This Good Money Week, Mike Appleby, Investment Manager in the Liontrust Sustainable Investment team, looks at the outlook for sustainable investment in the coming years – and how it can accelerate the positive change we urgently need.
It is looking increasingly unlikely that the target to keep global warming to a maximum increase of 1.5C is going to be achieved. This target was agreed by almost every country in the world through the Paris Climate Agreement in 2015.
Record high temperatures have regularly been reached and there is no doubt we are changing the climate of our only planet. The consequences are predicted to be severely negative – with the added possibility of tipping points taking us into a completely new state of climate.
The energy transition
The energy transition has not stalled, however, and is making positive progress. Encouraging companies to decarbonise and investing in businesses that can drive forward the energy transition both have important roles to play in accelerating this progress.
We invest in a total of 22 sustainable investment themes that help make our economy cleaner, healthier and safer. These themes help us understand the shifts happening and identify potential areas of structural growth, as well as areas of secular decline to avoid.
An example of the positive developments within energy transition is coal, which is plentiful, but also dirty and dangerous. In the UK, it has fallen from 66 per cent of the electricity generating mix to just two per cent over the last 30 years. In the US, usage has dropped from 55 per cent to 20 per cent. It is being replaced by cheaper and easier-to-deploy clean wind and solar. Solar is consistently cheaper than new coal or gas-fired plants in most countries, and solar projects now offer some of the lowest cost electricity ever seen with the price of its panels falling by around 95 per cent in the last 10 years.
The war in Ukraine has been a big catalyst to wean Europe off politically risky hydrocarbons, especially natural gas from Russia. This has spurred even greater initiatives to reduce the amount of energy we waste by promoting energy efficiency, as well as replacing fossil fuel electricity generation with economically competitive renewables. Wind turbines and solar panels overtook fossil fuels to generate 30 per cent of the EU’s electricity in the first half of 2024.
The renewables genie is out
We believe the genie is out of the bottle for renewables. The International Energy Agency observed that 2023 was a record year for the installation of renewables with 507GW, an increase of almost 50 per cent, on the previous year. This is about 10 times the UK generating capacity.
These examples demonstrate that the era of burning things for energy is coming to an end. Therefore, it is naïve to invest in the incumbent fossil fuel industries given they are going to struggle to compete economically as well as being diametrically opposed to the aim of a huge reduction in the amount of fossil fuels we burn.
The vast majority of the technology we need to reduce emissions is available and cost competitive today. We are thus seeing the energy transition to lower carbon happening now and believe there are ways to invest in businesses driving this transition.
Investment opportunities
By understanding which companies will experience long-term structural growth from this trend, as well as if that growth will be profitable, we now see a great investment opportunity in those businesses which help move us to a much lower carbon energy system.
The first example is Sustainable Energy Efficiency Income Trust, which has unique projects in energy efficiency, waste streams and olive oil. One such project is in Spain with the olive oil industry. Only 10 per cent of an olive is used to produce extra virgin olive oil, with the other 90 per cent going to waste. The Sustainable Energy Efficiency Income Trust project takes the waste – olive pomace – and from that produce extra olive oil called orujo. They are then left with the waste of that process in a biomass which is used to power electricity and the heat required in the production of olive oil. At the end of the process, there is only electricity and olive oil remaining, no more waste and this is a great example of a circular economy. They are producing more olive oil without consuming any more electricity and such use of waste can be replicated for the production of other foodstuffs.
The second example is a fund called the Atrato Onsite Energy plc and a solar farm it developed last year in Northamptonshire. This site used to be a quarry and comprises about 100 acres of land. Atrato obtained planning permission and a grid connection for a solar farm. Over the course of the last year, Atrato has installed around 55,000 panels, energised the plant in January 2024 and this energy is now supplying Britvic, the drinks company. This one solar farm can decarbonise Britvic’s UK operations by 75 per cent.
Humanity faces an enormous challenge to stabilise the climate. While we will almost certainly exceed 1.5C in warming in the coming years, every 0.1C of warming we can avoid is critical.
Sustainable investing is one point of influence that people can use to accelerate the change.
