How and in what circumstances does the ‘Green Transition’ represent compelling structural growth opportunities for investors?
We believe that environmental equities represent the biggest structural growth opportunity of the next generation. As a species we need to fundamentally change the way we generate energy, travel, grow our food, clothe ourselves, and construct our buildings. There is a revolution coming over the next 30 years that will touch every single company in the world to some degree. Such a transition is required not only to help tackle climate change, but also the equally pervasive threat of biodiversity loss. It will be particularly relevant for companies that are involved in the production or consumption of significant amounts of energy, including those in the energy and transportation sectors, as well as heavy industry. The structural growth opportunities appear so compelling because in many sectors completely new types of energy and production will be required. There are many areas in our investment universe that we believe will be 10 times bigger in 10 years’ time, including EVs, solar and wind power, but there are also areas that could realistically be 100 times or even 1000 times bigger, including green hydrogen.
Which types of companies should be the focus for investors, and why?
We believe investors should focus on companies that are providing tangible environmental solutions, not only because this makes good environmental sense, but also because it should be a significant source of alpha. Indeed, these companies have particularly positive environmental impacts. Their ‘carbon return on carbon employed’ is extremely high; the emissions reductions that occur due to using the solutions provided by many of the companies in our portfolio are typically over 15x higher than the emissions required to produce these solutions. Moreover, these companies should have the biggest structural growth opportunities ahead of them as they will need to scale up dramatically to facilitate the green transition. Within environmental solutions we believe it is important to take a holistic approach that focuses on both carbon emissions and biodiversity, which are inextricably linked. By narrowly focusing on emissions, we could solve the world’s clean energy problems and still destroy the planet; we would turn a carbon problem into a biodiversity issue. Without biodiversity, even if we could make the world a perfect temperature it is unlikely to be worth living in.
How can investors make a tangible positive environmental impact while also generating their desired risk-adjusted returns?
We believe it is a falsehood to claim that in order to make a positive environmental impact it is necessary to sacrifice attractive risk-adjusted returns. In our humble opinion, the fund’s track record demonstrates this: since its inception in May 2020 to February 2022 it has generated gross USD returns of 114%, whereas MSCI ACWI has generated 47%. The opportunity set for investing in companies that are making a positive environmental impact is significant. In our universe there are approximately 400 companies in a broad range of sectors and geographies, each with diverse characteristics. The one aspect that unites all these companies is that they are solving environmental problems. With this becoming a major policy and social agenda, particularly in the West, the opportunity set for these companies is expanding rapidly, which in turn creates opportunities to generate alpha. The urgency of the green transition has only increased in recent weeks as a result of the tragic events unfolding in Ukraine. Regardless of the outcome of the crisis, it already appears to have catalysed a momentous shift in global energy policy.
The Fund Selector Asia Investment Forum Thailand was held virtually on 24 March 2022 and was sponsored by Columbia Threadneedle Investments, Matthews Asia, TT International and Pimco.
Find out more about what was discussed and the strategies that were presented here: https://fundselectorasia.com/events/fsa-investment-thailand/
