By Henning Padberg, co-portfolio manager of Nordea’s Global Climate and Environment strategy
The popularity of climate-positive investing has grown exponentially over the past decade or more, as society has embraced the importance of supporting the multi-decade sustainability megatrend. But despite accelerating attention, the climate crisis continues to intensify, and multiple environmental challenges from microplastics to chemical pollution persist unabated. But instead of kicking the can down the road to future generations, humanity could choose to develop and adopt innovative solutions to ensure we can thrive on this planet in the decades to come.
As key allocators of crucial capital, investors have a major role in identifying the sustainable leaders of tomorrow. Pleasingly, there appears to be no end in sight when it comes to key environmental advancements and the industrial scaling of proven technologies, as well as the broadening global implementation of these sophisticated solutions.
Far from the days when the climate investing space was erroneously viewed as a simple play on the future of alternative energy, solutions providers aligned with the sustainability revolution can be found within numerous industries in the evolving global economy, increasingly because what is positive for the environment also makes economic sense.
Addressing the power problem of AI
When it comes to game-changing innovation, it is hard to look beyond the recent rise of AI, sparked by consumer-facing generative AI models like ChatGPT. As the years progress, AI has the potential to be revolutionary across multiple industries.
However, the AI revolution comes with its challenges, particularly as the applications can have a heavy emissions footprint over a full lifecycle. Did you know that a single query on ChatGPT consumes roughly 10x the electricity compared to a simple Google search? While the actual emissions of AI are difficult to gauge, chipmaker NVIDIA – the company at the forefront of the AI revolution – could be shipping 1.5 million AI server units by 2027. Running at full capacity, this would consume 85.4 to 134 terawatt-hours (TWh) of electricity annually . For reference, Ireland’s 2022 electricity consumption was 30.6 TWh.
There is an urgent need for solutions to reduce and mitigate the environmental impact. Fortunately, multiple solution providers with a focus on energy efficiency in the technology space are highly focused on addressing the issue. For instance, software innovation from companies such as electronic design leader Synopsis are enabling engineers to create more efficient designs and advanced packaging setups, which will optimise performance and lower power usage.
Transforming trash into treasure
While waste management is arguably at the opposite end of the cutting-edge spectrum to AI, companies within this space are pivotal to achieving net-zero goals by collecting, sorting, and processing recyclable materials and decreasing the carbon footprint associated with manufacturing new products.
Despite progress, the recycling rate of municipal solid waste remains low – at about 48% in the EU and 32% in the US . It is even lower globally. With a large amount of waste still sent to landfills, companies such as Republic Services, Waste Management and GFL Environmental are increasingly focusing on landfill-to-gas infrastructure, which harvests the methane emitted from decomposing garbage and converts it into energy.
From an investment perspective, this sector is also witnessing better fundamentals, with recycling businesses increasingly adopting a fee-for-service model that enables improved margins and decreases the cyclicality historically stemming from commodity prices.
Innovating chip design for efficiency
Semiconductors are becoming an increasingly important area in the quest for improved energy efficiency, due to the growing world population and the surging numbers of connected devices. One high-profile example of spiking semiconductor demand can be seen in the recent rise of chip-heavy electric vehicles (EV). Current forecasts suggest the EV share vehicles sales globally will jump from 14% in 2022 to over 60% in 2030.
As technologies advance at an unprecedented pace, the demand for faster, smaller, and more energy-efficient electronic devices continues to increase. This drives the need for progressively advanced software and simulation to design these chips.
Within this vertical, we are invested in Ansys, Synopsys and Cadence Design Systems – which have a combined market share of more than 60%. We believe the market still underestimates the longer-term growth outlook for the companies in this niche segment, which in our view could double in size by the end of the decade.
Accelerating grid investments remain imperative
With rising global temperatures, extreme weather events, and heightened environmental concerns, the importance of the energy transition – characterised by a significant increase in renewable energy generation and the development of a resilient power grid – has never been more critical.
However, the traditional power grid designed for centralised energy production and distribution faces challenges in accommodating the intermittent nature of renewable sources. To meet national climate targets, electric grid investments need to nearly double by 2030 to over $600bn annually per year . Encouragingly, plans are being laid out across the world to accelerate and support this journey.
We are positive on infrastructure construction companies specialising in energy – such as Quanta Services and MasTec – which can deliver engineering and construction solutions to redefine the grid and power generation landscape. Despite accelerating order intake, record backlogs, and signs of project progress, the market is still underestimating the future growth and profitability of the sector.
Adhering to accelerating regulation
Environmental disclosure has significantly evolved over the last decade and is continually catching the attention of regulators – not only in tackling public environmental claims but also in consumer protection. As sustainability regulations continue to tighten, the cost of ensuring transparency through testing and third-party verification will ultimately be passed on to businesses.
Here, we are invested in leading independent testing, inspection, and certification provider SGS, which enables companies across industrial and consumer sectors to implement more sustainable practices and adhere to constantly updated regulatory requirements.
Additionally, chemical pollution continues to intensify and threaten the natural and biological foundations of life. An example is PFAS, also known as ‘forever chemicals’, which are coming under scrutiny on both sides of the Atlantic. With a need for more technological solutions to analyse, detect and report these potentially dangerous chemicals, leading providers of testing equipment – such as Agilent and Waters – are likely to witness a multi-year tailwind.
Summing up the opportunity
Climate and environment challenges remain ubiquitous, posing major risks to the future outlook for society and our planet. However, there are comprehensive solutions that address many of these problems and their adoption is imminent.
The opportunity spectrum is broad — from a stable grid, to efficient technology, to cleaner waste, etc. Our investment strategy aims to select the winners in this long-term structural shift, which can provide investors with an attractive risk-reward in the long run.