How we as investors can help making human lives better
Could the “Great Going Green” be one of the pandemic-inspired tales our grandchildren will remember? We already marvel at clear blue skies without condensation trails, or cities cleared of the blur of toxic fumes. We have discovered the benefits of technology-supported work from home, and exceptionally warm weather in April had some of us dreaming of a higher share of solar in the future energy mix.
While we may be eager to tell a new story, the situation on the ground starts looking eerily familiar. The Covid-19 outbreak brought carbon and nitrogen dioxide levels down globally, but these emissions are rising rapidly again.1 The contrast is stark in Wuhan, the central Chinese metropolis of 11 million people and original epicenter of the pandemic, which is coming back to life after the lockdown. Pollution will remain a problem in China and elsewhere, but we are confident that things will change for the better.
The “decarbonisation” of the economy was a hot topic in the period leading up to the pandemic, and it should gain traction again once the current health crisis is under control. Many observers say now is the time to question the way our economies function. While fundamental changes don’t happen overnight, decisions to make them possible sometimes do. Take Germany’s “Energiewende”, a post-Fukushima ruling to phase out nuclear power and invest into offshore wind farms instead.
We believe there will be a window of opportunity to attach green conditions to the largest state aid since the Great Depression. Car replacement incentives and support for shipping companies and airlines, for example, could come with requirements to reduce greenhouse gas emission. The French government, for instance, has demanded that Air France cut carbon emissions by half by 2030, in return for a 7 billion euro bailout.
Regulation or government stimulus measures are among the factors driving such transformations. Europe seems to have a leg up on other regions in this regard. Brussels lined up the European Green New Deal in 2019,2 an investment program worth 1 trillion euros to “decarbonize” the European economy. The aim is to make the European Union the first climate-neutral block by 2050, and the scheme will partly draw on funds from private investors.3 For all the complexity inherent in the EU’s system, it has a record of pushing through eco-friendly initiatives such as tougher emission standards for cars.
The other driver of change will be innovation, and that is mostly found on the corporate level. We believe there are significant investment opportunities in areas like digitalization, resource efficient industries and “green” buildings that will not only benefit long-term climate ambitions but also increase economic benefits. We have been following several sectors for years (see figure 1), but the pandemic has thrust some of them into the limelight.
The work from home schedules most of us have embraced during lockdown remind us of the benefits of connectivity. An interesting company active in this sector is Germany’s TeamViewer, which offers software for remote control, desktop sharing, online meetings and video conferencing. Its business also includes solutions for managing production and storage of energy from renewable sources.
Automation is another big topic. The mad scramble for medical equipment at the height of the health crisis has demonstrated the fragility of global supply chains. This phenomenon, and the US-Chinese trade conflict, will stimulate a build-up of stocks and some insourcing of production. Moreover, customers increasingly demand tighter environmental and corporate governance standards. The likely reshuffling of some manufacturing processes could generate good business for Daifuku or Kion, two companies active in factory automation, logistic systems or manufacturing equipment.
At the same time, the pandemic hasn’t diminished the allure of most themes we have been following for years. Take building technology. Buildings absorb approximately one-third of all energy production, so lowering their consumption can make a world of a difference. One obvious way to do this is insulating buildings better, but installing energy efficient windows and self-dimming glass manufactured by France-based Saint-Gobain, for example, is equally important. Within the complex of heating, ventilation and air-conditioning systems, heat-pump producers like Sweden-based Nibe Industrier, or makers of energy efficient appliances and smart building controls like France’s Schneider Electric or US-based Itron look set to benefit.
Another example is energy infrastructure. The transition from fossil fuels to renewables requires top-notch power lines. We expect to see significant investments to strengthen and expand the power grid over the next couple of years, and utility companies such as Orsted and cable producers like Prysmian look set to be important players in this market.
The answer to the “green or brown” question seems clear. The world won’t go back to pre-corona times, in our opinion. We may fill up our tanks with cheap petrol in the short-term, but fly less. Companies will want their employees back at their desks, but will also have discovered the benefits of video conferencing and lower travel expenses. Governments will have to shoulder mountains of debt, but may also line up legislation to promote better corporate governance and social standards. Investors, meanwhile, will try to spot the opportunities any green revival should offer.
1. “How coronavirus stalled climate change momentum”, Financial Times, April 14, 2020 https://www.ft.com/content/052923d2-78c2-11ea-af44-daa3def9ae03?accessToken=zwAAAXHlBuLwkc8FKSPSeMIR6tOvRNqj3vmuAw.MEYCIQDiDQvI8LvHJ6VMYvCAVS84bF3S17yaI-6GrIne2AwZ1QIhAI-_zRi4rpNILx5GbnpPMFBUHbcw_XezCzhjV1_YbNhI&sharetype=gift?token=9d945a73-f395-46a9-9c11-2232c13dee8c
2. There is a similar initiative in the US called the Green New Deal supported by the Democrats, but it is red flag for many Republican politicians and business executives. China, for its part, aims to become a more services-based economy, but remains dependent on smokestack industries.
3. “The European Green Deal Investment Plan and Just Transition Mechanism explained,” European Commission – Questions and answers, January 14, 2020.