Net zero: a once-in-a-lifetime investment opportunity?
More than 120 countries have pledged to reach net zero carbon emissions by around 2050, along with numerous regional governments, cities and companies. Some countries have even brought their deadlines forward amid greater urgency to address climate change.
Investment is vital to success
Trillions of dollars will be needed to support and enable the transition to a lower carbon future, creating a once-in-a-lifetime investment cycle across a wide range of sectors. At the forefront will be companies in the energy, mining and agricultural sectors – those focused on natural resources – operating at the heart of sustainable development and decarbonisation.
Looking at the energy sector alone brings the magnitude of this investment into sharp focus. Investment bank UBS estimates around US$140 trillion is needed by 2050 to decarbonise the world’s energy supply.
Chart 1: Annual investment needed to decarbonise energy supply
Adding to the enormity of the opportunity is that, in 2050, the world’s population will be 20% bigger than it is today. That means an additional two billion people to house, feed, clothe and transport – all of which contribute to emissions that will need to be mitigated.
Natural resources are vital to the transition
Parts of the natural resources sector are far from carbon neutral. But we believe many companies can drive a level of carbon reduction across the global economy that eclipses their emissions footprint.
For example, operating a lithium mine generates emissions, yet as a battery mineral, lithium supports significant decarbonisation by providing the raw materials used to power electric vehicles and store renewable energy.
We see five broad decarbonisation investment themes, each with strong tail winds as we move to 2050:
The switch from fossil fuels to renewables is the single biggest contributor to carbon reduction in our view. We expect vastly more offshore wind, solar and hydroelectric facilities driving decarbonisation of the power grid and accelerating the move into zero carbon hydrogen.
The providers of electric vehicle and battery raw materials – copper, nickel, lithium, steel and aluminium are enabling this transition. The economics for these companies are strong and if mass take-up of renewables and electronic vehicles occurs, resource supply constraints could see many years of elevated commodity prices and excess returns.
The creation of a viable circular economy, where waste is recycled into materials to produce new products, rather than sent to landfill, will make a significant contribution to carbon avoidance. This will result in fewer emissions per unit produced, as well as overall waste reduction.
Agribusiness has a huge role to play in decarbonisation. On the negative side, the carbon emitted by the beef industry is 10 times higher than some fish alternatives and 100 times higher than legumes. There is also a growing realisation that carbon emissions can be minimised via improved land management, including less land clearing.
Carbon capture, storage and utilisation is still in its infancy, but is expected to see rapid growth as a means to dramatically reduce industrial emissions. Other methods to reduce emissions, such as planting trees to sequester carbon, may also increase during a period where the value of carbon credits is likely to grow.
A multi-decade runway lies ahead
The outlook for the natural resources sector and its potential to change the world for the better is incredibly exciting. This is a transition that will require investment and innovation at an immense scale.
Invest in the transition to net zero
Our new active ETF, the Janus Henderson Net Zero Transition Resources Active ETF (Managed Fund) (ASX:JZRO) offers access to this multi-trillion dollar investment thematic. It invests in companies all over the world that are enabling the transition to a net-zero carbon emission future. Visit our website or the fund profile below to learn more.
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Tim Gerrard is a Senior Investment Analyst at Janus Henderson Investors, a position he has held since 2015 when Henderson acquired 90 West Asset Management. Prior to joining 90 West, Tim worked for Lonsec Securities conducting sell-side research...