Sustainability

The ‘trends’ that inform our long-term investment decisions

11 Aug 2023 5 min read

Each year, our Investments team sets the strategic asset allocation for our portfolio. As part of this exercise, we produce an in-depth research piece on upcoming “secular trends”. In this article, the first of a series, we explain secular trends and their general significance, and take a closer look at the first of the 8 key trends we’ve identified. We’ll be looking at the remaining trends in upcoming articles.

What are secular trends and why do they matter?

Secular trends are evolving trends in the market that take place over a longer time horizon, rather than being seasonal or cyclical.

It’s important for us to understand secular trends when we’re reviewing and setting our long-term strategic asset allocation, as they help us identify investment opportunities and risks.

Key trends ahead

Our secular trend analysis this year looked at:

  1. carbon neutrality
  2. electronic and autonomous vehicles
  3. 3D printing
  4. the metaverse
  5. demographic changes
  6. quantum computing
  7. geopolitics
  8. blockchain, decentralised finance and cryptocurrency
  9. the hydrogen economy.

This article focuses on carbon neutrality.

Carbon neutrality

To keep global temperature increases at less than 2 degrees (preferably 1.5 degrees) above pre-industrial levels by 2050 and avoid the catastrophic impacts of climate change, the world needs to act by switching from fossil fuels to renewables and other forms of energy.

What does the transition to low carbon look like?

Our research shows that to make this transition work, we need to:

  • increase mining extraction to ensure we have the critical minerals and metals to develop the assets needed for the transition1
  • decarbonise our electricity generation, by moving from generating power from fossil fuels to renewable forms such as wind, solar and hydro
  • electrify transport by replacing end-of-life combustion engine vehicles with electric vehicles
  • improve and increase battery storage capabilities
  • develop improved technology for capturing and storing carbon.

There is considerable evidence that this transition is already underway, with governments and the private sector expanding their investments in renewable energy, at the same time as plans are made to phase out coal-fired power plants. Governments and corporates are setting their own emissions targets to align with the science-based targets, and there is increasing regulatory and market pressure for more robust sustainability disclosure across all sectors. There has also been an increase in money flows into ESG-friendly investments.

Forecasters suggest that around USD53.4 trillion2 will be needed to transition the electricity sector to net zero by 2050, including:

  • $20 trillion for renewable energy capacity and expansion
  • $21 trillion for renewable energy grids
  • $3.2 trillion for batteries
  • $8.6 trillion for other power sources and technologies such as nuclear, hydro, geothermal, biomass and gas.

This is more than half the global capital managed by asset managers today,3 representing enormous investment opportunities.

For the world to meet climate targets, obviously these changes and developments need to happen well in advance of 2050. Right now we are in the early stages of this shift. Acknowledging that technology will move at its own pace, we expect there to be significant investment opportunities for us to capitalise on.

Are there risks?

There are certainly geopolitical risks at play, which have the potential to slow the rate of transition. The Russia-Ukraine war has put pressure on energy security, and many countries in the short term, especially those in the European Union, will need to prioritise energy security over the transition to renewable energy simply in order for their countries to function.4

There are also risks surrounding the supply of critical metals and minerals. By 2030 the need for cobalt (used in many batteries) will jump by approximately 70%, while consumption of lithium and nickel (also used in batteries) will be at least 5 times today’s rates.5 More manganese, iron, phosphorus and graphite will be needed, as will more copper for clean energy technologies and to expand electricity grids. Failure to supply these critical metals and minerals could trigger an economic shock comparable to the oil crisis of the 1970s.6 As an investor, we need to keep a close eye on production rates to ensure they are adequate, while also monitoring the risks around worker conditions, health and safety and modern slavery as we extract these minerals as these industries are high risk.

Technological advancement

It’s important to note that some of the technology required for the transition to low carbon is still in its infancy, and is not yet commercially viable, especially the technology around carbon capture and storage. While we are hopeful that in time, with further research and development, they will become commercially viable, we acknowledge the following challenges around the decarbonisation of electricity generation:

  • short-term variability in grid stability as renewable energy generation from an individual asset can fluctuate throughout the day.
  • diurnal mismatch — that is, the changes in energy loads throughout the day
  • seasonal supply shortfall — changes in energy needs according to the seasons.7

Finally, as this is a fast-developing field, there’s also the possibility that future technologies could make current renewable sources redundant.

What does this mean for NGS Super’s portfolio?

We will continue to seek investment opportunities in renewable/green infrastructure via private equity and venture capital.

Noting that we have excluded investments in thermal coal8 and oil and gas exploration and production,9 we will be moving the portfolio to favour investments in critical mineral extraction and development to support the transition to renewable energy.

1 It is important to understand that we can't expand renewable energy to the levels required without a significant increase in critical minerals from the metals and mining sector. The International Energy Agency (IEA) has predicted that the demand for critical minerals is set to quadruple by 2040 (IEA, 2021). Current production rates of some important metals, including copper, are likely to be inadequate to satisfy future demand (N Valckx et al, 2021). While critical mineral demands are set to accelerate, coal demand will likely decline.
2 All dollar amounts are in USD unless otherwise stated.
3 Macquarie Asset Management, 2022.
4 McKinsey, 2022.
5 Janes, Stringer, and Leung, 2021.
6 As above.
7 Macquarie Asset Management, 2022. 8 We restrict holdings with companies that generate more than 30% of their revenue from the distribution, power generation, or extraction of thermal coal. For more information see our Responsible Investment Policy.
9 We restrict holdings with companies who are in the oil and gas exploration and production sector (as defined by the GICS sub-industry for listed investments; for unlisted investments an internal assessment is made). For more information see our Responsible Investment Policy.

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