Portfolio Managers Tal Lomnitzer and Tim Gerrard discuss the investment opportunity presented by the global decarbonisation effort and the key role natural resources companies will play in the transition to a low-carbon economy.
The potential consequences of climate change require urgent action, and natural resources companies are critical to facilitating the production and development of renewable, low-carbon energy sources.
The opportunities in the sector go beyond renewable energy, however, with critical raw materials, and agriculture, among others, also playing a key role in the transition to zero carbon.
In our view, an active approach to investing in this space is best suited to identify resources companies that are contributing to decarbonisation and driving what to us appears to be an attractive long-term outlook for the sector.
Tal Lomnitzer: Zero carbon is important for the global economy. It's a major investment thematic and there are several reasons why it's important. First is that global temperatures are rising in tandem with anthropogenic, manmade greenhouse gas emissions. And associated with that, weather is becoming more extreme. It's anticipated that if global temperatures rise further and they're not reduced, extreme weather events are going to become more frequent, impacting the availability of food. And if sea levels rise dramatically, which could also happen, that could impact millions of coastal communities, creating economic refugees and migrants. So inequality, social polarisation and political upheaval are all the potential consequences of not transitioning to zero carbon.
In the fight against climate change, we've now seen over 120 countries pledge to reach net zero by 2050. That's been complemented by more than 100 regional governments, 800 cities and over 1,500 companies committing to net zero by 2050.
Tim Gerrard: Over the last 20 years, progressively, governments, consumers have recognized that the climate is changing and there's a final agreement that it's changing so much that urgent action is required to decarbonise. What does this mean for investors? Well, it means a couple of things. There's something like US$140 trillion worth of opportunities between now and 2050 as the world decarbonises. That’s an incredible amount of money, it’s a lot of opportunity.
I think the thing to remember here when you think resources, be careful not to think too narrowly. Resources covers critical raw materials whether it's copper, nickel, aluminum, all that is critical and all that’s going to be in scarce supply. Resources includes agriculture, precision agriculture, smart use of fertiliser. It includes forestry and then resources includes new science.
Lomnitzer: As renewable generation grows, fossil fuels are going to need to be significantly reduced from around 80% of the current energy mix to less than half by 2050. Within energy, we see really attractive opportunities in companies that are selling the picks and shovels that facilitate production and development of renewable energy. As an example, within wind energy, we're looking at potential in manufacturers of wind turbines and blades. In mining and infrastructure and technology, a lot of commodity is going to be required to enable decarbonisation. For example, the amount of copper used in a battery electric vehicle is 5 to 10 times higher than that used in a conventional combustion engine vehicle. Agriculture is important because almost 10 billion people are going to be living on this planet by 2050 and that means we're going to need to produce more food in the next 40 years than we've harvested in the last 8,000 years.
In terms of roadblocks, the path of decarbonisation is not entirely straightforward. In our view, there are three obstacles to decarbonisation, all of which look like they're being resolved.
Gerrard: The roadblock used to be that renewable energy was way, way more expensive than fossil fuels. New technology plus the scale of these massive renewable industries has meant that it's cheaper now to produce the energy that way than it is using fossil fuels. So that roadblock is gone.
Lomnitzer: The second obstacle is global cooperation. It would be great to have a global carbon price. We don't have one at the moment, but a patchwork of global carbon markets or, sorry, geographic carbon markets. But again, we're seeing things change here and the playing field is somewhat leveling out. The third obstacle to rolling out of decarbonisation lies in measurement. And in particular, having sufficient, accurate, consistently measured data to assure ourselves that the companies are doing what they say they're going to do. On this front fortunately, things are improving, but there is a way to go.
In our view, an active approach to investing in this space is best suited to identify resources companies that are reducing their carbon footprints or contributing to decarbonisation and driving what to us appears to be an attractive outlook for the sector for years to come. Through the process of decarbonisation, company engagement and supplier requirements, many natural resources companies are actively seeking to reduce their carbon footprints and are focusing their efforts towards this end goal.
These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. Any securities, funds, sectors and indices mentioned within this article do not constitute or form part of any offer or solicitation to buy or sell them.
Past performance does not predict future returns. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.
The information in this article does not qualify as an investment recommendation.
The Janus Henderson Horizon Fund (the “Fund”) is a Luxembourg SICAV incorporated on 30 May 1985, managed by Henderson Management S.A. Henderson Management SA may decide to terminate the marketing arrangements of this Collective Investment Scheme in accordance with the appropriate regulation. This is a marketing communication. Please refer to the prospectus of the UCITS and to the KIID before making any final investment decisions.
Shares/Units can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
The Fund is focused towards particular industries or investment themes and may be heavily impacted by factors such as changes in government regulation, increased price competition, technological advancements and other adverse events.
The Fund may use derivatives with the aim of reducing risk or managing the portfolio more efficiently. However this introduces other risks, in particular, that a derivative counterparty may not meet its contractual obligations.
If the Fund holds assets in currencies other than the base currency of the Fund or you invest in a share/unit class of a different currency to the Fund (unless 'hedged'), the value of your investment may be impacted by changes in exchange rates.
Securities within the Fund could become hard to value or to sell at a desired time and price, especially in extreme market conditions when asset prices may be falling, increasing the risk of investment losses.
Some or all of the ongoing charges may be taken from capital, which may erode capital or reduce potential for capital growth.
The Fund could lose money if a counterparty with which the Fund trades becomes unwilling or unable to meet its obligations, or as a result of failure or delay in operational processes or the failure of a third party provider.