of market and currency movement, and you may not get back the amount originally invested.
