Why the investment case for decarbonisation makes good sense

>Why the investment case for decarbonisation makes good sense

Interviewer Sean Aylmer: Fresh from the United Nations climate change summit in Glasgow, I’m talking to Maxime Le Floch, investment analyst at responsible investing leader Regnan. Maxime, welcome back to The Point.

Regnan impact investment analyst Maxime Le Floch: Hi, thank you very much.

Interviewer Sean Aylmer: Maxime, does COP26 in Glasgow get a pass mark?

Regnan’s Maxime Le Floch: I think it’s really good progress we’re seeing. Obviously we are nowhere near where we need to be in terms of commitment from countries.

This is what matters for COP (Conference of the Parties to the UN convention on climate change). This is international negotiations where countries are pledging action and trying to coordinate things.

Overall I’m very optimistic that we’ll see an acceleration in action.

First, when you look at the national policies that countries have put together ahead of COP, we were already looking at 2.4 degrees global warming, which is much lower than what we had even back at the Paris agreement in 2015.

So, so there is a ratcheting up and I think this will accelerate.

And one of the reasons is we also have an accelerating cycle whereby those national policy contributions that a country needs to submit – the NDCs (Nationally Determined Contributions which contain a country’s emissions targets strategy) – they used to be on a five-year review cycle, and now they’re on one year.

So already next year countries will have to go back to the COP and show their increased commitments to decarbonisation.

When you look at the texts of the actual Glasgow climate pact, you’ve got a lot more focus on mid-term targets.

It’s not just about net zero by 2050, it’s also about what are you doing now, for the next 10 years, to really implement that into how you produce renewable electricity, how you produce cement, all those industries that need to decarbonise.

I think it’s a good outcome. We’re seeing the US, China in general getting more serious. Of course you still have things that are not perfect. India is trying to push for a watering down of some of the ambitions around coal.

But there is a lot of progress where China and India already are committing to net zero targets. It’s not yet in their national plans, but this is going to accelerate dramatically, I think.

Interviewer Sean Aylmer: Okay, so that sense of urgency has really come out in the last couple of weeks, which is great. Of course, we’ve paid a lot of attention to it – and the media has paid a lot of attention to Glasgow in in the last few weeks in the run up to it. But it’s really just the pointy end of a much deeper trend, isn’t it?

Regnan’s Maxime Le Floch: That’s right. One of the reasons we see an acceleration at this kind of international event is that we’re seeing that the economics of decarbonisation are getting a lot better.

And so countries are saying it just makes good economic sense to develop renewable energy, to have smart grid technology, electric vehicles, batteries and so on.

I think this is what you’re seeing with countries like China, which has very good technologies in all those domains. They’re saying, actually this could be a very interesting economic opportunity for this country to export.

This is what we think also as investors. Those markets are getting increasingly attractive to generate good financial returns while making an impact in terms of decarbonisation.

We just published last week a piece of research on green innovation. We’re saying there’s a deeper trend here – what we expect to be a new innovation cycle – that will be driven by green innovation.

Already, when you look at patent data, you see that the amounts of green patents within all kinds of global patents, is 10 per cent today, up from 6 per cent 20 years ago.

So there is an acceleration and this is creating a lot of opportunity. And we’re seeing that reflected in the outcomes for COP.

Interviewer Sean Aylmer: So bringing that back to the investor, that means there must be opportunities for investors in that area?

Regnan’s Maxime Le Floch: Yes, exactly. One of the major ways of decarbonising is to bring innovation.

There is a very big technological angle to this. Of course it’s not everything, but it’s a very important angle. And it’s particularly important for investors because innovation brings product to markets, brings revenues and bring profitable growth for those companies. So ultimately good returns.

Cement, for instance, is an industry that has not done much radical innovation. In the last decade it’s been mostly process improvements that are quite incremental.

But we’re seeing new approaches. One of the companies in which we invest, Hoffman Green Cement, has brought to the market radical innovation in the sector – a new kind of cement that doesn’t require the production of clinker, which is really where most of the emissions happen for cement.

Because of that, they can cut emissions from cement by a factor of six.

So it’s very, very radical. And you have to bear in mind that cement is a very big part of the carbon equation. If the cement industry was a country, it would be the third-largest emitting country after China and the US.

Interviewer Sean Aylmer: Okay, so what other general areas are of interest where you think there are technology breakthroughs that have happened or are happening?

Regnan’s Maxime Le Floch: One of the areas we are very interested in is the area of industrial software.

ON of the areas we are invested in is simulation software. A company like Ansys in the US is really helping accelerate innovation. It enables you as an R&D engineer to run very complex simulations that involve multiple physics.

You can simulate on a computer what would happen to an electric engine, for instance, depending on different scenarios for heat and pressure in real-world conditions.

[The software] helps those engineers run thousands of simulations on a computer instead of resorting to a physical prototype.

So it makes innovation cheaper, more effective, faster. It enables you to also include from the design phase of products, parameters such as environmental impact. So you can optimise for the carbon footprint of the product from the design phase, as opposed to as an afterthought. This would be a very important piece of accelerating innovation we think.

Podcast

  • Why the investment case for decarbonisation makes good sense

    17 November 2021 - 7 mins

  • Maxime Le Floch

    Analyst

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This podcast is for professional investors only. The information contained within this podcast including any expression of opinion is for information purposes only and is given on the understanding that it is not a recommendation. Views as of date of recording, 17 November 2021, and are subject to change. Past performance is no guarantee of future performance. The value of investments and the income from them may go down as well as up and you may not get back your original investment.

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