COP26 has brought into focus the need for action on climate change with pledges by countries around the world to act to reduce carbon emissions and reliance on fossil fuels. This will create challenges but also opportunity as economies and companies adapt to the changes required. Witan has identified climate change as a key investment theme for our specialist portfolio and in 2019 invested in the GMO Climate Change Fund. Below GMO describe the opportunity and their approach to investing.
 GMO introduced its Climate Change Strategy in April of 2017 after conducting extensive research into the opportunities presented by efforts to mitigate and adapt to global climate change. Lead portfolio manager Lucas White and his team believe that climate change is not only among the most important issues facing investors today, but that the sector is ripe with exceptional opportunities as the world mobilizes to address it.
The opportunities
The world needs a massive amount of investment to head off climate change. We believe decarbonizing the economy and overhauling our energy grids will require trillions of dollars, creating secular growth tailwinds in the climate change sector that are likely to last for decades. Many climate solutions are already the lowest cost choice, and this is driving transformational change.
As of 2017 | Source: DNV GL
Projections are subject to change and may vary significantly from the data shown.
Secular growth in and of itself does not make investing easy. Understanding the big picture, global policies, the details of changing technologies, and the companies themselves is a tall order. The uncertainty about how things will play out can lead to large swings in sentiment and wide dispersions in expectations, all things that breed opportunities. Today, the opportunity in the climate change sector, as we define it, is more attractive than ever before. In fact, the GMO Climate Change Strategy traded at more than a 40% discount to the MSCI All Country World Index as of September 30, 2021, the largest discount since inception almost five years ago.
As of 9/30/21 | Source: IBES, MSCI, GMO
Valuation metric is price/forward earnings.
GMO’s unique approach
The GMO Climate Change Strategy invests in companies GMO believes are positioned to benefit, directly or indirectly from efforts to mitigate and adapt to climate change. We often find attractive opportunities in places that few others even consider, such as clean energy materials, forward-thinking utilities, and agricultural productivity. We are looking for pure-play companies with business models that truly combat climate change and its effects.
A good example of the type of opportunity we are now finding attractive is in biofuels. Biofuels have a carbon footprint that can be 80%-90% smaller than oil-based fuels and even 40%-60% smaller than electric vehicles. Importantly, biofuels require little to no infrastructure investment which is a far cry from that required for electric vehicles. Biofuels are increasingly becoming an important alternative to carbon-based fuels, and we believe this overlooked industry is poised for tremendous growth over the next decade.
The importance of a value orientation
Where there is growth and innovation, and both are in plentiful supply in the climate change sector, there will be hype and hysteria which often leads to disappointing returns for investors. Success requires a disciplined value approach and an understanding of the evolving industry and company fundamentals. Perhaps the best-known electric vehicle manufacturers today are Tesla and Rivian. The valuations of both are sky-high and, in our experience, few companies ever live up to this kind of hype. We believe better investments can be found in the materials required to manufacture electric cars and batteries. For example, electric vehicles require up to four times more copper than gas powered cars, and copper producers will benefit substantially from the adoption of electric vehicles. Copper producers trade at low multiples and may offer better potential returns.
As of 2017 | Source: US Geological Survey, copper.org, Financial Times, Bloomberg New Energy Finance, GMO.
As of 9/30/21 | Source: IBES, GMO
The specific companies identified should not be viewed as current or past recommendations of GMO. The securities identified and described do not represent all of the securities purchased, sold or recommended for client accounts. The reader should not assume that an investment in the securities identified was or will be profitable.
Looking ahead
Climate change is increasingly impacting the global economy and our daily lives, and the world is clearly mobilizing to address it. While global economic profitability drives the broad equity market, profitability associated with the clean energy transition and efforts to mitigate and adapt to climate change will drive returns for the climate change sector. At a time when global markets look expensive and expected returns are generally low, there are unique opportunities for strong returns for decades to come in the climate change sector. 
GMO’s Focused Equity team,
25th November 2021 |
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