Investing in energy efficiency’s future generation

Renewable energy is arguably the most understood by markets right now of all the areas of economic and social upheaval that will occur in the future years.

This, according to David Harrison, the manager of the Rathbones Greenbank Global Sustainability fund, has its own set of problems.

“Renewables are absolutely receiving more funding,” he says, “but the problem is that entry hurdles aren’t that high.” We invest in wind energy because the business models have been established, but we aren’t investing in other renewable energy sectors right now because the valuations are too high.”

Energy efficiency, or companies that make products that enable people and businesses to use less energy, may be an area of opportunity, according to Harrison, because valuations are less stressed in this part of the market.

“These aren’t revolutionary developments, so there’s less enthusiasm around them, which means values are lower,” he says.

“While wind energy was not competitively priced a decade ago when compared to hydrocarbons, it is now. That demonstrates how the market has progressed, as well as how we have progressed past the stage when regulatory problems are the primary concern.”

“With the tremendous dangers posed by our ever-warming global environment come significant structural development possibilities across major sectors of decarbonisation: renewable energy, electrification, and resource efficiency,” says Graeme Baker, co-manager of the Ninety One Global Environment fund.

“We need to see energy consumption separate from economic growth in order to reorient the global economy to a net-zero path. The transition to a more electrified and efficient global system will be a significant driver of this.”

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“Resource and energy efficiency are less apparent and subtle topics that investors have yet to fully understand,” he continues.

“Decarbonisation requires more effective resource usage, which includes reaching greater efficiency requirements in numerous residential and industrial processes, buildings and appliances, and agriculture. Industrial electrification, hydrogen economy, waste management, and smart grids are only a few of the main sub-themes found under these categories.”

“We see much more to come in decarbonising transportation,” says Duncan Goodwin, sustainable equity fund manager at Premier Miton. Biofuels, electric power trains for trucks, ships, and other applications, new battery technologies such as solid-state batteries, and, eventually, hydrogen will all help to reduce carbon emissions in transportation. Beyond transportation, electrification of heating and other power sources will also assist to increase energy efficiency.

“Fuel cells will help hard-to-reach, power-hungry industries like steel and cement decarbonize, while carbon capture and storage will help heavy industry decarbonize even more. Finally, less carbon-intensive food and textile production are only now becoming viable business options, with enormous potential markets.”

Goodwin goes on to say: “Leading technology and businesses will emerge in a wide range of sectors and geographies, providing enough opportunity for regional and sector diversification.”

A wide range of alternatives is required

In terms of the future of renewable energy, Harrison believes that a “menu” of options will be required, with different countries using wind, solar, and hydrogen depending on their climate.

He compares hydrogen to internet shopping in 1997 as an energy source that is still in its early stages of growth in terms of investment.

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“At this point, all an investor can do is look at the track record, and we try to avoid the large bets,” Harrison adds.

One of the biggest problems confronting sustainable investors in the future, according to Martyn Hole, equity investment director at Capital Group, is electric cars.

He claims that while electric vehicles are part of the process of attaining net zero emissions, they use more copper than non-electric vehicles, and that as a result, increased demand for copper would result from the rise of electric vehicles.

He believes the investing opportunity stems from the reality that many copper mining firms would be banned from sustainable investment funds, resulting in lower values in a world where demand for sustainable investment funds is increasing.

According to Matthew Tillett, manager of the Brunner Investment Trust, the investment rationale for firms like wind farm providers is “well known,” therefore he chooses to invest in less well-known subjects like electrification — he owns Schneider Electric for this reason.

According to Ingrid Kukuljan, Hermes’ head of impact and sustainability, the sector’s next wave of activity is expected to be consolidation, which she feels would lead to more certainty surrounding renewable energy prices, boosting the investment case in the future.

“We believe the size of the growth opportunity for the industry as a whole over the next years has been under-appreciated, both as a play on capital allocation and appealing long-term investment exposure,” says Mark Hume, co-manager of the BlackRock Energy and Resources Income Trust.

“In general, we anticipate that the energy transition will accelerate in the coming years as authorities, businesses, and investors mobilize resources for decarbonization. We would expect investments to reflect this longer-term tendency by definition. Indeed, we believe the trend is picking up steam, with post-Covid economic stimulus likely to be concentrated on green businesses, as shown by the EU Green Deal and greater US attention.”

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“Renewable energy costs for onshore wind and solar PV are already near grid parity in certain areas, and such power generation now represents the most cost-effective technological alternative, which is driving fast adoption,” he continues. In other sectors, such as energy-efficient lighting and energy storage solutions in vehicle electrification, we observe similar cost competitiveness trends.”