Energy efficiency: a theme of the future

“Follow the money” – this principle can work just as well for investments as it does in police investigations.

Healthy and sustained increases in equity prices are always boosted by major investment or spending cycles. As examples, think of the bull market in steel at the start of the twentieth century, mass marketing and consumption in the 1950s-60s, or the notorious dot-com era, which fuelled a remarkable rise on the equity markets before the bubble burst.

Just under ten years ago, notwithstanding the current turbulence, a new sequence of significant rises was set in motion on the major equity markets, this time driven mainly by digitisation  – as evidenced by the growth figures posted in recent years by the cloud businesses of the likes of Microsoft, Amazon or Alphabet. This investment cycle, which has been around for a while now, could continue for several more years, although probably with less spectacular growth rates.

We can also expect massive investments in two other areas. One area is security in general and more specifically the defence industry, where we have seen increased spending on armaments since the start of the war in Ukraine.

The other, much more broad-based area we want to talk about is energy efficiency and transition – a theme that will underpin the biggest investment cycle ever seen. Some ballpark figures give an idea of the scale: we estimate that carbon neutrality targets will require spending of at least USD 150 trillion by 2050, equivalent to more than 1.5x global GDP and close to 7x US GDP.

The chances of the funds being committed are very high for several reasons, such as:

• The climate emergency, and with it the regulations and new obligations that individuals, companies and governments will have to respect.
• Competition – as we are already seeing, companies are increasingly pointing up the sustainability and compliance of their goods and services in their marketing pitches, and may be awarded carbon ratings – which are likely to impact the less virtuous firms.
• Productivity, since traditional energy resources will gradually become more expensive, making the benefits to companies of using “clean” energy increasingly significant, with the potential to boost margins.

The unique characteristic of this cycle around energy efficiency is the number of sectors it encompasses. While many people automatically think of producers of electric vehicles, solar panels and wind turbines, and “clean” utilities, the theme is so much more than that. It involves vast swathes of the equity markets and includes companies that will play an essential and integral role in the achievement of carbon neutrality targets. Paradoxically, mining firms are not considered to have environmental credentials, but the energy transition will considerably increase demand for many metals. Similarly, in terms of materials, the construction sector will have to use low-carbon products and insulation. In industry, there are vast numbers of companies active in transport and logistics, machinery manufacturing, continuous process control and optimising electricity consumption, to name just a few applications. And it’s also in the industrial sphere where most of the companies specialising in energy efficiency are operating, in sectors such as IT, semiconductors, computer-aided development software, etc.

It’s clear that building a high quality portfolio diversified by sector and region, while posting reasonable valuation multiples, is perfectly possible by investing in the energy efficiency and transition theme. Overall, the necessary conditions for long-term performance are already in place, and the considerable investments expected for the foreseeable future make for an even more compelling argument.

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