Greenlane Renewables Inc T.GRN

Decarbonization - The next multi-decade growth opportunity

[bmbruce]

Decarbonization - The next multi-decade growth opportunity

Just as e-commerce, cloud computing and A.I. can be classified as “multi-decade structural growth opportunities”, Decarbonization has similar attributes that allow it to fall under that same category.

The world has known of climate change for quite some time now, but as more nations begin to see severe weather events caused by it and the trajectory we’re on if we change nothing, it’s rapidly becoming a high priority that many countries and companies are wanting to address.

You might have expected that during the pandemic, businesses would put their sustainability initiatives on hold while they try to tackle the pandemic. But in fact, the opposite is true.

A survey conducted by EY in late 2020 of 200 executives across multiple industries found that 85% of them are more focused on ESG goals than before.

The survey found that Investors are seeking more information on a company’s ESG performance, employees want to work for environmentally conscious companies and customers' expectations for sustainable business practices are becoming more prominent.

It should come as no surprise because unprecedented heatwaves, fires, flooding, droughts and other extreme weather events have brought to light the urgency in which action is needed.

A report by the New Climate Institute and Data-Driven EnviroLab found that from late 2019 to early 2020, the number of companies and governments that have pledged to reach net zero emissions has accelerated rapidly.

The report found that in less than 1 year the number of regions, cities and companies that are pledging net-zero emissions has grown exponentially from 11 regions, 100 cities and 500 companies, to 101 regions, 823 cities and 1541 companies.

Those governments that have pledged (which includes the likes of Copenhagen and Glasgow) represent over 846 million people, or 11% of the global population, and the companies (including Microsoft) have combined revenue of over $11.4 trillion between them (over half of US GDP). 

Microsoft (NASDAQ:MSFT) garnered attention when it announced its plans early last year to be carbon negative by 2030, as well as removing all the emissions it has produced since its founding in 1975.

The number of entities making net-zero pledges is likely to continue increasing as more organizations and governments get on board. The subsequent demand for technologies and products that help companies and cities reach these targets will increase exponentially as global adoption grows.

While these groups have all made pledges, they each have different time-frames for when they plan to get there. Some plan on reaching their targets in the next few years, while others who are larger and more complicated entities have dates set anywhere from 2030 to 2050.

What’s certain is that achieving these targets will require significant innovation and improvement in the current areas that can help (renewable energies, storage, alternative fuels, etc). So the growth in demand for these solutions is almost unstoppable as innovation, cost reduction and adoption will continue improving.

 

Offsetting emissions vs reducing emissions

 

During the first few months of COVID restrictions when the world experienced huge decreases in travel, we got a glimpse of what the world could look like with less pollution.

Depending on where you were in the world, there were substantially fewer cars on the road and almost no planes in the sky or boats in the seas. Carbon emissions produced by us humans were lowered significantly.

Air quality improved in many high-density areas such as London and India (the Himalayas could be seen from India for the first time in decades), Venice had clearer waters and places like China noted a 25% drop in emissions over a 4 week period when all of its factories closed.

This was a real-world example of the power that emission reduction will have on the environment.

While we’d all like to resume life as normal and simultaneously keep our emissions as low as they briefly were during those lockdowns, unfortunately doing so is not a matter of flicking a switch. Given our current reliance on fossil fuels to power many areas of our everyday life, it will be a long and costly transition to reach the point in time where most societies are powered primarily by renewables.

That’s the decarbonization trend that will take decades to play out, and is the opportunity for investors that we’ll cover shortly.

In the meantime, many groups are pursuing offsetting initiatives, such as reforestation, or carbon capture and storage, which aims to act as a complementary but temporary solution to the ultimate goal of emission reduction.

Carbon offset projects have historically been a controversial topic given the difficulty in verifying them. Additionally, some argue that some carbon offset programs simply allow big polluters to continue polluting without actually trying to reduce their emissions.

However, highly-vetted carbon offset or carbon capture projects do have a big role to play in the interim as the world transitions to more sustainable energy sources longer term. The timeframe required to reach these net-zero goals is arguably too long, so these projects are effectively buying us more time.

All of this is to say that ultimately the reduction of emissions is the primary goal, while carbon offset and carbon capture programs will be complementary both in the short and long term.

As mentioned, this transition towards lower emissions and more sustainable energy sources provides huge opportunities for us as investors.

 

The winners and losers of the transition

 

That means existing carbon-emitting business practices are set for disruption or at least a major overhaul. While that spells the demise of some industries such as coal power plants and internal combustion engines, it provides huge opportunities for others.

Many new and emerging industries are set to benefit greatly from increased and sustained demand during this transition. A report by Credit Suisse outlines that the two primary areas of focus are carbon-free electricity and sustainable transport.

The report shows that power generation from the likes of wind and solar is expected to provide 40% of the world’s power by 2040 as it becomes much more affordable (up from 6% of the world’s power in 2017 and 10% in 2020).

On the other side of that, global power generation from coal is expected to decline from 39% in 2017 to 5.5% in 2040.

As for sustainable transport, at the time of the report 23% of global energy-related emissions stem from road, rail, air and water transport, so understandably they’re under a lot of scrutiny, and subsequently they’re experiencing a lot of innovation.

With such a clear and obvious transition in dominant industries taking place, a quote from Buffett comes to mind: 

 

“Sometimes you don’t have to pick the right carriage, just get on the right train.”

 

The areas that are almost certain to benefit from this transition are the likes of renewable energy generation, energy storage, electrification of engines, alternative fuel sources, carbon accounting (which is accurate measurement of emissions), waste-to-energy and of course, carbon offset or carbon capture programs.

Currently, the renewable energy industry is the largest and most established of the areas above, based on the fact that it has the largest pool of publicly listed companies.

Just like any new trend or innovation, the adoption curve starts somewhat slowly as innovators and early adopters break new ground. Then as those innovations start to get traction and become more accessible, adoption skyrockets as the early majority join in.

In terms of worldwide adoption, we’re still likely not even at the early majority stage.

Given the length of time remaining in this transition, it seems we are still in the early days of the decarbonization of our economies. As investors, that’s a huge opportunity to at least be exposed to what is another multi-decade structural growth opportunity.

Michael Paige

Simply Wall St  (25.09.21)