Why now for the Clean Economy
Since its launch in December 2018, the Clean Economy strategy has generated a total gross return of +92.3% (+30.3% annualised).1 2020 marked a pivotal year for many businesses within the clean economy investment universe. We have seen a clear shift among both corporates and consumers in their collective attitude towards greener production and consumption habits. This trend is also supported by a strong regulatory environment across the European Union (Green Deal), the US (Biden’s administration) and China (carbon neutral commitment by 2060). While we have seen some volatility and profit taking within the clean economy in H1 2021, as well as a rotation from growth to value stocks, we believe we are just at the beginning of this multi-decade growth opportunity.
The Clean Economy strategy is classified under Article 9 of the SFDR2 and has a dual objective of seeking to deliver a long-term financial return, while also aiming to achieve a positive and measurable impact on environmental issues. The strategy favours companies that have demonstrated a strong impact and a clear alignment with the six targeted environmental UN SDGs.3
To identify these companies, the investment team works closely with dedicated ESG4 and Impact Analysts. Their role is to identify impact leaders and contributors within listed equities, through fundamental analysis based on AXA IM’s five impact pillars: Intentionality5 , Materiality6 , Additionality7 , Negative Externality8 and Measurability.9
The threat of climate change has never been greater, but we believe that companies providing innovative solutions that support the energy transition and a reduction of greenhouse gas (GHG) emissions can play a key role in solving this global issue.
Reasons for optimism
Strong regulatory support
Countries with net zero targets together represent around 61% of global emissions, 68% of global GDP and 52% of the global population.10 But there is still a long way to go in the race against climate change. Progress talks will continue at COP26, the UN’s climate change conference, which will be held in Glasgow in November. Moreover, the IPCC11 has recently acknowledged the need to transition from fossil-based fuel reliance towards greener, renewable alternatives to limit global warming to 1.50c by 2030. Their report marked a significant milestone as the first scientific study on climate change since 2013, solidifying the importance of addressing the climate transition.
Policy momentum continues to be positive across all major regions. In Europe, there is a strong commitment towards a green recovery, with the €750bn EU Green Deal setting the ambitious objective of reaching net zero GHG emissions by 2050. In July 2021, the EU released its ‘Fit for 55’ package, a key component of the EU Green Deal, referring to a minimum 55% emission reduction target which the EU has set for 2030. This could mean more stringent environmental targets in existing areas of legislation and covering additional industries such as construction/building operations and aviation falling within the scope of policy.
China has recently committed towards achieving net zero emissions by 2060 as part of its 14th five-year plan. To reach carbon neutrality, China will need to continue its rapid development of clean technologies – already considered world-leading - and shift away from its reliance on fossil fuels.
In the US, following his election, coupled with the Senate win, Joe Biden reaffirmed his plans to build out clean energy infrastructure as part of a broader effort to curb climate change. The $1.2trn framework describes their proposed investment in electric vehicles (EVs) as the largest in history and will include $15bn to be spent across EV infrastructure – such as building 500,000 EV chargers – and electric buses.
This positive momentum from governments around the world is paramount to the energy transition. Crucially, it is estimated that annual investments in renewable energy will need to increase 3-4 times over the next three decades to fulfil key global decarbonisation and climate goals.12
Greener consumption habits
Consumers are swiftly changing their consumption habits and are playing a more active role in reducing GHG emissions – from the provenance of ingredients and raw materials to the environmental impact of finished products and packaging.
One area that has seen considerable pick-up is annual EV sales - in Europe, this figure more than doubled in 2020, with the penetration rate having reached 15% of total European new car sales over Q1 2021.13 Elsewhere, on a three-month rolling basis to April 2021, around 157,000 units were sold in China, representing a +346% year-on-year increase.14
The Tokyo Olympics is another good illustration of the growing greener consumption trend – with Toyota e-palettes and self-driving electric shuttles used to transport athletes and staff around the Olympic site. In addition, the Olympic medals were made using recycled materials from smartphones and laptops donated by the public, while the Olympic Flame was switched on and sustained using hydrogen.
Moreover, consumer interest in clean and sustainable diets is accelerating with a focus on a broad range of issues including food waste, air miles, clean labels, lab-grown meat and organic foods. Flexitarian and vegan diets are also on the rise, illustrated by the 580,000 people in the UK who signed up to the Veganuary challenge in 2021, an increase of +132% since 2019.15
Acceleration in climate-driven investment by corporates
Most mainstream companies such as Amazon*, Microsoft* and Coca-Cola* have pledged ambitious targets in order to reach net-zero carbon emissions, which is translating into increased capex towards clean technologies, including energy storage and energy efficiency services. This follows increasingly stringent regulation around environmental standards and rising consumer demand for more environmentally-friendly products and services.
For example, Amazon, who have pledged to operate with 100% renewable energy by 2025, became the world’s largest corporate purchaser of renewable energy in 2020, reaching 65% across the business. This has been achieved by investing in wind and solar projects worldwide, which includes a 350MW wind farm off the coast of Scotland.16 The energy generated from these projects is used to power Amazon’s corporate offices, fulfilment centres and the data centres used to host Amazon Web Services’ (AWS) public cloud platform. Furthermore, AWS runs multiple initiatives to use water more efficiently and use less drinking water to cool their data centres.
Corporates such as Amazon need innovative clean technology companies which provide products and services to support their energy transition. Nevertheless, there is still a long way to go and more investments in clean technologies will be necessary in order to begin making a difference to the environment. In fact, it is estimated that governments and companies will need to invest at least $92trn by 2050 to reduce emissions fast enough to prevent the worst effects of climate change.17
No assurance can be given that the Clean Economy strategy will be successful. Investors can lose some or all of their capital invested. The Clean Economy strategy is subject to risks including Equity; Emerging Markets; Global Investments; Investments in small and micro capitalisation universe; Investments in specific sectors or asset classes.
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