Of all of the areas of economic and social change that are destined to happen in the coming years, perhaps the best understood by markets right now is renewable energy.
This, says David Harrison, who runs the Rathbones Greenbank Global Sustainability fund, presents its own challenges.
He notes: “Renewables are certainly getting more capital, but the problem is barriers to entry are not that high. We invest in wind energy because the business models are proven there, but in other areas of renewable energy, we don’t invest there now because the valuations are high.”
Harrison says the area of opportunity may be in energy efficiency, that is, companies that make products that enable people and businesses to use less energy, as valuations are less stressed in this part of the market.
He adds: “These are not revolutionary changes [and] so get less hype, and that obviously means the valuations are lower.
“A decade ago wind energy was not competitively priced when compared to hydrocarbons, now wind energy is cheaper. That shows how the market has evolved and also how we are past the point really where this is about regulatory issues.”
Graeme Baker, co-manager of the Ninety One Global Environment fund, says: “With the huge risks created by our ever-warming global climate comes significant structural growth opportunities across key areas of decarbonisation: renewable energy, electrification and resource efficiency.
"To realign the global economy to a net-zero pathway we need to see energy demand decouple from economic growth. A major driver of this will be moving to a more electrified global system as well as one that is more efficient."
He adds: “Resource and energy efficiency are less obvious and more nuanced themes that are yet to be fully appreciated by investors.
"More efficient use of resources is key to decarbonisation, including achieving higher standards of efficiency in many domestic and industrial processes, in buildings and appliances and in agriculture. There are numerous key sub-themes within these categories including industrial electrification, hydrogen economy, waste management and smart grids."
Duncan Goodwin, sustainable equity fund manager at Premier Miton, says: “We see much more to come in decarbonising transport. Biofuels, electric power trains for trucks, ships and beyond, emerging battery technology such as solid-state batteries and, ultimately, hydrogen will all continue to drive down carbon used in transport. Electrification beyond transport into heating and other power will also help improve energy efficiency.
"Fuel cells will enable the decarbonisation of harder-to-reach, power-hungry industries, such as steel and cement, while carbon capture and storage will further decarbonise heavy industry. Finally, less carbon-intensive food and clothing manufacturing are areas that are only now emerging with credible investment opportunities and the potential markets are vast."
Goodwin adds: "The variety of industries and regions in which leading technologies and companies will emerge provides plenty of scope for regional and sector diversification.”
Variety of options needed
In terms of the future of renewable energy, Harrison says a “menu” of options will be needed, with wind, solar and hydrogen used in different countries depending on the climate in each country.
