How to invest in the energy transition and the circular economy

In the first two episodes we showed the relationship between CO2 emissions, rising temperatures and climate change, how the investments necessary to implement the energy transition and move towards a more sustainable economy are huge and why the world is lagging behind, but also how the results can be seen and are very concrete where things have been done seriously for over 15 years (Europe). And then how companies have well understood the multi-decade business opportunities that the energy transition and the circular economy bring with them, demonstrated by the rapid evolution of new technologies and business models, by the increase in the number of B-Corps in world and by (European) legislation that continues to push in this direction.

Today we close the “triptych” by showing you three investment methodologies that we believe are valid and which are available to those interested in these topics. The panorama is in fact quite broad, ranging from simple ESG filters / “best in class” strategies, super available but also relatively not useful for the final purpose, up to thematic and impact investing which are undoubtedly the most suitable forms.

  1. Listed thematic equity investment: there are numerous funds that ride the theme of energy transition and the circular economy that invest in listed companies active in this field. Bnp Paribas, Swisscanto, Pictet, Schroders, Fidelity, Nordea, Vontobel, RobecoSam, Candriam, Decalia are all asset managers that offer valid products in this area. We consider the topic interesting today, always in a long-term horizon given that we are talking about equity, because the valuations of these companies are low (around 8 Ev/Ebitda as the Schroders graph shows us, on average 30% lower than the overall market) given that the focus is on other themes at the moment (technology, AI, cloud, etc.), and because they are at a discount on their historical valuations (the average discount compared to the maximums reached in 2021 in area 16 is today almost 50%). The complicated vicissitudes of the last 3 years that companies operating in this field have experienced (cost-side problems for wind power due to the increase in metal prices, rapid rise in interest rates which has changed the validation of many renewable projects, delays in the transition to electric means of transport, lack of regulatory support in countries such as the United States, to name a few) may be behind us and conditions are improving.

  1. Unlisted equity investment: closed-end private equity and/or infrastructure funds are an ideal vehicle for investing in the two themes that are close to our hearts given that they naturally have a long-term investment horizon (typically 10 years) that fits well with the times necessary for the energy transition and the necessary changes to our economic models to make them more circular. In terms of number, the products available are fewer, but the firepower is very high given that they are often medium/large sized funds which in some cases reach or exceed 10 billion dollars in assets under management. Some examples of managers in this field are among the big ones Ardian, Brookfield, Blackstone, KKR, Macquarie, Partners Group, while players such as Energy Infrastructure Partners, Impax AM, Mirova, Triodos, Vauban and the Italians Ambienta and Tages are examples of very specialize in the area. Some of these players, including the French Mirova or the English Impax, also offer impact funds which therefore have as their primary objective that of generating an environmental (or social) impact alongside that of economic return. Closed-end private equity or private infrastructure funds are typically reserved for institutional investors or HNWIs also given their illiquidity; today they are in some cases also available to smaller investors through the European ELTIF instrument.
  1. Green, sustainable, social and sustainability linked bonds: here we are talking about investments in bonds with consequently a lower degree of risk, through which a company or a financial institution or a government is financed which will use the funds raised to activities that may have positive impacts on the environment, on the social side, on the reduction of emissions, on the biodiversity side, on the energy efficiency side, on the recycling and recovery of materials side, etc.

This world is in great development with more and more issuance as you can see from the Climate Bond Initiative graph that shows you the emissions made year by year in Europe. 2024 has also started well and should in projection lead to a new absolute record.

There are thousands of emissions, constructed differently given that the standards are still evolving at an international level. It is therefore very important to have a good ability to analyze the emissions statements and verify the objectivity of the targets that the issuers have set themselves (the best today are those based on SBTIs or on targets based on measurable objective scientific criteria) . In my opinion there are therefore two alternatives: use a data provider that carries out an in-depth analysis of each individual issue and here the Italian MainStreet Partners is the market leader or use funds or ETFs that invest in this type of bond, thus delegating the selection is up to the manager.

Stay tuned, in two weeks we will change the subject and talk about active ETFs, the new rapidly expanding category of financial instruments.