The need to decarbonise the planet is a major thematic of our time, and Climate represents a significant long term investment opportunity.
At Munro Partners, our Climate strategy aims to identify the long-term structural growth trend winners associated with tackling climate change and decarbonising the global economy.
This is a generational challenge.
Funding this "climate epidemic" is going to be extremely costly
Despite the world battling with the COVID-19 pandemic throughout 2020 and 2021, it coincided with further progress on a separate global challenge – The Race to Net Zero – as countries, councils, and more companies announced zero carbon targets by 2050.
It’s important to note that the “zero carbon” 2050 target does not mean emitting any more carbon; it means emitting no carbon.
However, funding this climate epidemic is going to be extremely costly.
Given the ambitious carbon goals now being announced, we think it will cost over US$50 trillion between now and 2050.
Climate is at the very start of its S-curve, with many new climate technologies still early in the adoption phase and therefore having the potential for significant growth.
Globally, fighting climate change is about far more than just clean energy and electric vehicles.
We see four structural categories from which will emerge the climate success stories that will enable the decarbonisation of our planet:
As your global growth investor, we aim to find those companies most likely to benefit from global decarbonisation and best positioned to win. The strategy specifically targets global companies whose earnings prospects should improve with the increased investment and focus on decarbonisation.
As always, at the individual stock level, there will be only a handful of climate winners and a long tail of losers. Below are 10 companies we think are currently best positioned to champion the planet’s need to reach net-zero and ‘save the world’.
Tesla (TSLA) – clean transport
US based Tesla Motors is the global leader in Electric Vehicles with EV penetration being driven by the need to decarbonise the planet. EVs are taking share in one of the world's largest Total Addressable Markets by sales (all auto sales).
The company also expects to expand by introducing new EV models and moving into lower price points. Beyond auto sales, the company also has opportunities in energy storage, insurance, mobility, network services, as well as providing power train solutions to 3rd parties.
Onsemi plays an essential role in the electrification of automobiles and infrastructure in the global pursuit of a renewable future. This process of decarbonisation is significantly dependent on electrification. As electrical demand grows, so does the need to manage power more efficiently.
Onsemi is this enabler of efficient electrification through semiconductor chips. Their power semiconductors drive efficient electrical control whilst sensing semiconductors support the process through electrical measurement. Combined these areas represent a USD$76bn revenue opportunity. As the application set widens and the content per application expands, Onsemi is expected to outgrow its underlying end market.
US-based NextEra Energy is a leading clean energy provider with approximately 55 GWs of generating capacity, composed principally of renewable, emission-free nuclear, gas-fired, and battery storage.
While NextEra operates regulated electric utilities serving approximately 5.5 million customers in Florida, it is also the world's largest generator of renewable wind, solar, and battery storage through the NextEra Energy Resources business.
US renewables capacity currently totals ~200 GW. This provides NextEra with a multi-decade growth opportunity. NextEra would also be a beneficiary of Biden possibly passing some element of his climate agenda (i.e. a slimmed-down Build Back Better legislation) which is focused on supporting the US clean energy sector.
Danish Vestas is the leading Onshore Wind turbine manufacturer globally with around 35% market share (ex-China). We expect continued Onshore Wind growth derived from more countries rolling out net-zero targets as well as increased interest in renewables from industry and business.
Within Vestas, the growing Services business (maintenance) improves the business' margin profile and provides strong visibility into future earnings. The company recently bought out its JV partner in Offshore Wind turbines, giving it an improved chance of competing in this fast-growing area of the industry.
American Electric Power provides generation, transmission, and distribution services to over 5.4 million retail customers in 11 states that cut across a broad swath of land from Texas to Virginia and Michigan.
They have recently embarked on a transition from legacy coal generation assets to renewables, with a target for this clean energy portion to reach 50% of generation by 2030 (from 7% today).
RWE is a large German utility that has transformed itself into one of the world's leading renewable developers, #2 in offshore wind and a significant onshore and solar portfolio.
We strongly believe that this will lead to the unwinding of an ESG discount, and this coupled with further earnings growth because of the EU50bn gross new energy investments planned over 2021-2030 should lead to share price appreciation.
Kingspan (KSP) is a leading producer of insulation products and building envelope solutions. The company is domiciled in Ireland, operates across 166 manufacturing facilities and sells in 70 countries globally.
Buildings account for 26% of total global CO2, where insulation serves as one of the easiest and most cost-effective ways of enhancing energy efficiency and decarbonising building stock. In addition to decarbonisation, KSP increasingly captures new growth opportunities in areas such as electric vehicle facilities, logistics and data centres.
As a ‘best in-class’ efficiency leader, valuation is rich yet will continue to find support from a green premium. Coupled with consistent organic growth and an accretive M&A opportunity set, the stock will continue to compound growth longer term.
SIG Combibloc is a leading global manufacturer of aseptic carton packaging solutions for the liquid food and beverage industry.
It is the clear number two in a highly attractive duopoly market to Tetra Pak.
The company pursues a so-called razor-blade business model, whereby it leases or sells highly engineered filling machines on attractive terms while securing supply agreements for laminated and printed carton sleeves over the lifetime of the filler. We see SIG as a key enabler of the shift from single-use plastics to recyclable carton packaging.
Waste Management is the largest provider of municipal solid waste services in North America and is pioneering a circular economy. Their traditional solid waste business provides collection, transfer and disposal services via an extensive national network of 268 landfills.
As one of the major US landowners, they have benefited from recent appreciation in tipping fees due to the scarcity of space suitable for landfills. They also generate energy from waste that they use to power their fleet and are a leading recycler of cardboard, paper, glass, plastic and metal, working closely alongside CPG companies to increase their recycled content.
Nutrien is the world’s largest integrated provider of crop inputs and services. The company plays an essential role in “Feeding the Future” through yield-enhancing fertilisers and crop inputs. Nutrien is the world’s largest potash producer, second largest phosphate producer and third-largest in global nitrogen.
They run the world’s largest Ag Retail network which serves over 500,000 growers across 14 regions globally. Long term they’re expected to benefit from food security, resource scarcity and the shift to sustainable agriculture.
With climate change mitigation now high on the agenda for governments, corporates and investors, it’s clear that huge investment opportunities will emerge in new technologies across the energy and industry sectors.
This process is closer to the start than the end and opens the door to a myriad of investment opportunities.
There will be winners and losers of course – and some stocks may get ahead of themselves in the short term. But the big structural climate winners that we find are likely to keep winning long into the future.
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