Decarbonisation: how can investors lead the charge to reaching net zero by 2050?
At the Janus Henderson Global Media Conference, New Investment Paradigm: Uncovering Opportunities and Challenges, our senior leaders and key portfolio managers from around the globe shared their insights and outlooks for their markets.
In this session, Head of Global Sustainable Equities Hamish Chamberlayne joins Portfolio Managers Daniel Grana and Tal Lomnitzer in a discussion on global efforts to reach net zero carbon emissions by 2050.
Louise Beale: Now, next we have a big question for you on decarbonization. How can investors lead the charge in reaching net zero by 2050? An important question I'm sure you'll agree.
So, let me introduce our moderator and our panel for this. We have Ignacio de La Maza, Head of EMEA Intermediary and Latin America. Can I pass over to you?
Ignacio de la Maza: Thank you so much, Louise, and good afternoon and good morning everyone. I hope you are enjoying the Global Media Conference. Thank you for taking the time to be with us today.
As it has been mentioned, we are going to be discussing a really interesting topic today which is decarbonization, and to discuss this exciting topic I have with me three of the top portfolio managers of Janus Henderson, who are experts also on this topic, who are Hamish Chamberlayne, Portfolio Manager of Global Sustainable Equities, Daniel Grana, who is the Portfolio Manager in Global Emerging Markets, and Tal who is the Portfolio Manager of Responsible Resources.
So, guys, thank you so much for taking the time. This panel is already bringing interest. We can see from the audience and the questions. So, let's just start with Hamish.
Hamish, can I ask you the following topic which is how realistic is it that we can reach net zero emission by 2050? Are we now more in an accommodative environment?
Hamish Chamberlayne: Thanks Ignacio and good afternoon everyone. So, there is no doubt that we are in a much more accommodative environment in respect of political support towards decarbonization.
In fact, I can't remember a time in my career where there has been greater political alignment with regards to the urgency and the ambition to follow this path of decarbonization.
However, whether we will achieve net zero carbon by 2050 or whether it's achievable is very difficult to answer, and the reality is today the climate pledges that have been made by governments around the world still fall short of what needs to happen in order to get a net zero by 2050.
And then I think a very helpful report recently has been one from the International Energy Agency which was published very recently which gave a very clear blueprint in what needs to happen in order to get to net zero carbon by 2050.
It's a huge challenge. Some of the headlines that really sprung out at me is that we need to get to 70% of the global energy mix coming from clean energy, renewable energy by 2050.
We need to get to 85% of buildings that are net zero carbon ready compared to 1% today. And we need to stop all new fossil fuel development, oil and gas new field development this year in order to achieve that.
Now, is that realistic or not? The answer is I don't know. However, what I do know and what is very clear is that there is an enormous investment opportunity. When we look at the way capital is going to flow and where investment returns are going to be made, it's going to be very much in pursuit or in the direction of decarbonizing the economy.
And the other key thing is that this is a critical decade where some things really need to accelerate.
The two things that we're really focused on is that annual capacity additions of renewable energy, annual capacity additions need to rise by a factor of four from now till the end of the decade to reach 1,000 gigawatts of annual capacity additions, and then also the automotive fleet needs to electrify with 60% of car sales needing to be electric within the next ten years.
de la Maza: Thank you so much, Hamish, for that point. Some of the points that you have touched on are really interesting and I would love to hear the view of Daniel regarding what the picture is for emerging markets concerning some of the points that Hamish has highlighted.
Daniel Graña: Environmental consciousness at a country level usually reaches a critical point once 50% of the population achieves middle-class status. That was the experience of the United States in the 1960s and 70s when the Clean Air Act, the Environmental Protection Agency and other environmental regulations were passed.
That is also now the experience of China. As more of the population reaches middle-income status, the people's focus shifts away from providing food on their families' plates to worrying about the kind of future their children are going to inherit and they want a better quality of life.
And so not all emerging markets have attained that level of economic development and a lot of these countries are also still struggling with the coronavirus and more immediate concerns. So, these countries are not going to be able to contribute to this global plan from net carbon zero emissions.
However, China, Korea and others are willing to do their part. And so we need to see further economic development in the poorer emerging markets in order to reach that level of understanding that this is important.
de la Maza: Daniel, that is a very good point. I think the next question would be for Tal, which is basically what does the impact of decarbonization have across the natural resources sector?
Tal Lomnitzer: Thanks Ignacio and hello everyone. There is a myriad of initiatives that are going to be needed across various industries to solve climate change and we believe many of them are going to be facilitated by companies in the energy, the mining and the agriculture sectors which all fall within natural resources.
Clean energy, currently 15% of the total energy consumed needs to go to over 55% for us to have a chance of being Paris compliant.
According to UBS that's going to require between 120 and $160 trillion of cumulative investment over the next 30 years, just to decarbonize the world's energy supply. And that's going to require large quantities of basic resources like steel, aluminum, copper, nickel, lithium, just to mention a few.
To give you a sense of the drivers here, consider that the amount of steel required to build one megawatt of offshore wind or of concentrated solar is three to four times higher than that in building a traditional coal-fired, gas-fired or nuclear power station.
Hamish has mentioned sustainable mobility in electric vehicles. Those need to go to more than two billion on the road by 2050 from around five million today. The numbers here are quite startling as well.
The amount of copper used in a battery electric vehicle is five to ten times higher than that used in a conventional combustion engine vehicle. The dominant battery chemistry uses lithium, it uses nickel and manganese and cobalt. All of these are going to see very significant increases in demand as EVs grow.
Now, as renewables grow, fossil fuels are going to shrink, again something that Hamish mentioned, and that's going to be a real headwind for current producers of hydrocarbons and probably explains why a lot of the large oil companies are pivoting as quickly as they can to renewables and looking to become energy businesses rather than oil businesses.
But it's still a real headwind and as that renewable electricity supply grows, it's going to be used to make green hydrogen, or it can be used to make green hydrogen, and that's got huge potential to decarbonize the steel industry by replacing coking coal or to decarbonize heavy transport like trucks or ships or planes.
We also see a role for carbon capture and storage in order to abate hard to decarbonize sectors like cement or fertilizer production, and that plays into the hands of sectors like energy services that have that ships and the expertise to help facilitate that.
I don't want to go on too long, but we also see opportunities in waste energy, sustainable packaging, biofuels, alternative proteins, reforestation and smarter farming. All of those offer opportunities for companies in the natural resources sector.
de la Maza: I think you all have touched on that the environmental benefits are clear here, but I think that, Daniel, as an expert on emerging markets, can you dive into the social benefits of carbon neutrality in China? Is China ready for this from a governance standpoint? Which country and sectors do you think will be the winners and losers with China's push to become carbon neutral?
Graña: This is clearly an important question. No global plan to reduce carbon emissions will succeed without China since China produces almost a third of the carbon emissions of the world, more than the next three carbon emitters combined.
So, we are fortunate I believe that China's 2060 plan to reach carbon neutrality is a critical credible commitment. First, from a national security consideration, China consumes five times more oil than it produces domestically, so the balance must be imported from very difficult geographies.
There are economic reasons why China needs to make this transition. Keep in mind today how much the world has changed. Keep in mind today that China employs more people in the renewables industry than it does in the coal industry.
Another thing to keep in mind is the cost of producing electricity from coal versus the cost of producing it from onshore wind and solar have now converged. And lastly, more than 75% of the global solar supply chain, so think everything from polysilicon to wafers to modules, the global supply capacity is in China.
So, for all three of these economic reasons it makes sense that China should make this transition. The social impact to the coal mining industry is not as great as it would have been, say, if they had tried this transition a decade or two ago.
In terms of the favored ecosystems, clearly everything that touches renewables from batters to solar and wind to electric vehicles to raw materials, as Tal has identified, copper and lithium, a lot of these are manufactured or produced in China and so China is very much favored in this situation, as are some other emerging market countries like Korea.
Polluting industries like steel and cement, hydrocarbon exporting countries like Russia and Saudi Arabia, and thermal power plants all have to make significant changes.
So, one would think that capital would flow to where there's an exciting opportunity to make great returns and capital would be a little bit more constrained for those industries and countries where they have to make significant changes to accommodate carbon emissions.
de la Maza: Thank you, Daniel. Hamish, as a global investor, do you favor any particular sector or industry for a low carbon portfolio? Are there any companies or sectors that you consider to be low carbon that might surprise us?
Chamberlayne: Yes, thanks Ignacio, Look, I think there are obvious investments and I think there are less obvious investments. We've been very consistent in the sense that we talk about low carbon investing as much more complex than just taking fossil fuels out of your portfolio and investing in clean energy and electric vehicles.
I always think it's helpful to think about, where do emissions come from? And when you look at the sources of emissions across the global economy, it's an incredibly complex picture.
After several hundred years of fossil fuel driven economic development, it's a very complex interdependent web of interactions of where carbon emissions come from. So, if we want to decarbonize, we need multiple solutions across multiple different industries and sectors.
Now, one of the big things that we keep coming back to is that in order to decarbonize we need to electrify. The global economy needs to electrify. So, we see this massive investment trend associated with electrification, electrification of everything.
There are so many different types of companies that are playing a role in that electrification technology. Closely associated with electrification is also digitalization, and in fact when we look at this decade, we see what we call the nexus between decarbonization, electrification and digitalization, the DED nexus if you will.
The things that really excite us are the opportunities especially in the technology sector where technology has got a really important role to play there, both in supplying the technology hardware to enable electrification and digitalization, semiconductors, connectors, electric wire harnesses, all the different types of advanced manufacturing techniques, fiber lasers, and then also software is going to play a really important role in that.
So, one of the things I'd like to leave you with is that we believe that the carbon impact of the technology sector is often misrepresented. In fact, we see it as having a really key role to play in decarbonization.
And two statistics that I would like to leave you with is, one, that the technology sector is the only sector to have sector-based decarbonization targets that are aligned with the United Nations climate targets. And the technology sector ultimately has a very low carbon footprint in aggregate.
One of the most impressive things is data centers in aggregate, the energy consumption of data centers has stayed flat over the last decade despite a 12-fold increase in data consumption.
de la Maza: You touched on a few really interesting points, Hamish, and I think I would love to hear the views from Tal as a natural resources portfolio manager. Where do you see the key growth opportunities along the value chain in terms of a transition to carbon neutrality?
Lomnitzer: So, in a gold rush the best way to make money is to sell picks and shovels. In energy we see the greatest opportunity in those companies that are selling the picks and shovels to facilitate the development of wind as opposed to perhaps the utility companies that will be developing those projects, where we're seeing returns being competed down as new capital flows in.
So, we like wind turbine manufacturers, we like manufacturers of copper cable that will connect up all these offshore projects to the grid, manufacturers of wind turbine blades and indeed energy services companies that are going to do the ocean bed surveys, build the foundations and provide the ships that are going to build these offshore wind farms.
In metals and mining we see great opportunities for providers of nickel and lithium which are essential components, batteries and electric vehicles. And of course, as I mentioned, in copper which is going to not just be needed in the cars but to strengthen the grid as renewable power grows.
When it comes to carbon capture, utilization and storage or hydrogen, which I mentioned before, we believe that arguably the best risk/reward lies with the industrial gasses companies.
Large companies such as Air Products or Linde have the expertise and the infrastructure in capturing and in transporting industrial gases and they look pretty well-placed as these markets evolve.
But it's not just metals and mining or energy that's involved in decarbonization. We also need to change the way we eat actually and how we produce food. In the agriculture space we see great opportunities in the development of alternative proteins, such as farmed salmon, or plant-based protein.
Just a statistic to mention, by 2050 there are going to be ten billion people living on this planet. That means that we would need to produce more food in the next 40 years than we've harvested in the last 8,000 years.
At present about a third of agricultural produce is actually wasted each year and so there's an important role for more efficient farming and distribution of food, but the type of food we eat needs to change as well.
According to Bank of America, farmed fish has an 85% lower greenhouse gas footprint than beef and plant-based protein has a 97% lower greenhouse gas footprint than beef. That plays straight into the hands of large agricultural companies and producers who are investing significantly in some cases to grow their plant-based nutrition businesses.
Also in the agri business space we see opportunities in owning large natural assets such as forests which are increasingly recognized as carbon sinks and also providers of renewable materials that can be used to replace high carbon content construction materials, like cement being replaced with wood and indeed plastic packaging being replaced with paper products or pulp being used to make bioplastics.
Suffice it to say that there are a lot of opportunities through the food chain. It's going to move around, but we see a multi-decade runway ahead and we as a team are as excited about the outlook for natural resources as we've ever been.
de la Maza: Some of those points that you have touched on, Daniel, one question would be around the fact that many of the large oil and gas producers are emerging markets in the Middle East and Africa. So, are these countries able to achieve the goal in terms of energy transition? We'd be happy to hear your thoughts there.
Graña: That is a very good question. Again, I go back to who has that national level of consciousness about the importance of the environment, the importance of carbon reductions and thought about what they plan to do?
Many of these hydrocarbon countries are in denial. Many of these hydrocarbon countries don't see that future as we see it, and so consequently many of them have not planned for that future.
What I would suggest is to look at countries that are innovating, that are part of the solution. Who is doing research on hydrogen fuel cells that will eventually power trucks? Who is doing research on batteries for the next generation fast-charging electric vehicles? Those are the companies that will be better positioned for the future. Those that remain stuck in the old way of doing things will have a very painful and difficult transition.
So, there are some hydrocarbon exporting countries like Saudi Arabia that do have a plan. We have to monitor it carefully in terms of their plans to diversify their economy away from simply exporting crude or natural gas.
But there are others that don't have plans at all. And so the longer they delay, the more painful that transition will be because I think many of us would agree that we see peak oil consumption in our investment lifetimes and that will have enormous implications for a lot of these countries.
Related themesEnvironmental Social Governance (ESG)
Tal Lomnitzer is a Senior Investment Manager on the Global Natural Resources Team at Janus Henderson Investors, a position he has held since 2019. He is responsible for several ESG oriented portfolios within the Global Natural Resources suite of strategies. Prior to this, he was deputy head of global resources and fund manager at Colonial First State Global Asset Management from 2011. He launched and ran various global resources and energy funds at Merchant Capital, NewSmith Capital, and ORN Capital, where he was a partner from 2010, 2007, and 2004, respectively. Tal began his career in 1998 at Morgan Grenfell/Deutsche Asset Management.
Tal received first class BA and MA degrees in economics from Cambridge University. He holds the Chartered Financial Analyst designation and several ESG accreditations including the CFA Level IV Certificates in Climate & Investing and ESG Investing as well as the UNPRI Advanced Responsible Investment Analysis Certificate. Additionally, he is certified by the Institute of Directors, currently serving as Chairman of HVH Arts a charity serving underprivileged children in London. He has 23 years of financial industry experience.
Hamish Chamberlayne is Head of Global Sustainable Equities at Janus Henderson Investors and is responsible for managing a suite of global and regional sustainable equity strategies. He was an investment manager with the firm from 2012 and joined Henderson as an investment analyst in 2011 from Gartmore, where he was an equity analyst with the global equity team. Prior to this, from 2004 to 2007, Hamish worked as a senior auditor at PricewaterhouseCoopers, where he covered a variety of sectors, including energy, technology and communications. He began his career at Burlington Consultants in 2003 performing commercial due diligence on businesses identified as acquisition targets by private equity houses.
Hamish graduated with a master’s degree in chemistry from New College, Oxford University. He holds the Chartered Financial Analyst designation and is a qualified accountant. He has 20 years of financial industry experience.
Daniel J. Graña is Portfolio Manager, Emerging Market Equity at Janus Henderson Investors, a position he has held since joining the firm in 2019. Daniel is responsible for co-managing the Emerging Market Equity and Asia Pacific ex Japan Growth Equity strategies. He is also responsible for the emerging markets sleeve of the International Opportunities strategy. Previously, he managed emerging market equities at Putnam Investments from 2003 and was an analyst on the emerging markets team from 1999 to 2002. Before Putnam, he spent four years in the Latin America investment banking group at Merrill Lynch.
Daniel received bachelor of science degrees in economics and political science from the Massachusetts Institute of Technology and a master of management degree from Northwestern University, Kellogg School of Management. He holds the Chartered Financial Analyst designation and has 28 years of financial industry experience.