2 compelling ideas within the fastest-growing theme of this decade
Amid the raging bull market of the post-Global Financial Crisis era, the momentum behind decarbonisation - particularly as an investment theme - grew stronger and stronger (as did the flows received by related funds).
But it seems that people care little about the planet when their portfolios are headed south. According to Calastone, flows into Australian-domiciled ESG equity funds dropped more than 85% in the second quarter, with flows falling from $746 million to $109 million.
Despite continuing volatility in markets, flows have returned in force in the third quarter - up 1,241%. So why are investors still backing decarbonisation as the next major theme for the coming decade? And which stocks look particularly attractive right now?
Glad you asked. In this Expert Insights video, Munro Partners' Nick Griffin shares some of the key learnings from the first year of the Munro Climate Change Leaders Fund, why this theme looks more compelling now more than ever, as well as two stocks with some serious clean power (and momentum) behind them.
Note: This interview was filmed on October 13th, 2022. You can watch the video or read the edited transcript below.
What have you learnt from the first year of the Munro Climate Change Leaders Fund?
Nick Griffin: We launched our Climate Fund last year and it is really a thematic fund. It's a fund that's designed to identify and invest in the big winners of decarbonisation. We think it's going to cost somewhere between $50 and $100 trillion to decarbonise the planet and that's $150 to $100 trillion of revenue for the companies that can enable decarbonisation. That's why we launched the fund. We think it's a big opportunity on a multi-year time horizon.
The big learning has been that there's a lot of confusion in the marketplace, quite frankly. Lots of people look at ESG funds, for instance, and they say that the ESG fund is giving them the impact that they want. But in many cases, Microsoft is still the fund's biggest position because it's a "good" corporate citizen. We like Microsoft too, but it doesn't sit in our Climate Fund. The Climate Fund is about enabling decarbonisation and so, what we've learned so far is there's really a difference between an ESG fund and what our product is, which is a thematic fund that's ultimately trying to take advantage of this one great opportunity.
Decarbonisation has been a difficult place to invest in 2022. Are you still backing decarbonisation as the next major theme for the coming decade?
Launching in October 2021 was probably not the best timing, but the fund has actually done quite well relatively, at least so far. If anything, we think that the need to decarbonise and the momentum behind decarbonisation has actually got bigger since we launched the fund. And there are two really big things that have changed.
The first one is that Europe's gone into an energy crisis. Clearly, they can't rely on the Russians for gas any longer. What that means is that they need to shift to renewables faster. In Germany, they are turning back on coal plants - this is the antithesis of what they want to actually do. So we think the European energy crisis actually accelerates the shift to decarbonise, accelerates the shift to energy efficiency, and accelerates the shift to electric vehicles.
The second big thing that's happened since we launched the fund was that US President Joe Biden introduced his Inflation Reduction Act. This is his entire climate policy. They snuck it through a couple of months ago and it's important to flag that this gives them 10 years of credits or subsidies for renewable energy, energy efficiency, electric cars, hydrogen, and for nuclear for the next decade in the US. So basically, it underwrites the US to get to the Paris Agreement.
Now, this is a huge shift. For decades now, there's been shambles of credit systems, like two-year credit systems that expire. This is a decade of regulatory certainty. That is gonna kick off decarbonisation in the largest economy in the world. On top of that, the US will take that to COP27 in Sharm El Sheikh, Egypt, next month in November and basically say to the rest of the world, "Look what we did. What're you going to do?"
So from our point of view, the shift to decarbonise has only accelerated. And so our conviction that this is the next big investment theme is certainly higher. And if anything, the opportunities look better today than they did when we launched the fund a year ago.
What are your favourite stocks right now within the decarbonisation thematic?
The great thing about this space is that it is an energy transition. It's the decarbonisation of the planet. So it throws up lots of opportunities. There are simple opportunities like electric vehicles. Electric vehicles are going to take share from regular vehicles over time. We've been quite public about our love of power semiconductor companies. Even onsemi (NASDAQ: ON), a company we recommended a year ago. It's probably the last company you'd recommend going into an economic slowdown but guess what? It's still up for the year. It's up because the S-curve of electric cars have actually outrun the macro (which is, it's a bad economy). That would be one good idea for semiconductors.
Secondly, within that transition, you have more nuanced ideas. Constellation Energy (NASDAQ: CEG) is the US's largest nuclear generator. Nuclear has an important role to play in the decarbonisation of the planet. You've got to keep your nukes on. That's what the Germans learnt. So in this Inflation Reduction Act, Biden is giving credits to nuclear to make sure that there's a put price or a floor price on nuclear generation so that they never have to close. That makes them more valuable.
Secondly, that nuclear energy can now be used to create what's called pink hydrogen. You know, if you want hydrogen, hydrogen has to be made with renewable energy. The biggest source of renewable energy is nuclear.
Thirdly, where are you gonna build a new nuclear plant in the world? There's really only one place you can build one, and that is next to a current one. So the people who have those nuclear facilities have that capability.
And lastly, which is amazing to us - Microsoft is trying to hit their net zero targets that they promised to investors in those ESG funds that I talked about. How do they do that? They buy renewable energy from Constellation Energy, but they pay a premium for it. Power is the most commoditised product in the world. And you now have to pay a big premium for clean power, so you can advertise that to your clients.
This is where the world is shifting. These are just some of the opportunities that are being thrown up and that's why we really like this product.
Want to learn more?
Munro Partners is a global growth equities manager. Munro invests alongside clients to benefit from some of the key structural changes that are occurring in our world today. To find out more, visit their website.
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