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Laurent Denize – Global Co-CIO ODDO BHF

Since the peak in January 2021, the performance of sustainable funds and investments linked to the ecological transition has been disappointing. However, the investment needs to meet the objectives of the Paris Agreement have not diminished, on the contrary. Capital requirements are estimated at 5,000 billion dollars per year in a 1.5°C scenario, which represents a threefold increase on investments made in 2023. This context highlights the need for increased support for decarbonisation initiatives to meet global climate ambitions and drive responsible growth. Our aim is to see green investment as an opportunity rather than a constraint. With much more attractive valuations and more mature companies, revisiting the theme makes sense. Here we provide you with some investment ideas for the coming years, and to identify the sectors that stand to benefit from this age-old growth theme.

Clean electrification at the heart of the green rebound

Today, around 70% of greenhouse gas emissions come from energy production and consumption. Clean electrification is therefore at the heart of the process of decarbonising the economy, and is based on 3 pillars:

1. An increase in the share of renewable energies in power generation: around 30% today, the share of renewables should represent between 38% (with current roll-out policies) and 57% (to follow a trajectory < 2°C) of the energy mix in 2030. The most rapid development is in solar energy (lower production costs, ease of deployment), with estimated growth of 18% to 24% per year by 2030. In comparison, the expected (de)growth of fossil fuels in power generation should sit between -5% and -6% per year until 2030.

2. A need for power grid development: after several decades of under-investment in electricity networks, the acceleration of electrification is leading to a sharp increase in capex for transmission and electricity distribution infrastructures. With an average infrastructure age of around 30 years in North America and Europe, annual investment of around $400 billion is required, split between replacing the most obsolete assets (19%), upgrading existing assets (40%) and developing new infrastructure (41%). 

3. An increase in power demand: With demand for electricity soaring, we need to turn to cleaner sources. Buildings (30%), industry (30%) and transport (27%) currently account for the majority of electricity demand. The rapid development of data centres (a key challenge for the green energy sourcing of artificial intelligence) is expected to further increase electricity demand in the coming years.

Green investment opportunities across the whole electrification value chain

In addition to direct positions in these three areas (solar and wind equipment manufacturers, municipal services, electrical equipment, EVs/batteries, clean hydrogen), there are numerous investment opportunities across the electrification value chain: high and medium voltage cables, energy storage solutions, electrical infrastructure engineering services, and data centre cooling systems. 

Microsoft, for example, is also relying on green energy to meet the colossal needs of its data centres. The company has signed a 20-year power purchase agreement with Constellation based on the restart of the Three Mile Island nuclear power plant in Pennsylvania. Constellation plans to spend $1.6 billion to restart the plant, which is expected to be operational by 2028. It will have a capacity of 835 MW, enough to power 800,000 homes. According to the US Department of Energy (EIA), energy consumption associated with data centres in the United States will more than double by 2030, consuming about 9% of the country's total electricity. To avoid the risk of a shortage, and to cope with an AI-heavy carbon footprint, Microsoft and the other tech giants are ready to explore all options, including nuclear. The carbon footprint of cloud hyperscalers is larger than expected, extending the growth potential of decarbonisation solutions beyond clean power generation. Key decarbonisation solutions include clean energy, energy-efficient appliances, clean materials and carbon capture and sequestration (CCS), all of which offer investment opportunities across a wide range of sectors. 

Artificial intelligence to limit global warming?

Overall, we continue to believe that the development of the generative AI infrastructure in the US will generate significant productivity gains across many industries and that there are several underappreciated dynamics, including:

1.The shortage of direct voltage capacity in the United States, in a situation where the volume of direct voltage under construction is less than 6 gigawatts for 2025 to absorb 10 gigawatts of volume of GenAI chips sold.

2.Beyond the need to deploy new nuclear power installations, the growing acceptance of this controversial energy by the general public and governments, the development of fuel cells, and even the reduction in the energy needed to mine cryptocurrencies. 

Could Artificial intelligence be at the service of the planet's survival and in a position to help achieve the objectives of the Paris agreements to limit global warming? Certainly, and to the benefit of an even greater interconnection between technology and the environment. The ultimate goal is not only to give meaning to your investments, but also to seize major opportunities that will generate performance for your portfolios.

Europe has nothing to be ashamed of in green technologies

I'd like to conclude with a comment on the Draghi report. Admittedly, the former President of the European Central Bank emphasizes Europe's lag behind the United States and China in terms of digitalisation. Admittedly, several of the recommendations run counter to the European Green Deal’s fundamental principles, as they call (in particular) for deregulation and the reduction of environmental standards that fail to contribute directly to the competitiveness of industry. Admittedly, the report overturns some of the pillars of the European green finance regulatory framework (the CSRD and CSDDD directives), which, in his view, impose an administrative burden on companies. However, Mr Draghi also underlines the dominance of European technological progress in the field of sustainability and clean technologies and sets out a number of ways to position Europe in the global race for a sustainable environmental transition. 

There's no need to look only to the United States or Asia for green gems - there are plenty of them in Europe! ... and the timing is perfect: GO for Green!

Disclaimer

This document has been prepared by ODDO BHF for information purposes only. It does not create any obligations on the part of ODDO BHF. The opinions expressed in this document correspond to the market expectations of ODDO BHF at the time of publication. They may change according to market conditions and ODDO BHF cannot be held contractually responsible for them. Any references to single stocks have been included for illustrative purposes only. Before investing in any asset class, it is strongly recommended that potential investors make detailed enquiries about the risks to which these asset classes are exposed, in particular the risk of capital loss. 

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