On a recent webinar, senior investment professionals from across our global resources and environmental sustainability teams shared their views on key themes on navigating short-term developments and the implications for future sustainability goals. For those seeking to better understand the dynamics between traditional commodities and sustainability trends, there are three key takeaways from the webinar:
- The opportunity set is even bigger than you think: While the power and transportation segments make headlines, the overall impact of sustainability trends will span industries and create a far-ranging opportunity set that is underappreciated by many investors.
- What’s old is new: The shift towards clean technologies is creating investment opportunities in areas like natural gas and renewable diesel, as traditional energy providers race to keep up with sustainability trends and recent geopolitical events.
- The future of food: In response to the current environment and a continuing expanding population, we expect that the agriculture space in particular will need to respond to growing demand for cleaner, healthier and more environmentally sustainable foods.
The following summary features highlights from the conversation, including an overview of the themes and trends that are impacting today’s markets and long-term sustainable initiatives that we believe will play out in the decades to come. The full webinar replay can be viewed here: Finding Sustainability in Traditional Commodities.
A Multi-Decade Transition in Its Early Beginnings
As governments across the world commit to long-term carbon-reduction policies, cumulative investments in clean technologies are expected to soar. Examples include the massive overhaul of existing infrastructure, as well as modernizing and digitizing buildings and factories across the global supply chain.
We believe this multi-decade transition will create a far-ranging opportunity set that is underappreciated by many investors (06:04). For example, the focus on environmental sustainability tends to be primarily on power and transportation, which is likely too narrow in scope. Agriculture, forestry, and other land use contribute nearly as much to global emissions as electricity and heat production (08:50).
Sustainability: Addressing a Broad Range of Industries
Global Emissions by Sector
Source: Brookings Institute. Data as of December 2020.
Even Conservative Estimates Indicate Robust Demand for Renewables and Clean Technologies
The International Energy Agency’s (IEA’s) Stated Policies Scenario (STEPS) provides a more conservative benchmark for the future growth of sustainable investing by assuming that many governments will be unable to fully meet their currently stated climate objectives (09:50). That said, even this more conservative estimate highlights the potential for a dramatic increase in renewables and associated clean technologies, which will create a significant opportunity set across a range of industries.
Batteries and Electric Vehicles Are Major Source of Growth Potential
We believe the shift towards electric vehicles (EV) represents one of the most compelling opportunities among current sustainability trends.
Total Addressable Market for Renewables, Electric Vehicles and Electrification
Source: Bernstein, VanEck. Data as of January 2021. Company abbreviations (where applicable): LG Energy Solution (LGES); BYD Co Ltd. (BYD); Samsung SDI Co Ltd. (SDI); Contemporary Amperex Technology Co. Ltd. (CATL); SK Innovation (SKI); Tesla (TSLA). Not a recommendation to buy or sell any security mentioned herein.
As the chart above shows, the total addressable market for batteries and electric vehicles is massive (10:45). The dark squares toward the middle of the chart above represent the amount of capacity for EV batteries that is currently built. To meet expected demand for EVs going forward, we expect this capacity will have to grow by 70x from 2020 levels (15% growth year over year) through 2050.
Growing Demand for Renewables Leads to a New Opportunity Set in Minerals
The shift towards renewable energy is creating soaring demand for a new set of commodities (11:39). Minerals like copper, cobalt, lithium, and nickel are essential components of clean technologies. In addition, clean technologies like EVs require significantly more minerals relative to conventional energy sources (13:58).
With demand expected to trend higher in the years to come, the minerals used in clean technologies represent a compelling investment opportunity for long-term investors. However, selectivity and flexibility are essential components of investing in this space. While key input minerals for clean energy technologies are already seeing dramatic price increases, not all clean technologies are dependent on the same minerals. For example, copper plays an essential role in the production of EVs and battery storage but is not used in the geothermal space. It’s important to have a holistic view of the commodities market and sustainability trends.
Clean Energy Minerals’ Next Big Theme: Recycling
Recycling practices, which are less established for metals like lithium and cobalt, are also expected to play a more important role in the future of clean technology mineral supply (17:43). However, even when we look ahead to forecasts in 2040, these recycling practices are expected to remain less than 10% of the overall mineral supply for EVs and battery storage, according to the IEA. The bulk of metals used in clean technologies will need to be mined from traditional sources, meaning supply chains will need to become more sustainable and secure. For example, with a greater emphasis on responsible sourcing of minerals, global concerns are mounting over the geographic concentration of minerals extraction and processing (15:42). Over time, we expect governments will incentivize the development of onshore supply.
Don’t Forget about Natural Gas
The shift toward renewable energy and clean technologies is a long-term trend that will play out over several decades. In the immediate term, there are also opportunities in traditional energy sources that are being amplified by recent geopolitical turmoil (23:30).
Europe is among the largest consumers of Russian-supplied oil and gas. The European community was already on a path to diversify its sources of energy, a plan that it has accelerated since the conflict in Ukraine. Europe’s plan has three main components:
- Diversification strategy: Ensure gas storage levels of 90% by October 1, 2022; add new liquefied natural gas (LNG) and pipelines; scale renewable gas production 55 billion cubic meters (bcm) by 2030 (including biomethane and hydrogen).
- Electrification strategy: Increase wind and solar deployment by 20%; encourage behavioral changes in energy consumption and use of heat pumps.
- Fuel switching options: An additional 120 terawatt-hours in coal-fired generation to cut gas demand by 22 bcm in one year; return nuclear reactors under maintenance in 2022 and temporarily delay the shutdown of any major reactors.
This shift in commodity market supply and demand dynamics will pave the way for new winners to emerge. For example, European-based gas suppliers with efficient production facilities are well positioned to deliver more gas to Europe. In addition, companies that innovate in offshore wind energy also stand to benefit as Europe aims to deliver on its electrification strategy.
Renewable Diesel Could Also Benefit in the Near Term
From 2018 to 2025, renewable diesel market supply is expected to grow from approximately 5 to 25 million tons per year (27:46).1 Over the next five years, Europe is anticipated to transition from a net exporter to a net importer of renewable diesel, while North America is expected to see its share of global supply and demand grow.
This market backdrop is creating a wealth of investment opportunities. For example, Neste is the only renewable diesel refiner that integrates its technology across three distinct product lines: renewable road transportation, renewable aviation and renewable and recycled plastics and biochemicals—all made from recyclable raw materials. It is also the largest producer of renewable diesel and jet fuel in the world.
Integrated oil companies like TotalEnergies, Eni and Chevron are also focusing on the conversion of their existing conventional refineries as an important factor in their ambitious renewable agendas. For a more detailed overview of the opportunity in renewable diesel, read: Fueling a Sustainable Future with Renewable Diesel.
The Important Role of Hydrogen
Hydrogen will likely be a significant contributor in helping countries achieve their net-zero targets and reduce dependency on fossil fuels (32:50). While most of the current hydrogen supply comes from “grey” sources (i.e., methane reformation without carbon storage), estimates show that at least 30% of this production can be converted to clean sources (i.e., through electrolysis powered by renewables) by 2030.2
The Future of Food: Agriculture Is Also on the Brink of a Sustainable Transformation
Global population growth, greenhouse emissions from traditional food sources and changing consumer preferences are leading a sustainable transformation in agriculture.
Global population is expected to increase by 25% from 7.8 billion today to nearly 10 billion by 2050. At the same time, more people are expected to enter the middle class than any time in history, a trend that will drive increased consumption of animal-based foods, which are resource-intensive and lead to higher greenhouse gas emissions. It may take as much as 70% more food production to feed this larger and wealthier population compared to 2015.
Going forward, we expect growing demand for cleaner, healthier and more environmentally sustainable foods will create growth opportunities in downstream areas such as alternative protein and dairy (34:40).
VanEck’s Sustainable Solutions Align Returns with Aspirations
To capitalize on the broad set of opportunities created by these sustainability themes, VanEck offers a wide range of strategies across equity and fixed income, including both active and passive approaches.
|3||Good Health and Well-Being||■||■||■||■|
|6||Clean Water and Sanitation||■||■||■||■|
|7||Affordable and Clean Energy||■||■||■||■||■|
|8||Decent Work and Economic Growth||■||■|
|9||Industry, Innovation and Infrastructure||■||■||■||■||■||■|
|11||Sustainable Cities and Communities||■||■||■||■||■|
|12||Responsible Consumption and Production||■||■||■||■||■|
|14||Life Below Water||■||■|
|15||Life on Land||■||■||■|
|16||Peace, Justice and Strong Institutions||■|
|17||Partnership for the Goals||■|
Source: United Nations, VanEck. The Sustainable Development Goals (SDG) are a set of global goals designed to be a “blueprint to achieve a better and more sustainable future for all”. They address the global challenges including poverty, inequality, climate change, environmental degradation, peace and justice.
1 Source: Barclays, VanEck, BNEF. Data as of March 2022.
2 Source: Hydrogen Council. Data as of March 2022.
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