Daniel Sullivan, Head of Global Natural Resources, discusses what COP-26 means for natural resources investors and the opportunities arising from a climate-conscious world.
- The transition from fossil fuels to renewable energy is the most impactful change for the industrial economy, and is expected to accelerate into 2030 and continue to at least 2050.
- The key long-term growth opportunities include copper for economic electrification, raw materials used in battery and electric vehicle production, renewable energy and agricultural and food science.
- Accelerating adoption of recycling, the circular economy and the shift towards hydrogen as a source of clean energy add to the diverse opportunity set offered by natural resource companies.
The United Nations Climate Change ‘Conference of the Parties’, known as ‘COP’, is a meeting of the 197 countries that have ratified the Convention. The first COP was held in Berlin in March 1995 and twenty years later the Paris Agreement was adopted in December 2015.
The negotiations at the COP are designed to move faster to the Paris Agreement goals to limit global warming well below 2 degrees Celsius, by aiming for 1.5 degrees. The Glasgow COP26 meeting is a major commitment point for countries to update and accelerate their plans for reducing global emissions.
We don’t expect the world to suddenly change overnight, but the COP meetings and the commitments that result from them are helping to coordinate countries to find ways to address climate change.
Massive changes are reshaping the industrial economy, and these factors are expected to accelerate into 2030 and continue to at least 2050. Prime among these changes is the transition from fossil fuels to renewable energy.
Starting with coal and now oil, soon natural gas will also be given diminished investment attention, higher carbon abatement hurdles and operators will need to dramatically change their businesses to thrive in the long-term. The case is similar for vehicles as diesel and petrol are being phased out, while electric vehicle manufacturing and sales are ramping up.
In agriculture, carbon emissions also require management, while in our cities and buildings, society can collectively have a large impact through the widespread adoption of energy-efficient inclusions, using renewable power sources and breaking wasteful habits, such as lighting, heating or cooling office blocks unnecessarily.
Across the globe more broadly, there must be increased efforts not just to recycle, but to integrate industries into a truly ‘circular economy’. A circular economy is one where products can be recycled at the end of their life by channelling them back into the production of new products, reducing pressure on the environment by reducing waste disposal and raw material extraction requirements.
In the Janus Henderson Global Natural Resources team, we are keenly watching these developments and positioning for growth and opportunities in these decarbonisation-enabling industries. As investors operating across the mining, energy and agricultural sectors, the consideration of material environmental, social and governance (ESG) factors is critical.
ESG factors put value at stake through both the risks and the opportunities they provide; their consideration is integral to our investment process. Having a responsible, active investment approach towards ESG provides us with a competitive advantage and contributes to the creation of investor value and superior risk-adjusted investment returns over the long-term.
As we see it, the key long-term opportunities across our diverse investment area include copper for economic electrification, raw materials used in battery and electric vehicle production, renewable energy and the services that support them and agricultural and food science for healthy sustainable food. These are supported by investments in recycling, the circular economy and hydrogen.
Carbon won’t go away quickly, but as energy transitions to net zero carbon, and consumption falls considerably, additional costs or taxes will progressively make these industries less attractive to investors.
It is hard to imagine, but the pollution has to be paid for, prevented and remediated. Other industries have gone down the road of disruption before – VHS videos were superseded by DVDs, BlueRay and ultimately the cloud – the key difference here is that ESG adoption is the catalyst, rather than new technology making older ones redundant. Established industries that negatively affect the planet are now in decline as more sustainable alternatives come to the fore and COP26 commitments force countries to make meaningful, coordinated change.