As investors explore tomorrow’s low-carbon leaders, they can turn to a new exchange traded fund strategy that focuses on carbon transformation.
“We believe investors need a new playbook for a changed environment,” Roger Mortimer, portfolio manager, KraneShares, said in the recent webcast, Understanding Investing in the Carbon Transformation: A Due Diligence Session.
Mortimer argued that there is a substantial opportunity in decarbonization-related capital investment as an emerging multi-decade secular growth theme. Looking ahead, spending in this area will be driven by government policies, regulation, and companies seeking to transform.
Science-backed warnings are driving changes in global policy. For example, the 10 warmest years since 1880 have all occurred since 2005. July 2021 was earth’s hottest ever month on record, with a combined land-ocean surface temperature 1.67° F above the 20th century average. Ongoing “climate related disasters” increased 83% in 2000-2019 over the prior 20-year period. About 70% of extreme weather events are exacerbated by human behavior. Around 97% of scientific research confirms the occurrence of global warming caused by human activity.
Amidst this threat, Mortimer argued that there is a tremendous opportunity. The way we generate and use energy today is at odds with our need for climate stability. Global energy demand will grow 50% by 2050, and 80% of the world’s energy use is currently fossil fuels. Consequently, reaching net-zero emissions requires a fundamental transformation of the global economy and implies essentially the rebuilding of substantial portions of our energy and land use infrastructure in the next 30 years. Meanwhile, the capital spending needed to achieve this is estimated to average $9.2 trillion annually from 2021 to 2050, 60% more than we currently spend on infrastructure.
“There is a substantial opportunity — decarbonization-related capital investment is an emerging multi-decade secular growth theme,” Mortimer said. “Understanding its impact and implications is an investment imperative and is highly relevant to all investors.”
Governments are backing policy changes to combat climate change. Many see decarbonization as having the potential to meet climate policy commitments by driving greenhouse gas (GHG) reduction; contribute to strategic energy security (both certainty of access and price stability); and promote economic development or creating new industries for growth.
Investors are also voting with their money, driving changes in corporate behavior. For instance, major asset owners are increasingly active and exclusionary in their bid to perform social responsibility. Private equity is also raising capital and participating in driving outcomes. Additionally, sustainable investments have enjoyed increased inflows, especially those that track environmental, social, and governance principles.
Furthermore, technology is fueling increased efficiency and adoption of innovative green alternatives. As new industries scale, costs fall rapidly. Solar generating costs have fallen 90% in 10 years. More than 80% of all new electricity capacity added in 2020 was renewable, of which solar and wind accounted for 91% of the total.
The Kraneshares Global Carbon Transformation ETF (KGHG), an actively managed ETF, could help investors access this new opportunity and capture the low-carbon leaders of the future.
“We believe the carbon transformation opportunity arising from net-zero provides multiple investible industries that will both grow faster than historically and from which new leaders will emerge,” Mortimer said. “Invest in the ‘problem,’ in those companies where there is commitment to change and lead, and in their value chains.”
“We believe the low-carbon leaders of the future will re-rate on both improving financial and ESG metrics as they deliver superior growth and are perceived differently than today,” Mortimer added.
KGHG focuses on companies in traditionally high-emissions industries that are on the cusp of the transition away from fossil fuels to renewable technology, according to KraneShares. Companies in high-impact industries that have a stated commitment and demonstrated action towards decarbonization may see superior growth compared to their peers, and could potentially benefit from a reevaluation and improved environmental, social, and corporate governance (ESG) score.
KGHG can help provide access to the emerging decarbonization leaders disrupting their industries and provide potential portfolio diversification, as climate-focused investments may act as a differentiated and non-correlated source of return that is not driven by the economic cycle.
Financial advisors who are interested in learning more about the global carbon transformation can watch the webcast here on demand.