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Green energy transformation: a megatrend with attractive investment opportunities

If society is to resolve its climate challenges, we need to accelerate the provision of renewable energy. This will create attractive new business and investment opportunities, says the investment team behind the Global Sustainable Future investment fund.

When governments, US states or the EU set ambitious goals for cutting CO2 emissions, they spark a wave of green innovation across the business community to supply technology that can resolve global climate challenges. Companies that can ride that green wave make for interesting investments and could create value for us as shareholders, according to Simon Christensen. He is co-lead and chief portfolio manager in the team behind the fund Global Sustainable Future, which invests in companies that can help drive society in a green direction.

“Political climate ambitions are adding a surge of momentum to the green transition, which is creating huge growth opportunities for climate-related companies and a financial incentive to develop climate technologies.”Simon Christensen, co-lead and chief portfolio manager

Climate as an investment theme

Achieving our global climate ambitions will require massive financing of and investment in green projects, says Martin Slipsager Frandsen, co-lead and senior portfolio manager in the fund team. He notes that the OECD and the US Environmental Protection Agency estimate the annual financing requirement for projects that support the Paris Agreement will increase almost five-fold from around USD 500 billion in 2020 to around USD 2,250 billion between 2025 and 2031 – which underlines the commercial potential for companies with green solutions.

“Climate stability is one of the main themes in our fund, where we focus on investing in companies leading the green transition and supplying solutions that can help society achieve the target of being CO2-neutral by 2050. They are companies that contribute to the UN Sustainable Development Goals concerning renewable energy and the development of sustainable infrastructure and innovation. Through detailed research, we arrive at those companies that are best positioned to address the global climate challenge and which we expect will share in an aspect of economic growth that other companies will not.” Martin Slipsager Frandsen, co-lead and senior portfolio manager

Mature and competitive market

The cost of renewable energy has fallen dramatically in recent years to the point where it can now compete with fossil fuels in many parts of the world. The cost of green energy is expected to fall even more in the coming years, which will increasingly speed up the transition from black to green energy. For Simon Christensen, this trend simply underlines that moving in a green direction makes good business sense – and has a positive effect on the opportunities for investors to earn a return.

“The green transition will only experience stronger and stronger tailwinds in the coming years, which will have a positive economic effect on the many industries necessary for the transition. That is why we invest broadly in different types of companies, including those in renewable energy, like wind turbine companies, or companies that produce copper, which is vital to the green electrification of the economy. We also focus on investing in companies in the financial sector who supply the capital needed to transition to a CO2-neutral world,” adds Martin Slipsager Frandsen.

Driving forces of the green transition

Driving forces of the green transition. The team behind Global Sustainable Future highlights three particular sectors as being the fundamental drivers of the green transition and which are attractive from an investment perspective.

  • Climate technologies

    Renewable energy has to be massively expanded if we are to transition from a black to a green economy. That requires new solar and wind parks along with the upgrading and expansion of our energy infrastructure, so we are able to integrate green energy into the power grid. Better infrastructure is also required to store surplus solar and wind power, so society can draw on green power as required. Hence, we need to create a flexible energy system with a focus on upgrading energy infrastructure or developing battery and hydrogen technologies. The fund invests in Avangrid, for example, a leading US renewable energy company. Avangrid plans to produce 20 GW of solar and wind energy, which will provide power to more than 11.5 million homes, and the company is upgrading and building new infrastructure so that renewable energy can reach consumers. In addition, Avangrid is building infrastructure and solutions for electric cars and green hydrogen, which are important elements in creating a climate-friendly transport sector.

  • Raw materials for the green transition

    A great many raw materials are needed to produce climate technology. As more wind turbines, solar panels and batteries are produced, so the pressure on and demand for raw materials increases. The fund invests in mining company Antofagasta, which produces copper, one of the key raw materials for a successful green transition. Four to six times as much copper is needed to produce energy from wind turbines and solar panels as conventional energy, while four times as much copper is used to produce electric cars compared to conventional cars. Large amounts of copper are also used in energy infrastructure, such as charging stations for electric cars, energy storage facilities for renewable energy and in electrical cables and transistors that can handle power generated from renewables. Antofagasta has also set ambitious goals for reducing the environmental and climate impact of its copper production. For example, the company has a goal of only using renewable energy in its mining operations from 2022.

  • Financing

    Huge investments are required if we are to transition global energy consumption to renewables. And if companies are to be in a position to make the necessary investments in green energy and infrastructure, then that will require financing, and here the banks and financial markets will play a key role. The OECD, for example, expects that bank lending to projects that support the Paris Agreement will increase to around USD 600 billion a year in the 2030s. Along with green bonds, where banks also help facilitate issuance, financing will play a key role in providing companies with the financial muscle to invest in wind, solar and infrastructure projects, energy-efficient property or to reduce the climate impact of transport, food production, water infrastructure or waste management. Furthermore, several banks are in the process of setting targets for how much CO2 their loans to companies may emit. This contributes to companies focusing more on reducing their CO2 emissions in order to be able to finance their business via the banks. The fund has, for example, invested in Toronto Dominion Bank, which is the first North American bank with the ambition that their loans to companies may not emit CO2 by 2050 and should live up to the climate goals of the Paris Agreement. In addition, the bank has a goal of facilitating USD 100 billion for CO2-reducing projects. In part this is to be through direct loans to companies that have specifically borrowed money for renewable energy projects.

Looking for the green technologies of the future

The team are also on the lookout for the climate technologies of the future that could become attractive investments in the long term. For example, a major challenge is that some of the green power produced by solar or wind parks gets wasted if not used right away. Moreover, the power produced from the sun and the wind fluctuates with the weather, which means that renewable energy is not always available to meet demand. That creates an unstable energy system and is an impediment to creating a society in green balance. The team has pointed to hydrogen technology as a solution to creating an efficient energy system, as hydrogen enables surplus solar and wind energy to be stored and used later via fuel cells. This would allow society to better utilise green energy and develop a robust and green energy system. Furthermore, hydrogen can also be used as a fuel in the transport sector and in heavy industries, and so could replace fossil energy. Hydrogen technology cannot compete with fossil energy sources at the moment, and we have to be able to use the technology on a much larger scale before it becomes an independent element in the green transition. Many large companies, like Ørsted and Avangrid, are currently investing to develop and mature the technology, and the fund team expects that hydrogen will be a key component in driving society towards being CO2- neutral.

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