The fast view
- We believe that investing in climate solutions offers the structural growth opportunity of a lifetime. Global efforts to cut carbon emissions are driving vast flows of capital, fuelling innovation and creating an enduring tailwind for select companies.
- The Ninety One Global Environment Fund invests in leading climate solution companies, focusing on three pathways to a low carbon future: renewable energy, electrification and resource efficiency.
- An investment strategy based on this opportunity has the potential to generate compelling returns over the long term while contributing to a positive real-world impact.
- The Fund’s focus means it has very little similarity with typical client portfolios and therefore offers a differentiated return signature. Our modelling shows that an allocation to the Fund offers significant diversification benefits to various investment styles, including quality-focused global equity portfolios.
South Africa benefits from a number of factors that provide the potential for it to be a future leader in the manufacturing and production of climate solutions. According to the South African Department of Energy, most areas in the country average 2 500 hours of sunshine per year, with an average daily solar radiation level across a year of more than double that of Europe. South Africa has an abundance of naturally occurring raw materials that can be used in the manufacture of electric vehicles, including lithium, cobalt, nickel, graphite and manganese. There is also government support to reach net zero by 2050, with a heavy emphasis on greening the power sector.
Many SA investment portfolios are exposed to some of these trends by virtue of holdings in domestic mining companies as well as traditional energy companies that will be undertaking a transition in their businesses over time. However, exposure to the globally leading climate solution companies of today, such as those owned within the Ninety One Global Environment Fund, is much more limited. These companies offer the prospect of attractive returns with a real-world impact, which if accessed through a highly selective and conviction approach, provide a compelling addition to both a domestic portfolio and an international portfolio.
The structural growth opportunity of a lifetime
Climate change is the single biggest health threat facing humanity, according to the World Health Organisation. The United Nation’s Intergovernmental Panel on Climate Change has warned that to prevent millions of climate change-related deaths, the world must limit global warming to 1.5°C. If we are to get anywhere close to this, there needs to be a significant increase in climate-related finance from current levels, as can be seen in Figure 1.
Figure 1: Global tracked climate finance flows and the average estimated annual climate investment need through 2050
Source: Climate Policy Initiative Global Landscape of Climate Finance 2021, December 2021.1
This climate emergency has resulted in a fast-evolving regulatory and policy backdrop as well as a significant momentum shift in corporate and public attitudes towards climate change.2 The vast majority of governments around the world have made net-zero pledges. A meaningful and growing number of publicly traded developed market companies now have net-zero targets. Consumer behaviours (including investment related) continue to firmly trend towards a greater consideration of sustainability issues.
Acting on climate change isn’t just about doing the right thing though. For investors, ‘decarbonisation’ (reducing the world’s carbon emissions) matters because transitioning to a low-carbon economy requires a radical overhaul of everything we do. As the International Energy Agency’s (IEA’s) seminal 2021 report “Net Zero by 2050” highlighted, the transition from a carbon-heavy global economy to one based on clean energy has barely begun. This affords companies that are enabling that transition an unprecedented growth opportunity.
Achieving carbon neutrality by 2050 requires the following milestones to be achieved by 2030, a mere 7 years from now:
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A 4x increase in wind and solar capacity |
An 18x increase in electric vehicle (EV) sales |
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A 41x increase in annual EV battery production |
US$4 trillion of annual investment in the energy sector alone |
That is only part of the getting-to-net-zero story. The IEA’s energy-sector focused report accounts for only about two-thirds of global emissions. Reducing the remaining one-third will require radical changes to agriculture, food production, industrial processes, buildings and much else besides.
All this is changing the risk and return potential of industries and individual companies. Global efforts to cut carbon emissions are driving vast flows of capital, fuelling innovation and creating an enduring tailwind for select companies.
In our view, investing in climate solutions therefore offers the structural growth opportunity of a lifetime. We believe that companies whose products and services help the global economy to decarbonise, have the potential to grow revenues and profits faster than the market average, with the earnings and growth prospects of these companies typically underappreciated by the market.
If appropriately executed, an investment strategy based on this opportunity has the potential to generate compelling returns over the long term while contributing to a positive real-world impact. Importantly, this isn’t prioritising real-world impact at the expense of returns. In our view, these attractive returns are achievable because of this real-world impact.
Accessing this opportunity: it is broader than you think
The climate-solutions investment opportunity set is extremely broad, extending far beyond the wind and solar farms that many people might think of at first. It also spans companies that are helping to decarbonise the buildings we work in, the homes we live in, the food we eat, the products we consume and the transport we use. Moreover, it encompasses not just the direct beneficiaries of the energy transition, but the entire related supply chains that need to be built up around them. It is also global. We believe emerging markets offer significant additional potential for investors in decarbonisation. Certain companies in China, in particular, are global leaders in technologies that are crucial to efforts to tackle climate change.
Finally, contrary to a potential misconception, this isn’t a small/mid-cap play. Although such companies are well represented in the investment universe, we find that the types of companies we are looking for – attractive growth with persistent profitability and strong competitive advantages – lead to a large-cap orientation. (Approximately 85% of the portfolio was large cap, as defined as having a market cap >$10 billion, at 31 December 2022.)
In thematic terms, the opportunity set for the Ninety One Global Environment Fund – which is a high-conviction global equity portfolio – can be described as encompassing three pathways to a low carbon future: 1) renewable energy, 2) electrification, and 3) resource efficiency.
Figure 2: Investment opportunities throughout the value chain
Historically, we have owned between 22 and 27 companies in the portfolios, with the top 10 holdings representing 50-55% of the fund. The active share relative to the MSCI All Country World Index (ACWI) has been close to or above 99%, indicating significant variation both in terms of the holdings and sizing relative to global equity indices.
Our approach is deliberately high conviction and highly concentrated. We believe this approach is warranted to ensure we focus only on the best companies in this space. It also means that individual company outcomes matter more for both our investment returns and real-world impact. Finally, it helps us to have more meaningful company engagements.
The role our investment strategy plays in a portfolio – diversification
As noted above, there is significant variation between the positions held in the Ninety One Global Environment Fund and the MSCI ACWI. As at 31 December 2022:
- There were two holdings that were not even in the index, and only one company within the top 100.
- Similarly, there is zero position overlap with domestic portfolios, and typically very little position overlap with international global equity strategies (core as well as sustainability focused).
- Further, structural sector biases (i.e. favouring industrials, utilities, materials, green tech and not investing in US mega-cap tech, energy, financials, real estate or healthcare) and country biases (i.e. lower relative exposure to the US and higher relative exposure to China) accentuate these differences.
The result is a very different return signature, and in particular, a lowly correlated/uncorrelated alpha signature.
In a portfolio context this is highly compelling. The differentiated alpha pattern means that the Fund typically generates alpha at different times to other allocations, which can help to smooth the overall portfolio alpha through time.3 To help illustrate this, Figure 3 models the historical effect of having incrementally added an allocation to the Fund from a global equity portfolio. For the sake of simplicity, we have used the MSCI ACWI Quality Index as the global equity representation here, given many investors have biased their portfolios to the quality style. Figure 3 shows that the addition to the Ninety One Global Environment Fund (“E” in chart) would have historically improved the efficiency of the quality-focused global equity portfolio (“Q” in chart). There is a sweet spot allocation of 10-20% to the Ninety One Global Environment Fund that significantly improves the information ratio without an incremental increase in tracking error.4
Figure 3: Compelling diversification benefits
Source: Ninety One, Bloomberg, 31 December 2022. Global Environment data is based on the USD A Acc share class, performance is net of fees. Quality data is based on the MSCI ACWI Quality Total Return Index. Data starts from 1 March 2019.
While the above results show a historical favourable comparison against a quality-focused portfolio, a low correlation between the excess returns of the Fund and the excess returns of other styles is prevalent too. This is shown in the below correlations against growth, value and momentum as well as quality styles (vs. MSCI ACWI):
- Quality = 0.01
- Value = -0.12
- Growth = 0.13
- Momentum = 0.04
It is not very often that an investment opportunity comes along with strong long-term drivers, providing the potential for attractive returns while contributing to a positive real-world impact. Moreover, the Ninety One Global Environment Fund is highly differentiated and complementary to existing allocations. So, yes, you can make a real-world impact and earn an attractive return – if you do it properly.
South African investors can now also get full exposure to the Ninety One Global Environment Fund by investing in the rand-based Ninety One Global Environment Feeder Fund.
We launched the Ninety One Global Environment Feeder Fund on 15 December 2022.
Watch the fund explainer:
1 https://www.climatepolicyinitiative.org/Full-report-Global-Landscape-of-Climate-Finance-2021.pdf
2 https://ninetyone.com/planetary-pulse-2022-early-steps-towards-transition
3 Alpha refers to the excess return of an investment relative to the return of a benchmark index – Investopedia.com.
4 The information ratio is a measurement of portfolio returns above the returns of a benchmark, e.g. an index, and considers the volatility of those returns. Tracking error is the divergence between the price behaviour of a position or a portfolio and the price behaviour of a benchmark – Investopedia.com.
