The fund investing hundreds of billions of dollars every year in climate finance

FIFI PETERS: Ninety One has lodged an application to the Financial Sector Conduct Authority here in South Africa for its popular Global Environment Fund to be registered as a rand-denominated feeder fund in the country. It is a fund that helps its investors balance the climate risk in their portfolio by investing in companies that are transitioning to a low-carbon future.

With us to talk more about the fund is Deirdre Cooper, co-portfolio manager of the fund and head of Sustainable Equity at Ninety One. Deirdre, thanks so much for your time. First of all, let’s start with the basics. Why is this Global Environment Fund so popular?

DEIRDRE COOPER: The Global Environment Fund invests in the companies that are the solution providers for climate change. Globally we invest today five-, six-, seven hundred billion dollars every year in climate finance.

If the world is to transition to a net-zero economy, which we really believe will happen – it won’t happen linearly – that’s absolutely the direction of travel driven by regulation, driven by technological change, driven by individuals making decisions in their own life to buy products that are more sustainable. Then that’s six/seven hundred billion needs to grow to somewhere between four and six trillion dollars every year.

So that’s really why we believe that investing in a concentrated portfolio of climate-solution providers allows, first of all, investors to hedge that climate risk, so to offset some of those investments they might have that really don’t perform quite so well as we transition, but more importantly to give those investors access to a really attractive, high structural growth investment opportunity that has the ability to outperform as the pace of decarbonisation accelerates.

FIFI PETERS: What is the investment philosophy of the fund?

DEIRDRE COOPER: The fund really believes, as I touched on earlier, that the world is moving towards a low-carbon economy, and there’s a number of reasons behind that.

Part of it is regulation. You might have seen the US recently passed a really important bill called the Inflation Reduction Act. In spite of its name, that’s really a climate-change bill. The big point of that is to incentivise investment in things like renewable energy, in electric cars, and in energy efficiency to move the US towards a low-carbon economy.

Here in Europe we have ……2:33 The climate agenda in Europe has actually accelerated recently post the Russian invasion of Ukraine, massive shortages of gas – Europe is very, very reliant on Russia for its energy supply. That 30%, 40% of gas in Europe comes from Russia. So as a result the investment in renewable energy in a low-carbon economy is driven not only by climate, but also by that need for energy security.

Similarly in China, as the Chinese government thinks about stimulus, thinks about infrastructure stimulus, ç is a really big part of that infrastructure investment – whether it’s, again, clean electricity or investment in grid, but also investment in low-carbon transportation. So in China at the moment, for example, almost a third of all cars sold are electric cars. So China’s leading the world in the electrification of transport.

So it’s not a one-country or even a one-region phenomenon. It’s something that we see all over the world. Our strategy believes that that’s going to accelerate. Therefore, as I touched on at the beginning, those companies that are exposed to that decarbonisation-growth tailwind, those companies have the ability to outperform global equity, driven by that structural tailwind and to deliver a very different performance footprint, one that isn’t really impacted as much by fitness in GDP, but is rather impacted by the pace of decarbonisation.

FIFI PETERS: So sustainability is a big theme presently, and likely to remain a big theme even tomorrow. What then sets your fund apart from other funds that also operate under a sustainability theme?

DEIRDRE COOPER: When you have a proprietary methodology – we work together with the Carbon Disclosure Project, which is the biggest non-profit organisation in this area – that allows us to create a bespoke universe of the climate-solution providers. So, unlike the tech sector or the healthcare sector, there is no one easily accessible definition in order for investors to allocate those companies that will outperform as we start to decarbonize more quickly.

So it’s a bit of a proprietary way of finding those companies. We access a universe looking at the carbon data, so finding the companies that have products and services that have worked.…..4:57 carbon. So that allows us to find companies that you might not normally think were really going to outperform and decarbonise more quickly. We see more attractive valuations in some of those more undiscovered areas. And it also allows us to report on the impact of the companies in a really systematic manner. So for every single company, every year, we report on how the company is reducing its own emissions. And then we also report the positive benefit of its products and services.

FIFI PETERS: Wherein are you seeing opportunity presently for your fund?

DEIRDRE COOPER: We see opportunity across a really wide variety of areas. We see some really interesting companies, for example, in China. We own some companies in China that are very active in the electric-car value chain. I touched on, earlier, the fact that almost a third of new cars sold to China at the moment are electric. We own a company [Huichee??…5:50] Intelligent (Wuxi Lead Intelligent Equipment) that makes the machines to make batteries for electric cars. So every time an automaker wants to grow their percentage of electric cars, they need to invest in machines to make batteries. The lithium-mine batteries are sitting with a bottleneck in that value chain.

We also own a company called Zhejiang Sanhua Intelligent Controls that makes the heat……6:07 management for those batteries. So making sure that they stay safe is really important, and that again is a critical component.

In other areas that you mightn’t necessarily immediately think of, we own a company in the UK called Croda, that makes bio-based chemicals that go into more sustainable consumer products. L’Oréal is one of their biggest customers. L’Oréal wants to make sure that over the next five years or so everything that they sell is bio-based and sustainable, and Croda is their key partner in delivering on that.

We own a company in Denmark called Novozymes, that similarly is the world leader in manufacturing enzymes. Enzymes are used to allow processes to run at lower temperatures. So they have solutions for consumer products, for industrial companies, and also for agriculture and more sustainable fertilisers and other agricultural products.

So it’s a really broad range of different types of companies. Some are a little earlier stage, like [Pushi Leeden??] ……7:07, the company that makes the machines for electric car batteries that was founded just over a decade ago to much more established, more defensive companies like Tutilities……?, like Nextera Energy in the US, which is the largest owner of wind and solar generation in the world, but is a really defensive, regulated business that has delivered through many cycles.

That allows us to build a diversified portfolio across different regions and types of companies.

FIFI PETERS: How would you describe the current pace of transition towards, as some say the Ukraine conflict and the skyrocketing energy prices that followed have kind of slowed that transition. We have a lot more countries using coal right now than they probably would’ve liked to before the war broke out. But what is your view? And do you think the Ukraine conflict and soaring inflation around the world have slowed or even diverted the transition to net zero?

DEIRDRE COOPER: Absolutely not. In the short term – and this is important – it will mean that emissions will go up. And the reason for that is that they’re switching from gas to coal. So there’s no question that this is bad from a climate perspective, as Europe tries to replace, as I said, 30 or 40%, depending on the period of the gas ……8:32? in Europe comes from Russia. That gas is no longer flowing. The Russians have turned off the tap.

So Europe is dealing with that in two ways. One is demand reduction, and the other one is using coal instead. Coal is much more carbon-intensive than gas. So all emissions are going up. But the pace of decarbonisation is accelerating because an investment in energy efficiency that perhaps used to take three or five years to get your money back, now you have payback in a year. The relative cost of renewable energy versus fossil fuels used to be maybe 10 or 15% cheaper in Europe to generate electricity from solar. Russia is using the electricity grid. Now it’s like 75% cheaper, because where those energy prices are.

So if you look across all the various areas that we invest in, higher energy prices mean that the transition is now an economic transition, as well as a climate transition.

It also means, as I said, that the energy security element of this discussion has become much more important. Europe wants to transition, not just because they want to do the right thing from a climate perspective, but because they need to find a way to not be reliant on imported fuels. And that is also the case in other parts of the world. Gas isn’t found easily in every area. China doesn’t have a lot of domestic natural gas. And I think this crisis has led countries all over the world to realise that they need to control their energy supply. And of course the wind and the sun are typically not imported.

FIFI PETERS: Well, thanks for stating the facts as you are seeing them right now, Deirdre. We’ll leave it there for now. Deirdre Cooper is co-portfolio manager of the Ninety One Global Environment Fund, as well as the head of Sustainable Equity at the company.

Brought to you by Ninety One. 

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