Novozymes: decarbonising industry and agriculture, one microbe at a time

With global temperatures hitting record highs and climate stresses intensifying, calls to accelerate the shift to a low-carbon economy are growing louder. For a select group of companies, the transition towards net zero represents an expanding commercial opportunity – as Ninety One’s Global Environment investment team explains.

Diverse opportunity set

When people consider what it will take to get to net zero, they tend to think big: wind turbines the length of football pitches, clean-energy infrastructure, electric vehicles. But as Ninety One’s Graeme Baker and Sam Anthony discuss, the investment opportunity set is far wider than often assumed.

“The journey to a low-carbon economy demands changes to many aspects of the global economy, some of which most people are unaware of. That is partly what makes decarbonisation such an exciting area for investors,” Graeme says. “For companies that are enabling the net-zero transition – whether through biotech, engineering, software, energy production and other sectors – we think it is the commercial opportunity of a generation.”

The Global Environment Fund invests in a select group of companies that are driving decarbonisation, and that the investment team believes have the potential to perform strongly as a consequence. Its diverse portfolio ranges from businesses that operate at massive scale, such as clean-energy utilities, to those whose products can only be appreciated under a microscope. This case study shines a spotlight on one of the latter: Novozymes¹, a Danish biotech company that produces enzymes and microbes.

Decarbonising enzymes

Enzymes are biological catalysts that speed up chemical reactions. They are produced by living organisms, including bacteria, fungi and animals. Novozymes manufactures enzymes for a wide range of commercial applications, with one thing in common: they all contribute to decarbonisation, by improving yields, increasing energy efficiency or reducing greenhouse gas emissions.

In the household care sector, for example, Novozymes’ enzymes can replace petrochemical-based surfactants in detergents. They also allow washing machines and dishwashers to run at lower temperatures and on shorter cycles, saving electricity and hence emissions. In agriculture, enzymes can be used to make alternatives to petrochemical-derived pesticides and fertilisers. In the food sector, enzymes can prolong shelf-lives, reducing the emissions associated with food waste, and lower the energy intensity of food manufacturing. Enzymes also have carbon-saving applications in industrial processes and in the production of cleaner transport fuels. “Enzymes are critical for converting grains like corn into fuel-ethanol for biodiesels,” says Sam.

A growth opportunity

For the Global Environment team, Novozymes exhibits one of the primary characteristics they look for in a potential investment: the potential to benefit from the structural (as opposed to cyclical) economic growth being driven by the shift to a low-carbon world. Simply, they expect demand for solutions that enable decarbonisation to grow over the long term as the shift to a more sustainable economy progresses. Other key traits the team look for include durable competitive advantages and the potential to consistently generate returns for shareholders.

For investors, decarbonisation is a dynamic area. Companies in this space are continually innovating as efforts to cut emissions spread across industries and as new technologies emerge, creating new potential avenues of growth. Early-stage opportunities that Novozymes is exploring include using enzymes in carbon-capture solutions, as well as to produce alternative proteins with a lower environmental impact than meat.

Active management

While decarbonisation is a long-term tailwind for select businesses, cyclical factors, changing markets and company-specific factors can all impact businesses in the decarbonisation investment universe. “As investors, we need to analyse these shorter-term impacts carefully and actively manage the portfolio,” says Graeme.

In the biotech sector, for example, some businesses have faced tougher competition lately as customers that had overstocked during COVID and its immediate aftermath normalise inventories. Doubts over the global economic outlook have also weighed on some biotech companies’ share prices this year. But according to Sam, “longer term, we continue to see a trends towards increasing bio-based inputs across industries. We think that adds up to a compelling area for investment.”

¹ Novonesis was included in the Global Environment Fund portfolio as at 29 February 2024.

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. This security was chosen as it is a leader in its field and demonstrates decarbonisation across numerous industries.

Specific Portfolio Names

References to particular investments or strategies are for illustrative purposes only and should not be seen as a buy, sell or hold recommendation. Such references are not a complete list and other positions, strategies, or vehicles may experience results which differ, perhaps materially, from those presented herein due to different investment objectives, guidelines or market conditions. The securities or investment products mentioned in this document may not have been registered in any jurisdiction. More information is available upon request.