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We recently sat down with Alexis Deladerriere, Head of International Developed Markets Equity in Goldman Sachs Asset Management’s Fundamental Equity business, to examine a number of environmental themes and their potential impact for investors. His team believes we are at the beginning of a broad-based sustainability revolution that will have global and cross-sector impact on both investment risks and opportunities. As corporates, consumers and policymakers alike are increasingly focused on environmental impact, he believes the heightened scrutiny will create investment opportunities as “clean tech” has the potential to disrupt existing industries.
What are some of the sustainability themes you’re seeing today?
We’ve seen a number of sustainability themes that we believe are secular trends in four areas: sustainable consumption, clean energy, resource efficiency and the circular economy. To dig a little deeper into one, “Sustainable consumption” is one of the main themes we’re seeing across the market, and it’s manifesting across a number of sectors, from food to fashion. For consumer-driven companies, there’s this idea about having a “clean label”—a respectful supply chain and sustainable packaging. This has driven a return to biology and promoted more natural and biodegradable ingredients. One example we’ve looked at recently is a Dutch company—DSM—which is seeking to commercialize feed supplements reducing methane emissions from cows, which are significant contributors to this particularly potent greenhouse gas linked to climate change. The dairy industry today has a healthy and green image which it wants to keep, but to do so it needs to embrace solutions, which might improve the environmental impact from its commercial activities. We would expect to see more innovation in the years to come in this area, among others.
How are corporates and governments playing a role?
On the corporates side, we believe there are really three types of companies that are focused on solutions to make positive impacts or reduce negative impacts: start-ups, which largely have been created to develop new products exclusively to find a solution to a problem; companies that were always focused on this and are just now seeing exponential growth; and incumbent players that are changing their behaviors to align with increasing focus on environmental solutions. An example of the latter would be General Motors, a legacy American automaker, that has an ambition of only selling electric vehicles by 2035. To do so would illustrate a corporate that has been at the forefront of this transition and seeks to capitalize on changing preferences. These changes are not just affecting large corporations, either. An important development over the past year has been the increasing depth and breadth of the investable universe aligned with these themes, via spin-offs, SPACs and IPOs, which creates more possibilities to get exposure to these growth opportunities.
Policymakers around the world have played a critical role in curbing activities with a negative environmental impact via taxation and regulation, while at the same time incentivizing the development of alternative solutions. For example, the European Emissions Trading Scheme, which covers 40% of EU emissions, has been successful in reducing these emissions by 35% over the past 15 years. In the US, we’re beginning to see local policies banning certain types of single-use plastic items. And in Norway, electric vehicle (EV) incentives have lifted the share of EVs to 54% of total car sales in 2020, with the objective to get to 100% by 2025.
What are the evolutions you are seeing in the renewable power space?
Wind and solar have become, in many cases, the lowest cost providers for energy in a given market. That’s a big departure from ten years ago, when these types of energy were expensive and were often subsidized to stay competitive. In the past two years, technological improvements have increased the capacity for wind turbines by 50%, and the cost of this power has declined by 80% to 90% over the past ten years. And there’s still more efficiency to come, which helps explain the exponential growth in renewables today. But the potential is still enormous, with only about 6% of power being generated by wind and solar in the world today, compared to approximately 40% from coal.
Another interesting development here is offshore wind, which has been historically challenging because bottom-fixed turbines cannot be built in depths greater than 50 meters. The solution to this is floating wind turbines, which can be anchored in most places at sea at greater depths, out of sight and away from shipping and fishing routes. Although this development is still in its infancy, we believe there could be attractive opportunities in the coming years to increase wind generation capacity through offshore means.