First, you’ve seen multiple governments across the globe committing to net zero emissions by 2050-60 such as China, Korea and Japan and other governments will likely follow including the US under Biden leadership. This means that there will be trillions of dollars that will be spent on enabling the transition to clean energy and to achieve this commitment. China for example is looking to phase out coal which is currently still the largest power source. This monumental government push towards net zero will drive adoption of clean energy technology / infrastructure including renewables / EV and adoption will in turn drive scale which in turn will bring down unit cost. Take offshore wind, which due to these commitments see an increase from 30GW to 950Gw by 2050 (up 30x). Similarly for EV, which could grow from 7m EV cars as of 2019 to 245m EV cars by 2050 (>30x), which explains the run ups for EV related thematic stocks.
Second, in addition to government / policy support, you are seeing shifts in people’s perception or concerns around ESG issues, particularly in regards to climate related issues. A new generation of consumers or Gen Z are caring a lot more about environmental impact and other social issues (e.g. labour practices) when buying goods. That is why you’ve seen the rise of Impossible and Beyond Meats as well as shoes / clothes made from sustainable material. Corporates are incentivized to change their product lines and introduce new businesses to adapt to this changing consumer behaviour. Furthermore, corporates are increasing their commitments / disclosure on ESG issues which is why you are seeing rise of corporates taking energy sources direct from renewable developers or developing renewables themselves (e.g. Apple and Amazon).
Third, investors are looking beyond returns and have become a lot more focused ESG issues, particularly post Covid, ranging from exclusion to ESG focused investing which has resulted in significant capital flow into the ESG sectors including clean energy etc (take clean energy ETF, ICLN, for example).The final piece of this ESG puzzle is the improving technology and cost curves . Take solar and wind for example, on cost per MGW basis for solar and onshore wind is already cheaper than producing power for coal powered plants and this cost is expected to decline (offshore wind will soon become cheaper). On the technology front, wind turbines are getting bigger and more cost efficient in terms of construction which allows companies to generate larger amount of power at more effective cost.
Another example and a hot topic is Hydrogen. Hydrogen has been around for the last decade or more but suffered from a lack of adoption. It is also typically produced from natural gas which is carbon intensive (i.e. grey hydrogen). However, as renewable source of energy proliferates Hydrogen production will shift to “green” hydrogen and as cost becomes cheaper, adoption is expected to accelerate. In particular for long haul and large transportation, Hydrogen is likely to be more viable solution vis-a-vi electric vehicles given current view of economics and can typically achieve longer distance.
With these factors in mind, I am of the view that outlook and fundamentals for ESG thematics (e.g. EV or renewables) are very strong. Yes, high valuation in a lot of cases does pose a challenge and likely to see some level of correction but given multi decade themes and growth and explosive capital flow, I am happy to ride the ESG wave.
Blackbird Capital 