Global Environment

Notes from the road: investing in climate solutions

The fund industry talks a lot about investing in climate-solutions providers. But who are these businesses? And what do they actually do? Join the Global Environment team’s analysts on in-person tours of three companies that, in very different ways, are contributing to decarbonisation – and that the team believes are well placed to ride the structural-growth trends arising from the energy transition.

10 Oct 2022

12 minutes

Sam Anthony
Yunli Liu
Linnea Bengtsson
The fund industry talks a lot about investing in climate-solutions providers. But who are these businesses? And what do they actually do? Join the Global Environment team’s analysts on in-person tours of three companies that, in very different ways, are contributing to decarbonisation – and that the team believes are well placed to ride the structural-growth trends arising from the energy transition.
Novozymes: decarbonising industry and agriculture, one microbe at a time

Linnea Bengtsson, Analyst

Company profile
  • Sector: biotechnology
  • Home country: Denmark
  • Decarbonisation growth drivers: accelerating sustainability trends in multiple sectors including household care, food & beverages, bio-energy and agriculture

Bagsværd is a pleasant suburb of Copenhagen, Denmark. It is a suitably understated setting for a business whose principal products – enzymes – few people ever give much thought to. Yet the enzymes Novozymes manufactures touch millions of lives and reduce emissions from many different industrial, agricultural and domestic verticals.

Enzymes are proteins produced by all living organisms, including bacteria and fungi. They are biological catalysts, meaning they speed up chemical reactions. Enzymes in our bodies help us digest food, for example. Scientists have so far identified more than 5,000 types of biochemical reaction that enzymes are known to catalyse. Yet, if treated correctly, these hardworking biological agents are untouched by the reactions they enable. Consequently, they can be used again and again – which makes them a highly effective way to make stuff happen at the chemical level.

Efficiency gains

With a share of almost 50% of the global industrial-enzyme market, Novozymes supplies enzymes and microbes for a wide range of applications. But a common theme across many of these applications is that its biological solutions make processes more efficient, saving energy, water and other resources.

For instance, washing detergents that contain certain enzymes can clean clothes better and at lower temperatures, hence requiring less energy. Incorporating enzymes in bread production can improve texture (or ‘mouthfeel’, to use the industry term), and also increase shelf-life, reducing food waste. In industry, using enzymes in textiles manufacturing can strengthen fabrics, as well as reducing energy consumption. In farming, enzymes can improve animal health, and help livestock achieve slaughter weights faster and with less feed. Novozymes reported that its enzymes avoided 60 million tonnes of CO2-equivalent last year by enabling low-carbon fuels in the transport sector alone, a figure that does not include its other business segments where we believe carbon avoided is also material.

Giant tanks

You might wonder what an investor can learn by going to see a company whose principal work is at the microbial level. Visually, the most striking feature of Novozymes’ Copenhagen plant, which we visited earlier this year, is the giant fermentation tanks, the height of a three-story building. Through the small observation windows cut into the side, you typically see a white-ish foam, rather like a bubbling, boiling beer froth.

Novozymes employs teams of technical experts to analyse enzymes and microbes collected from around the world. Their job is to figure out what these tiny entities could be used for and how they can be commercialised. The latter happens via a method called submerged fermentation, whereby specially selected microorganisms are grown in a soup of nutrients under the specific conditions needed for them to thrive and secrete the desired enzyme. Few companies can match Novozymes’ expertise at producing enzymes with the precise properties required for a target application at such scale and at viable cost.

Efficient and at scale

As investors, we have long regarded this ability to produce enzymes efficiently and at scale as Novozymes’ key competitive advantage. What we gained a new appreciation of during our visit was the extent to which Novozymes applies scientific and production breakthroughs made in one area to expand or enhance the biological solutions it offers in other end-markets.

This has a multiplying effect on the potential returns from Novozymes’ research and development (typically 13-14% of net revenues). Having achieved an increase in productivity in a bacterial strain used to produce an enzyme product, these benefits can be ‘cookie cut’ across the portfolio, whereas competitors with a narrower range of applications can only gain a slice of these economies of scale.

Growth potential

Overall, our visit strengthened our conviction that Novozymes has durable competitive advantages, which is one of the key criteria for us to consider a company for the Global Environment portfolio. Another is that a business must be exposed to the structural growth linked to the transition to a low-carbon economy, and we continue to see a significant opportunity for Novozymes in this regard, too.

Given the huge efficiency gains required to get to net zero, we expect demand for Novozymes’ bio-solutions to increase over the long-term (shorter-term, enzyme demand fluctuates based on multiple factors, including economic cycles and the oil price). Not only do we think the business has the potential to increase penetration of all of its current end-markets, it continues to find new applications for its ever-expanding library of bio-solutions.

Finally, while we don’t yet include them in our model, new industries that rely on enzymes are emerging in response to the climate crisis and other sustainability challenges. Among the most promising are enzymatic recycling, which has the potential to revolutionise our ability to tackle plastic waste; enzymatic carbon capture, which doesn’t require the same volume of chemicals that conventional carbon capture systems do and is potentially more cost effective; and new methods of developing alternative proteins, a food group that will likely be essential to feed the world’s growing population sustainably.

No representation is being made that any investment will or is likely to achieve profits or losses similar to those achieved in the past, or that significant losses will be avoided. This is not a buy, sell or hold recommendation for any particular security.

Specific risks

Geographic / Sector: Investments may be primarily concentrated in specific countries, geographical regions and/or industry sectors. This may mean that, in certain market conditions, the value of the portfolio may decrease whilst more broadly-invested portfolios might grow. Currency exchange: Changes in the relative values of different currencies may adversely affect the value of investments and any related income. Derivatives: The use of derivatives is not intended to increase the overall level of risk. However, the use of derivatives may still lead to large changes in value and includes the potential for large financial loss. A counterparty to a derivative transaction may fail to meet its obligations which may also lead to a financial loss. Equity investment: The value of equities (e.g. shares) and equity-related investments may vary according to company profits and future prospects as well as more general market factors. In the event of a company default (e.g. insolvency), the owners of their equity rank last in terms of any financial payment from that company. Concentrated portfolio: The portfolio invests in a relatively small number of individual holdings. This may mean wider fluctuations in value than more broadly invested portfolios. Commodity-related investment: Commodity prices can be extremely volatile and significant losses may be made. Emerging market (inc. China): These markets carry a higher risk of financial loss than more developed markets as they may have less developed legal, political, economic or other systems. Sustainable Strategies: Sustainable, impact or other sustainability-focused portfolios consider specific factors related to their strategies in assessing and selecting investments. As a result, they will exclude certain industries and companies that do not meet their criteria. This may result in their portfolios being substantially different from broader benchmarks or investment universes, which could in turn result in relative investment performance deviating significantly from the performance of the broader market.

General risks

All investments carry the risk of capital loss. The value of investments, and any income generated from them, can fall as well as rise and will be affected by changes in interest rates, currency fluctuations, general market conditions and other political, social and economic developments, as well as by specific matters relating to the assets in which the investment strategy invests. If any currency differs from the investor’s home currency, returns may increase or decrease as a result of currency fluctuations. Past performance is not a reliable indicator of future results. Environmental, social or governance related risk events or factors, if they occur, could cause a negative impact on the value of investments.

Authored by

Sam Anthony
Analyst
Yunli Liu
Analyst
Linnea Bengtsson
Analyst

Important Information

This communication is provided for general information only should not be construed as advice.

All the information in is believed to be reliable but may be inaccurate or incomplete. The views are those of the contributor at the time of publication and do not necessary reflect those of Ninety One.

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