The global need to invest in de-carbonisation efforts is clear. Carbon and other greenhouse gas emissions from human civilisation are warming the global climate and a massive effort is required to de-carbonise supply chains and our energy systems.
Governments in many countries are planning or already implementing major fiscal support packages to accelerate this process, with large subsidy and spending packages aimed at increasing low and zero carbon energy sources, electric vehicles, and to encourage more environmentally friendly processes across a range of industries.
Businesses with technologies and offering products / services that can aid in this process will be beneficiaries of this spending for many years. This is an obvious place for investors to search for long-term investment opportunities. If we can buy the beneficiaries of climate change mitigation spending today, we can benefit from many years of revenue and profit growth and see our investment returns grow.
This is the idea in practice, but in reality, it is much more complicated.
A good example is in the wind industry. Wind power is a renewable, green source of energy. There have been big buildouts of onshore and offshore wind in Asia, Europe, and North America, and it is now a well-established industry. Further, industry and energy research forecasts predict that we will need a 10x increase in wind power build-out plans to meet requirements to de-carbonise energy systems in the coming decade. Meanwhile government subsidies support the industry and many investors from different sectors have been pouring money into the space.
Despite all the above, the industry over the past two years has been plagued with cost overruns, cancelled projects, delays in connecting wind farms lasting years in some cases, and share prices of related stocks have been poor performers.
Higher interest rates and input cost inflation have put pressure on margins of turbine suppliers and wind farm operators, where margins were already low. Bottlenecks in supply chains and poorly structured supply contracts between suppliers and operators further are weighing on the sector. These issues will be resolved eventually and companies in the industry will stabilise at mature profit margins, but in the meantime, it will be a volatile ride for investors in the sector.
The solar industry has been through similar gyrations in the past, as has the electric car sector since 2021, with many previously high-flying EV companies suffering from major declines in share prices.
The lesson here for investors is that investing in a long-term structural trend like climate change mitigation requires three things for success: (i) focus on the details, (ii) patience, and (iii) a willingness to break with consensus.
Blindly investing in renewables, for example, because of the likely growth in the size of the industry is not enough. We must understand the economics of the individual products, industry dynamics, and take a view on how this will play out over the long-term. In the case of offshore wind, we think this will be an industry that will experience strong growth and success for some specific suppliers, but it will take years before we see stability in the industry as it adapts to the headwinds it currently faces. Making investments in this space today requires investors who are willing to hold-on for many years.
At the same time, investors at the institutional and retail level alike, have missed out on strong returns in the nuclear power supply chain over the past two years because of a fear of breaking with consensus. Despite the strong green credentials of nuclear power and increasing acceptance around the world that climate change mitigation will require big buildouts of new nuclear power, the investment community has largely shunned it in recent years, instead focussing on pouring money into EV and renewables investments which have been poor performers since 2021.
We think the combination of a focus on details, the patience to own investments in climate change mitigation for the long-term, and a willingness to own businesses offering solutions that will work (despite the sentiment towards them), are a strong combination for investing successfully in this major structural trend.
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