Climate change and decarbonisation are now firmly on the agendas of most major global economies. Most major industrialised countries, as well as most major corporations and significant global investors, have already committed to eliminating net carbon emissions by 2050. Australia announced its plan to deliver net zero emissions by 2050 late last year.
Decarbonisation of the planet is not just good for our survival, but it also offers a wide variety of investment opportunities that extend well beyond alternative renewable energy sources.
In 2020, global investment in the transition to low-carbon energy exceeded $US500 billion for the first time. That was an increase of 9% on the previous year and came despite the disruption caused by the COVID-19 pandemic.
Given the ambitious carbon goals now being announced by governments around the world, Munro Partners forecasts the transition to decarbonisation will require an investment of more than $US50 trillion between now and 2050.
Investment will be across 10 main sectors and presents a massive opportunity, in our view. Two of the sectors where we believe a large proportion of investment and growth will be required are energy efficiency and passenger electric vehicles.
At 2% of all passenger vehicles sold in 2021, electric vehicles may account for just a small percentage of total vehicle sales in Australia but that has tripled over the past 12 months, according to the Electric Vehicle Council of Australia.
This trend will continue, as Australia catches up with the rest of the world. Of the $US50 trillion we forecast climate transition to cost globally, we expect that around 18% will be in passenger electric vehicles and clean transport.
The overall number of total vehicles sold may not increase dramatically over the next 25 to 30 years, but electric vehicle penetration of the total market definitely will, and is forecast to grow from less than 10% now, to as much as 50% by 2050, as the chart below shows.
Source: Arete Research (October 2021), Jefferies Research (January 2022), Munro Partners Estimates
The obvious investment for this sector is Tesla but its trades at a Price Earnings (PE) multiple of around 50 times. In Munro’s opinon, there are other cheaper companies in the supply chain.
An example of this is the semiconductor industry, which is quite concentrated around a handful of companies. Most modern vehicles need semiconductors but electric vehicles need twice as much semiconductor content as your average internal combustion engine vehicle, and an autonomous electric vehicle needs twice as much semi-conductor content again.
Companies involved in battery production and charging, and lithium mining and production, are also all set to likely benefit from increasing market penetration of electric vehicles.
A cleaner climate future isn’t just about investing in renewable sources of energy, although that is of course important, it is also about making existing infrastructure as energy efficient as possible.
Munro predicts energy-efficiency enablers to represent nearly a quarter, or 24%, of the total $US50 trillion investment in energy transition.
This is an often overlooked and misunderstood component of the climate transition but there are some “old school” companies in this sector that are experiencing a renewed interest as many companies and households seek to update existing systems.
Companies involved in HVAC retrofitting (heating, ventilation and air conditioning), for example, are likely to be at the forefront of this opportunity set. Any existing office building that was built more than a decade ago, is going to need to retrofit existing systems if they want to reach a 6-star energy rating. Making buildings and factories more energy efficient also assists in those companies’ goals of reaching net zero by 2050.
Another smaller, but important, winner of the energy transition, will be companies involved in transmission and distribution grids, which Munro forecasts will account for a combined 12% of decarbonisation spending.
As the energy transition occurs, transmission and distribution grids need to be effectively hardened and improved. If you've got different power sources and are moving from coal and gas to onshore and offshore wind and solar, then companies involved in grid infrastructure will need to invest and upgrade their systems, likely presenting great investment opportunities.
Climate is at the beginning of what Munro believes will be a long growth runway – or what Munro likes to call the “s-curve”.
As with any new investment opportunity, it is important to try to identify the long-term winners from the energy transition. To do so, examining supply chains for the often overlooked “hidden hero” is a good place to start.