Governments around the world are in the first inning of a clean-energy transition. In arguably no other market will those changes be more impactful than in the real assets space.
Q3 2020 hedge fund letters, conferences and more
The Case For Investing In Real Assets
A core tenet of our case for investing in real assets is that the transition to a low carbon economy makes the space a fertile investment opportunity. Further, we posit that the path toward carbon neutrality should be the North Star guiding investors’ evaluation of real asset business models.
The reason real asset businesses have such a critical role in that transition is simple: They are currently responsible for 70% of U.S. carbon emissions, but they are also a critical cog in the supply chain of nearly every industry, including renewable energy technologies. Simply put, a low carbon transition doesn’t push forward unless these companies supply it, and clean up their own emissions along the way.
The following 10 statistics illustrate the role real asset industries will play in decarbonization, and show why the space is ripe for investment.
Clean Energy Transition: Investment That Will Hit Real Asset Industries
These first three data points illustrate the wave of investment that will hit real asset industries as a result of the clean energy transition:
- While renewables, nuclear and other power market investments currently run at around $640 billion per annum, the IEA estimates that they would have to reach about $1.47 trillion by the 2030s. These estimates are based on what it will take for the world to reach 100,000 TWh hours of renewable electricity by 2050, which is the baked in projection behind government policy targets. Moving from billions to trillions is a staggering number. It essentially assumes an $830 billion per annum increase of investment into real asset industries.
- Building a hydrogen economy to supply 800 million tons (Mt) of hydrogen per year (for end use only) would require at least $3.7 trillion, or $130 billion annual for 30 years. We break out the figure on hydrogen because many view the resource as pivotal for decarbonizing heavy industry and freight transportation. But making hydrogen a viable resource – at scale – will require massive investment in either electrolysis equipment or carbon capture and storage. Hence, hydrogen doesn’t become viable without major real asset investment.
- Decreased energy intensity during 1975-2016 saved 30x more cumulative US primary energy than a doubling of renewable energy did.1 Few realize that saved energy is already the world’s largest source of energy services, larger than oil. (i.e., 1990-2016 reductions in global energy intensity saved more energy in 2016 than the oil burned in 2016). The tie to real assets may seem counterintuitive, but here too, real asset industries have a critical role to play, as incremental investments on energy using equipment and buildings may be $1,500 billion, per year, by 2030.2
The Supply And Demand Dynamics
These next three data points show the supply/demand dynamics that will be needed as battery metals evolve to power an increasing load of electric vehicles and other technologies. Here too, real assets will underpin that growth:
- The global supply of nickel will need to increase by at least 19x to supply the needs of a growing number of battery cell factories. There are currently 88 battery cell “mega” factories globally, up from just 28 in 2016. An additional 30 new plants are being built along with 72 expansion projects. This equates to roughly $130 billion in planned capital expenditure.3
- There were 25 lithium chemical producers in 2016. Today they are 69, with a planned increase of up to 114. Paired with 13 expansion projects across 36 nickel sulphate producers, at least $15 billion is required in chemical processing for EV supply chains.4
- Battery electric vehicle producers (OEMs) have grown by 72% since 2015, with a quadrupling of production. More than $300 billion has been committed to this space. These changes have ramifications across the vehicle supply chain.5
Demand For Real Assets To Enable A Clean Energy Transition
The stats above largely show the demand for real assets to enable a low carbon transition. But to lower the global carbon footprint, the real assets on which everyone depends will have to decarbonize their own businesses. These statistics show what is needed, and why this is a period of change for real asset industries. (We believe that change is an opportunity for investors.):
- In 2019, the chemical, cement and steel industries consumed as much energy as the total primary energy demand of the United States, emitting 20% of global green house gas emissions in the process. The effectiveness and cost of these materials mean there is simply no viable substitute for their use in the construction of nearly everything. In short, an energy transition doesn’t happen without changes to these industries’ business models.
- To decarbonize, the additional incremental global investment needed to address emissions within the heavy industrials space will total $1.6 trillion between now and 2050, or $50 billion per year. Additional investment in EU heavy industry alone could be $370 billion over 30 years or $5.5 billion per annum, with the largest element being in the chemicals sector.
- According to the IEA, by 2070, technologies that are currently only at the demonstration and prototype stage account for nearly half the annual emissions reductions in 2070 relative to baseline projections. Bringing all these technologies at demonstration and prototype stages to markets quickly is critical if the heavy industry sectors are to make their contribution to reaching a net-zero emissions energy system.
Whether these facts create concern for the status of some of the business currently in your portfolio, or intrigue you with the possibility of the yet to be invested in companies that are not yet in your portfolio, climate change is an issue investors must be considering.
And if it does not, consider this final stat:
- Why are 89% of executives recently surveyed by Deloitte developing strategies to reduce reliance on fossil fuels, accelerate adoption of clean technologies and strategizing for life in a decarbonized world?6 Only 30% of executives have a fully developed plan today which means we should expect a lot of strategic announcements in short order.
1Lovins, “How Big is the energy efficiency resource?”, Environmental Research Letters, 2018.
2Energy Transitions Commission, “Making Mission Possible”, September 2020.
3Benchmark Mineral Intelligence, 2020.
4Ibid.
5Ibid.
6Deloitte Insights, March 2020. A survey of 600 C-suite executives across varying industries and market capitalizations.
