South Africa benefits from several factors that provide the potential for it to be a future leader in the manufacturing and production of climate solutions. According to the South African Department of Energy, most areas in the country average 2 500 hours of sunshine per year, with an average daily solar radiation level across a year of more than double that of Europe. South Africa also has an abundance of naturally occurring raw materials that can be used in the manufacture of electric vehicles, including lithium, cobalt, nickel, graphite and manganese. And there is government support to reach net zero by 2050, with a heavy emphasis on greening the power sector.

Many SA investment portfolios are exposed to some of these trends by virtue of holdings in domestic mining companies as well as traditional energy companies that will be undertaking a transition in their businesses over time. However, exposure to the globally leading climate solution companies of today is much more limited. These companies offer the prospect of attractive returns with a real-world impact, which if accessed through a highly selective and conviction approach, provide a compelling addition to both domestic and international portfolios.

The structural growth opportunity of a lifetime

Climate change is the single biggest health threat facing humanity, according to the World Health Organisation. The United Nation’s Intergovernmental Panel on Climate Change has warned that to prevent millions of climate change-related deaths, the world must limit global warming to 1.5°C. If we are to get anywhere close to this, there needs to be a significant increase in climate-related finance from current levels.

This climate emergency has resulted in a fast-evolving regulatory and policy backdrop as well as a significant momentum shift in corporate and public attitudes towards climate change. Acting on climate change isn’t just about doing the right thing though. For investors, ‘decarbonisation’ matters because transitioning to a low-carbon economy requires a radical overhaul of everything we do. As the International Energy Agency’s (IEA’s) seminal 2021 report “Net Zero by 2050” highlighted, the transition from a carbon-heavy global economy to one based on clean energy has barely begun. This affords companies that are enabling that transition an extraordinary growth opportunity.

Achieving carbon neutrality by 2050 requires the following milestones to be achieved by 2030, a mere seven years from now:

• A 4x increase in wind and solar capacity
• An 18x increase in electric vehicle (EV) sales
• A 41x increase in annual EV battery production
• US$4 trillion of annual investment in the energy sector alone

That is only part of the getting-to-net-zero story. The IEA’s energy-sector focused report accounts for only about two-thirds of global emissions. Reducing the remaining one-third will require radical changes to agriculture, food production, industrial processes, buildings and more.

All this is changing the risk and return potential of industries and individual companies. Global efforts to cut carbon emissions are driving vast flows of capital, fuelling innovation and creating an enduring tailwind for select companies.

Investing in climate solutions therefore offers unparalleled structural growth opportunities. We believe that companies whose products and services help the global economy to decarbonise have the potential to grow revenues and profits faster than the market average, with the earnings and growth prospects of these companies typically underappreciated by the market.

If appropriately executed, an investment strategy based on this opportunity has the potential to generate compelling returns over the long term while contributing to a positive real-world impact. Importantly, this isn’t prioritising real-world impact at the expense of returns. In our view, these attractive returns are achievable because of this real-world impact.

Accessing this opportunity: it is broader than you think

The climate-solutions investment opportunity set is extremely broad, extending far beyond the wind and solar farms that spring to mind. It also spans companies that are helping to decarbonise the buildings and homes we inhabit, the food we eat, the products we consume and the transport we use. Moreover, it encompasses not just the direct beneficiaries of the energy transition, but the entire related supply chain that needs to be built around them. It is also global, and we believe emerging markets offer significant additional potential for investors in decarbonisation.

This opportunity set can be described as encompassing three pathways to a low carbon future: 1) renewable energy, 2) electrification, and 3) resource efficiency as illustrated below.

Investment opportunities throughout the value chain

Finally, contrary to potential misconception, this isn’t a small/mid-cap play. We find that the types of companies we are seeking for the Ninety One Global Environment Fund, for example – attractive growth with persistent profitability and strong competitive advantages – lead to a large-cap orientation. In fact, approximately 85% of the portfolio was large cap (defined as having a market cap >$10 billion) at the end of last year.

It is not often that an investment opportunity comes along with strong long-term drivers, providing the potential for attractive returns while contributing to a positive real-world impact. Investors should consider exploring investment strategies that invest in the companies driving decarbonisation – or risk missing out on an unprecedented opportunity. DM/BM

By: Deirdre Cooper, Head of Sustainable Equity, Multi-Asset, and Graeme Baker, Portfolio Manager, Multi-Asset at Ninety One