By Kilian Stemberger, fund manager of DJE - Equity Market Neutral Europe and analyst responsible for data validation and ESG
Addressing climate change with clean tech
The EU is tightening its climate targets, the USA wants to rejoin the Paris climate agreement and China is planning CO2 neutrality before 2060. Global politics is declaring war on climate change. This creates promising opportunities for investors, as combating climate changeincludes an almost inexhaustible bundle of megatrends. An investment theme for the DJE - Alpha Global.
To limit global warming to clearly below two degrees compared to pre-industrial levels it is necessary to reduce the concentration of carbon dioxide in the atmosphere. This can only be achieved if net greenhouse gas emissions fall to zero over the next few decades. With 42 billion metric tons of emissions per year this is a challenging task that can only be crowned with success if existing low-emission alternatives are expanded, viable technologies are made comprehensively ready for the market and groundbreaking innovations are researched. This creates promising opportunities for investors, because combating climate change represents a whole bundle of megatrends.
Energy turnaround: enormous potential for sun and wind
Electricity, heating and transportation are responsible for nearly three-quarters of global greenhouse gas emissions, because 85% of energy generation in these sectors currently comes from fossil fuels. Therefore, significant CO2 reductions can only come from a rapid shift away from fossil fuels to low-emission energy sources. It should be borne in mind that hydroelectric power plants have a considerable impact on nature that the nuclear waste issue has not yet been resolved despite intensive research and that products such as biodiesel are very resource-intensive to grow. Wind and solar are therefore predestined to become the primary energy sources of the future. Due to economies of scale and research investment costs have fallen enormously, making the two energy sources already a more cost-effective alternative to conventional power generation in parts of South America, for example. But this trend is also expected to continue in the future: Compared to past years, wind power is expected to become up to 27% cheaper again by 2035, photovoltaics even up to 45%.
This results in enormous growth with forecasts that have had to be continuously adjusted upwards in the recent past. For example, onshore wind energy is expected to grow in the mid-single digits over the next 10 years. However, these forecasts do not yet include the fact that, for environmental and cost reasons, manufacturing companies are increasingly looking into implementing their own wind power plants or securing long-term exclusive rights for green power (power purchase agreements) from utilities. In addition there is a projected growth of more than 20% p.a. in the even more efficient offshore plants, i.e. wind farms off the coasts, until 2030. Should China successfully implement the recently published goal - CO2 neutrality by 2060 - all these forecasts are likely to be too conservative.
Apart from the shift away from fossil fuels for electricity production itself, there are other powerful arguments in favor of the enormous potential of renewable energy sources: For the energy transition in the transportation sector, (1) electro mobility and the promising fuel cell are key. Ultimately, however, both are only sustainable from a climate perspective if the energy demand is covered by green electricity. Furthermore a (2) continuously increasing world population will increase the global demand for electricity independently of climate change. Last but not least a less obvious argument: It is well known that CO2 emissions per capita are significantly lower in developing countries compared to the rest of the world. Unfortunately, the decisive reason for this is not a more pronounced environmental awareness, but rather the fact that 1.4 billion people do not have (3) access to electricity. This acute problem certainly deserves attention in a separate article is very multifaceted and anything but trivial to solve. But solar power could make a significant contribution especially on the African continent.
It so happens that by the year 2050 global energy demand is forecast to increase by almost 60%. This would correspond to an offshore wind farm the size of Canada. In reality, of course, the energy mix will then be far more complex but in conjunction with the use of CO2-negative technologies, the issue of CO2 neutrality does not appear to be impossible.
Trend toward innovative storage options
With electrification demand for efficient storage solutions is also getting higher. Our energy demand fluctuates over the course of the day, is higher in winter than in summer and can change ad hoc at short notice due to unpredictable weather events. In addition the wind does not always blow with the same strength and the sun does not always shine with the same intensity. As a consequence there are always imbalances between supply and demand that need to be balanced out in order to ensure a secure power supply. Extensive storage systems are therefore needed to make the generated electricity available on demand without any significant loss of energy. Various solutions exist including hydrogen in the context of the "power-to-gas" alternative (using water electrolysis and electric power to produce a fuel gas that can be stored for later use) but the best known is the battery. Containers full of e-mobile car batteries are already being used in isolated cases to store surplus electricity. Since such systems are very space-intensive the efficiency of the batteries is crucial.
This also applies to e-mobility. In terms of range and short charging times enormous economies of scale are expected in the future which will make this type of drive more attractive and consequently increase demand for it. This structural trend will also boost charging station manufacturers without whom it will not be possible to create a comprehensive e-mobility infrastructure.
While the future probably belongs to electric vehicles in the passenger car segment there is probably room for several alternatives for commercial transport. Especially for fuel cells. In contrast to batteries storage is uncomplicated. As with the internal combustion engine the range depends on the tank size. And since buses, trucks or even ships offer much more space larger tanks can be installed. Commercial vehicles have the advantage that they are not necessarily dependent on a nationwide infrastructure.
Innovation and optimization in non-substitutable sectors
Not all products or industries will have equivalent CO2-neutral replacement technologies in the mid- to long-term as is the case in electricity or mobility. For example infrastructure development will continue to rely on cement that is enormously energy-intensive to produce and in any case it will be more difficult than ever to do without the mining industry. The energy transition requires an enormous amount of minerals and metals - just think of the quantities of lithium, nickel and cobalt needed to manufacture a battery or the (possibly completely underestimated) copper required to expand the e-mobility infrastructure.
To justify their future existence it will be vital for these companies to make their production or extraction processes as efficient and low-carbon as possible. In some sectors there are already signs of a preference for placing orders with suppliers that have a sustainability advantage compared to their competitors.
As a result there will also be a significant change in these sectors with winners and losers. Accordingly forward-looking companies have already been investing for years in the development of alternatives that are acceptable in terms of climate technology. With success: In the cement industry, a product with a significantly lower CO2 footprint is now on the market which can be further reduced in the future. By blending construction waste the existing materials are not only recycled and less new clinker is needed but the overall product costs also drop. Therefore the manufacturer even has a financial incentive to sell the more climate-friendly product.
In mining where heavy equipment (such as the house-high dump trucks) determines the extraction process vast quantities of fossil fuels are consumed. Mining companies will have to rethink their entire machinery fleets here. Due to the high energy demand and the still limited storage capacity of batteries this could become an interesting field for fuel cell-powered vehicles and equipment. For such large machines the fuel cell can hide its efficiency disadvantage compared to the battery as enough space is available for a large hydrogen tank. Many mines already have their own photovoltaic systems, which they could use to produce hydrogen with the help of electrolyze.
Conclusion. Clean tech offers high market potential
Climate change is a bundle of megatrends offering investors a variety of possibilities. Some of these have been presented here. Unfortunately the space available here is not sufficient to present other sectors such software solutions for more efficient resource consumption, for example in agriculture, or efficient construction technology. Also worth mentioning at this point are the CO2-negative technologies, which are still in their infancy, but have an almost infinite market potential (mankind has already emitted over 2,000 gigatons of CO2).
Anyway, no economic sector or with regard to the social sphere, no individual can be excluded. The fight against climate change affects everyone and everything. Because everyone can do something, falling well below the 2-degree mark is not impossible. What is needed, however, is a change in thinking, as is currently taking place in the economy. And despite all risks this also offers promising opportunities.
Note: All information published is for your information only and does not constitute investment advice or other recommendation. Long-term experience and awards do not guarantee investment success. Securities are subject to market-related price fluctuations which may not be compensated for by the active management of the asset manager or investment advisor. This information cannot replace a personal consultation. All information has been provided with care and to the best of our knowledge at the time of preparation. Despite all due care the data may have changed in the meantime. Further information on opportunities and risks can be found on the website www.dje.de. The sales prospectus and further information are available free of charge in German from DJE Investment S.A. or at www.dje.de The fund management company is DJE Investment S.A. DJE Kapital AG is the distribution agent.