Simpler and cleaner: profitable opportunities from efficiency

As we are bottom-up stock pickers, portfolio allocations to our six investment pillars are essentially an outcome of our investment process. However, looking at how these allocations have evolved over longer periods of time can provide us with some fascinating insights, and highlight some important global trends. One such example is our allocation to the Resource-Efficient Industry pillar, which has significantly increased over recent years and now represents around 40 percent of our portfolio. With such a significant evolvement comes many important questions, such as why we have found this pillar increasingly attractive over recent years and the impact this positioning has on the overall portfolio. In this Viewpoint, we aim to provide some perspective around this positioning and most importantly outline why we believe an allocation to resource efficiency is critical in tackling climate change.

Portfolio positioning and characteristics are those of the strategy’s representative portfolio. This account was selected as we believe it most closely reflects the current portfolio management style of the strategy. Allocations and characteristics subject to change and may differ from those associated with your portfolio. Source: Vontobel, as of 31.12.2024.

Efficiency plays a crucial role in driving global emissions lower

While there is little debate on the role of renewable energy sources in reducing global emissions, the contribution of energy and resource efficiency is frequently underappreciated. Its benefits are often less visible and unmeasured. However, looking at the numbers, efficiency has likely enabled more avoided emissions globally than the generation of renewable power over the past decade. Climate scientists have long argued for the benefits of being efficient when it comes to energy and resource usage, and we believe that this focus on efficiency will continue. Indeed, given the enhanced digitalized age that we live in, it may even accelerate further. Solutions in this space are diverse in nature, backed by impressive levels of technological progress (think about the advancements in AI in recent years), and help to positively impact carbon intense processes across numerous industries. Electrification of transportation, manufacturing processes, and intelligent heating of buildings allow for significant carbon emissions reductions, whereby innovative light-weight materials or high-performance insulation materials further reduce energy needs.

In addition, the election of President Trump in the US has ushered in a period of higher uncertainty when it comes to the future growth rates of renewable energy in the world’s largest economy, which could result in efficiency playing an even larger role in the coming years. Companies providing products and services that help to lower consumption intensity of energy and other resources without hampering quality of processes, could face structural tailwinds as they are often in a good position to reduce environmental footprints while potentially also limiting inflationary pressures.

Who are the enablers of efficiency?

Enablers are crucial to realize efficiency gains and accelerate change. An excellent example of such an enabling technology are semiconductors, where exponential growth in computing performance, combined with gains in energy efficiency and cost deflation drives reductions in energy intensity across many products, and accelerates the expansion of critical green technologies such as solar panels or electric vehicles. Consequently, automotive and industrial electronics, that are key parts of our investment opportunity set, are expected to outgrow not only global GDP but also other areas of the semiconductor market.

Modern semiconductor chips also require electronic design automation tools that enable everything from the design of individual transistors to the development of software before any hardware is built. Addressing any complications from the outset and managing the whole lifecycle with simulation software gains importance as a product’s full lifecycle environmental impact is often determined during the design phase, making early modifications the most sustainable and cost-effective approach.

Efficiency gains are not limited to hardware and software. Modern production equipment facilitates factory, warehouse and process automation, helping to reduce energy consumption, increase precision and speed, and ultimately improve reliability and safety, as well as working conditions. Elsewhere, industrial combustion processes can be improved by using steam or replacing air with oxygen; such industrial gases also play a key role in other environmental applications, such as water treatment or air pollution control.

These different types of enablers are crucial to move the needle and our process has managed to unearth many attractive companies with commercially scalable technologies and proven business models.  However, we don’t believe there is any single solution or silver bullet that can transform our climate to lower carbon or net zero. Breaking down the allocation of the Resource-Efficient pillar, we invest in many different sub-scopes ranging from semiconductors to innovative industrial components and solutions. More traditionally speaking, this currently covers companies from three different GICS sectors and eight countries, ensuring a broad level of diversification.

Renewable energy and efficiency: Two sides of the same coin

The role of renewable energy in a net zero world is undisputed. However, we believe that efficiency also plays a vital role that is often unrecognized and certainly underappreciated. Energy and material prices are highly volatile, and in the longer run tend to increase. Efficiency solutions allow using less for the same output, which significantly de-risks the full lifecycle costs of investments. As we move into a more digitalized economy, the role of efficiency will arguably become more important and therefore represents an important part of our wider investment landscape.