Portfolio Managers Tal Lomnitzer and Tim Gerrard discuss the investment opportunity presented by the global decarbonization effort and the key role natural resources companies will play in the transition to a low-carbon economy.

Key Takeaways

• The potential consequences of climate change require urgent action, and natural resources companies are critical to facilitating the production and development of renewable, low-carbon energy sources.
• The opportunities in the sector go beyond renewable energy, however, with critical raw materials, and agriculture, among others, also playing a key role in the transition to zero carbon.
• In our view, an active approach to investing in this space is best suited to identify resources companies that are contributing to decarbonization and driving what to us appears to be an attractive long-term outlook for the sector.

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Tal Lomnitzer: Zero carbon is important for the global economy. It’s a major investment thematic and there are several reasons why it’s important. First is that global temperatures are rising in tandem with anthropogenic, manmade greenhouse gas emissions. And associated with that, weather is becoming more extreme. It’s anticipated that if global temperatures rise further and they’re not reduced, extreme weather events are going to become more frequent, impacting the availability of food. And if sea levels rise dramatically, which could also happen, that could impact millions of coastal communities, creating economic refugees and migrants. So inequality, social polarization and political upheaval are all the potential consequences of not transitioning to zero carbon.

In the fight against climate change, we’ve now seen over 120 companies pledge to reach net zero by 2050. That’s been complemented by more than 100 regional governments, 800 cities and over 1,500 companies committing to net zero by 2050.

Tim Gerrard: Over the last 20 years, progressively, governments, consumers have recognized that the climate is changing and there’s a final agreement that it’s changing so much that urgent action is required to decarbonize. What does this mean for investors? Well, it means a couple of things. There’s something like $140 trillion worth of opportunities between now and 2050 as the world decarbonizes. That’s an incredible amount of money, it’s a lot of opportunity.

I think the thing to remember here when you think resources, be careful not to think too narrowly. Resources covers critical raw materials whether it’s copper, nickel, aluminum, all that is critical and all that’s going to be in scarce supply. Resources includes agriculture, precision agriculture, smart use of fertilizer. It includes forestry and then resources includes new science.

Lomnitzer: As renewable generation grows, fossil fuels are going to need to be significantly reduced from around 80% of the current energy mix to less than half by 2050. Within energy, we see really attractive opportunities in companies that are selling the picks and shovels that facilitate production and development of renewable energy. As an example, within wind energy, we’re looking at potential in manufacturers of wind turbines and blades. In mining and infrastructure and technology, a lot of commodity is going to be required to enable decarbonization. For example, the amount of copper used in a battery electric vehicle is 5 to 10 times higher than that used in a conventional combustion engine vehicle. Agriculture is important because almost 10 billion people are going to be living on this planet by 2050 and that means we’re going to need to produce more food in the next 40 years than we’ve harvested in the last 8,000 years.

In terms of roadblocks, the path of decarbonization is not entirely straightforward. In our view, there are three obstacles to decarbonization, all of which look like they’re being resolved.

Gerrard: The roadblock used to be that renewable energy was way, way more expensive than fossil fuels. New technology plus the scale of these massive renewable industries has meant that it’s cheaper now to produce the energy that way than it is using fossil fuels. So that roadblock is gone.

Lomnitzer: The second obstacle is global cooperation. It would be great to have a global carbon price. We don’t have one at the moment, but a patchwork of global carbon markets or, sorry, geographic carbon markets. But again, we’re seeing things change here and the playing field is somewhat leveling out. The third obstacle to rolling out of decarbonization lies in measurement. And in particular, having sufficient, accurate, consistently measured data to assure ourselves that the companies are doing what they say they’re going to do. On this front fortunately, things are improving, but there is a way to go.

In our view, an active approach to investing in this space is best suited to identify resources companies that are reducing their carbon footprints or contributing to decarbonization and driving what to us appears to be an attractive outlook for the sector for years to come. Through the process of decarbonization, company engagement and supplier requirements, many natural resources companies are actively seeking to reduce their carbon footprints and are focusing their efforts towards this end goal.

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