Podcast transcript: scroll to the areas that interest you

• IR: Iman Rappetti
• CP: Campbell Parry, Global Resource Analyst at Investec Investment Management
• BS: Barry Shamley,  Fund Manager & ESG Executive, Investec Wealth & Investment
• BR: Boipelo Rabotata, Deputy Fund Manager, Investec Wealth & Investment
• ZB: Zane Bezuidenhout, Equity Analyst, Investec Investment Management UK

• 00:00: Intro

  IR: 2015 is a year that will be remembered for a few things. Cuba and the United States reestablished diplomatic relations. Volkswagen was caught cheating on their emissions tests. And Donald Trump made his first bid for president. But among all the events of that year, only one continues to shape our world almost a decade later.

  At COP 21, 196 countries signed the Paris Agreement, the international treaty that's guided the world's climate change mitigation activities as we strive to reach net zero by 2050. These actions are focused on reducing greenhouse gases and increasing the use of renewable energies in a bid to keep the global temperature below two degrees Celsius above preindustrial levels.

  This incredibly ambitious goal will require a never seen before effort by all of humanity, but it also presents a monumental investment opportunity. To ensure a sustainable and more resilient future, significant investments need to flow into an energy system that prioritizes renewables, electrification, efficiency, and associated energy infrastructure.

  Welcome to The Current, an Investec Focus Radio series that delves into South Africa's energy transition. Over 10 episodes, we explore the country's energy crisis and how we can collectively shape a resilient and sustainable energy system. I'm your host, Iman Rappetti, and in this episode, we're looking at investment strategies and opportunities around climate change; how you can invest to help shape South Africa and the world's future for the better, without compromising on returns.

  Before we get into the episode, an important note.

  This podcast is for informational purposes only, and should not be construed as legal, tax, investment, financial, or other advice. The information is provided without any warranty, express or implied, regarding its correctness, its fitness for purpose, or any other relevant factor.

• 02:22: Meet the guests

  CP: I'm Campbell Parry. I'm a global resource analyst at Investec Investment Management.

  BS: I'm Barry Shamley, Fund Manager and also involved in ESG integration and stewardship at Investec Investment Management.

  BR: I'm Boipelo Rabotata, and I work on ESG integration, stewardship, and I'm a Deputy Fund Manager on the Investec Global Sustainable Equity Fund.

  ZB: My name is Zane Bezuidenhout. I'm an Equity Analyst in Investec Investment Management based in London. 

• 02:55: Investing in mining and green metals

  IR: The first and arguably most fundamental investment opportunity comes in the form of those companies that are intrinsic to net zero. Not because they're developing technologies of the future, but because they're the literal bedrock on which these technologies will be built.

  We're talking mining, and in a sustainable energy context, mining means green metals. The drive to transition to a net zero global economy has compelled countries and businesses to shift focus and to look at solutions to abate greenhouse gas emissions in this transition, the mining sector has taken center stage, shining a spotlight on green metal.

  So what are green metals and why is there an increased demand for them?

  CP: Green metals are the metals that are going to make that energy transition happen. For example, you've got a Tesla in your garage. It's not going anywhere without the nickel in the battery. It's not going anywhere without the copper windings in the motor.

  It's not going anywhere without the aluminium that makes the body part that allows the car to drive. So green metals can be considered to be those metals that are going to enable the energy transition.

  IR: Markets & Markets released a report suggesting the global green technology market is expected to grow from 28.6 billion in 2024 to 134. 9 billion by 2030. It's a clear indication of magnificent investment opportunities. So what avenues can investors explore in this fast-growing sector?

  CP: We like to play the companies that service the energy transition, Glencore, Anglo-American, and BHP, for example, here listed in this country, are companies that have exposure to copper, to aluminium, to zinc.

  CP: These can all be considered metals that are going to enable the energy transition.

  The energy transition also includes the electrification of power generation. So the ramp-up of solar and wind, for example, all of those are highly metals and minerals intense, and we're going to need significantly more uptake of those metals and minerals to enable net zero to work just through the sheer scale of what's needed to make it happen. And we like the enabling companies that help other companies deliver into that energy transition. Um, companies like Mondi and Ecolab.

  IR: How do we answer the question around guidance for investors in terms of parts of the green metal supply chain, which parts of the green metal supply chain offer then the highest promise of returns?

  CP: I think let's just talk about some stocks specifically. If you look at Glencore, roughly 30 to 35 percent of its profits are linked to copper. As a green metal, they have a little bit of nickel or less of it now. And a little bit of zinc exposure.

  Anglo American at the moment has about 23 percent of its profits geared to copper. It has PGMs of course, platinum is considered to be a green metal in that it helps enable the hydrogen economy. And it also has a little bit of nickel.

  The third one I mentioned before is BHP, which has a very low cost, very high quality copper business. But in terms of profit split or profit exposure, it's not as much as those other two companies. So those will be the three companies. I would think of that are exposed to green metals. 

• 06:05: Is renewable energy a good investment?

  IR: The move to net zero has brought renewable energy into sharp focus and South Africa's Eskom-induced electricity crisis, which you can learn more about in episode two of the series, has made renewables a hot topic locally.

  Naturally, such an upswing in alternative energy production brings with it investment opportunities. Barry, let's bring it to you: is renewable energy production a good investment given the clean energy transition seems to be moving slower than most people appreciate?

  BS: There are a number of arguments for investments in renewables. The most important obviously is to try and mitigate climate change. In addition to this, renewables are in many cases cheaper than fossil fuels.

  There are great data sources for this which verify this, like Lazard's Levelised Cost of Energy publication. It's an annual publication, and what it does is it adjusts for intermittency, so it's a like-for-like comparison, and their work's based on actual projects, not estimates.

  Secondly, outside of CO2 emissions, pollution from coal power stations causes endless health issues for communities around them. Another great reason to transition is energy security and continuity of supply.

  In South Africa, outside of renewables being cheaper, you're able to mitigate the impact of load shedding and keep your business operating.

  In terms of achieving net zero by 2050, South Africa has made a nationally determined contribution as part of our COP21 commitment, and so have many listed corporates.

  We essentially committed to energy transition over the next couple of decades, and it's not a case of if, but when. If it's left too late, you end up with a disorderly transition, which could impact growth and create a lot of volatility in markets.

  I suppose the last thing to mention is that there are measures being put in place to ensure you don't arbitrage energy policy and something like the European Carbon Border Adjustment Mechanism is effectively going to levy a cost on exporters from South Africa into the EU or from any other country.

  And that's when you produce something and use fossil fuel-derived energy, you're going to pay for that and you're not going to be competitive in a global market. So aside from providing energy security, the fact that it's cheaper, the fact that we've committed as businesses and countries, I just don't see any reason why you wouldn't just start transitioning your business as fast as possible.

• 08:17: The importance of efficient energy use

  IR: For Zane, the focus shouldn't just be about energy sources and production.

  ZB: It’s not only just cleaner energy, it's also using the energy that we have more smartly. If we look at the US energy system at the moment, it's estimated around two-thirds of the energy produced in America is wasted.

  So only one-third of the primary energy production is ultimately used in the end consumption.

  So in terms of the energy transition, that is the problem we're trying to solve. But we don't have to replace all the energy, we have to just replace the energy we use because we waste a lot of it.

  And the energy that we do use, we have to use it more efficiently ultimately. And that is a big step in the net zero challenge.

• 09:02: Battery technology advancement

  IR: While solar, wind and green metals present investment opportunities that fall most easily to hand for South Africans, there is another key ingredient to the energy transition to keep an eye on, even though their inclusion in the local energy mix may still take some time in arriving.

  CP: The energy transition by nature is dynamic, and the way we see it today is vastly different from the way it was five years ago when we started looking at this, and it will be very different in five years' time again.

  But a couple of things I think that are going to happen. Wind and solar right now suffer from intermittency, but what's going to happen over the next few years, which will make it a baseload power source, is that battery technology, stationary battery technology will advance in leaps and bounds. Not only the efficiency of that storage, but also the capacity of the storage.

  And China, I think China last year, added 22 gigawatts of battery capacity. It's half our national power generation. So that's a big number and it's just going to get bigger and bigger. The other thing with energy transition is the electrification of mobility, electric vehicles and things like that.

  And that's going through a bit of an air pocket at the moment, customers pushing back. But why are they pushing back? They're pushing back because it's too costly.

  It's too costly because the battery is too expensive. And over the next five years, battery technology will get better and better. And range will be taken care of by just a more sort of extensive, a charging infrastructure rollout.

  So this energy transition we're talking to, I think, you know, it's going to come in fits and starts, but ultimately it's a trend that is alive and well, and we continue to push it as an investment. 

• 10:34: Construction companies' boom off the back of energy transition

  IR: While South Africa doesn't yet have battery storage companies that offer sizable investment, the pervasive nature of the energy transition means that even companies that aren't directly involved in providing power or the raw materials that make it happen still present an attractive investment opportunity.

  BS: The companies seeing the biggest benefit right now in South Africa are the construction companies. A large part of their new order book growth is coming from renewable energy space.

  And that would be both wind and solar. So there's nothing direct that you can buy necessarily like you can't say, " I'm buying a wind company or a battery company or a solar company in South Africa", but you do get companies where it's a part of their portfolio and it's a great part of their portfolio.

  And you're going to benefit from some growth where a lot of other parts of their portfolio are not necessarily growing right now because of the slow GDP growth we're experiencing.

  IR: Our conversation with Boipelo, Campbell, Barry and Zane will continue after this.

  Promo: Are you looking for an investment that will contribute to a sustainable future for people and planet? A place to put your money to do good and simultaneously do well. Invested wealth and investment has the solution for you. The Global Sustainable Equity Fund invest. And companies that align with the united Nations 17 sustainable development goals. Find out more by clicking on the link in the podcast notes or search for investing sustainable equity fund.

• 12:09: A bearish short-term view on hydrogen

  IR: Throughout this series, and specifically in episode three, there's been reference made to the hydrogen economy, the elements and technologies that go into it, and its potential as a game-changing energy solution.

  However, the investment realities are, for now, a little far off for regular investors. 

  ZB: When I started looking and investigating or teaching myself a lot more about hydrogen, I was a bit of an evangelist and it was touted as the Swiss army knife for the energy transition.

  I've tempered my views quite a bit. It has a place, hydrogen, it's not a near-term solution. It is way in its infancy and potentially one could argue that it serves as a distraction from what we should be doing.

  And what we should be doing is ramping up the cheapest form of energy being renewable wind and solar as quickly as possible, coupled with storage. So that's where we think the focus, at least in the next 10, 15 years, in terms of government policy and private investment, needs to be investment into existing renewable technologies.

  Campbell is a little more blunt about hydrogen's immediate prospects.

  CP: That to me is a very long way from any kind of commercial reality. Despite what you may read today, I think it's still really expensive.

  It's not a very efficient storage of electrons. There's a lot of efficiency losses along the way. So for every 100 electrons that a solar farm or a wind turbine produces, only six are then reproduced in the form of hydrogen.

  It's difficult to store hydrogen because it leaks through most things, so there's a lot of technical and commercial difficulties around the concept of green hydrogen at the moment, which makes it to us as a post 2030 technology.

  It has fantastic utility, perhaps in future, and it makes a lot of sense, but I think globally, there's a lot of perils and pitfalls that we still have to overcome in hydrogen.

  In South Africa, there's a lot of talk about Boegoebaai Hydrogen, which is an IDC-Sasol led consortium. Personally, I'm a little cynical about that. I just think that the expense of it.

  The coordination required, the technical impediments I mentioned just now, these are all going to get in the way of something like that happening.

  As a hydrogen economy rolls out worldwide, I don't see South Africa playing a very meaningful role in it. It's going to be something that's going to be led by nations that have the financial wherewithal to push that technology initially, and they're going to be the ones to have that intellectual property, which they'll benefit from ultimately.

   

• 15:47: Investing in companies contributing to the SDGs

  IR: It's so interesting that even in this transition, there's still so many nooks and crannies and investor opportunities. So what are some of these that investors can take advantage of in companies that are right now transitioning to cleaner energy that might not be present in companies that haven't yet started their transition process?

  BR: I work on the Investec Global Sustainable Equity Fund. The investing criteria is that we're looking for companies that are contributing positively on a net basis to the Sustainable Development Goals and climate change is an SDG goal and so we see opportunities where companies continue to align with the net zero commitment because when they're aligning there's a clear connection with a positive impact to the SDGs.

  IR: Barry, you want to add?

  BS: I think it's really just about understanding each company specifically - where they are on their transition timeline, what capital has been spent and what remains to be spent.

  So the management teams that have been doing the right thing for a number of years that are past that point in the capital cycle and that are generating their own electricity, those are the companies you want to identify.

  So if you have two companies that are earning the same amount of revenue, they've got a similar basket of production, but one is further along on that transition timeline, that's the one you want to prefer.

  So that's the kind of work that we do, that Campbell, Zane and the rest of our research team do, understanding which are the companies that are better positioned.

  And I think that'll add a lot of outperformance over time because it's not a simple exercise for these companies. A lot of money has been spent, a lot of projects have to be delivered on specific timelines, and getting that right and being further down the timeline than your competitors is a big advantage and certainly makes us believe that the management teams that are planning, implementing for the long term are ultimately going to do better than their peers.

• 17:13: Transitioning companies present an opportunity

  IR: Boipelo, just in terms of global investments, we are seeing a massive outpouring of investments for companies with impressive green mandates. So in countries like New Zealand and in cities like Abu Dhabi, these companies rely less on fossil fuels and compete with each other for opportunities in the energy transition. Are there any indicators that help check the progress of these companies towards their journey of becoming more sustainable?

  BR: We've seen more and more companies setting decarbonisation targets. For example, MSCI World Index, more than half, so that is 52 percent of listed companies have published their climate targets for 2023 and beyond. And this might sound like a small number, but in 2015 this number was only 6 percent of companies, but however of those MSCI companies, only 9 percent have science-based targets.

  This means in a simplified way that a smaller percentage of companies have had their commitments assessed by the science-based targets or short for SBTI.

  And what SBTI essentially does, it verifies and assesses these targets to see if the commitments made by these companies are basically realistic.

  We monitor these companies with the help of a third-party data provider. And they have a net zero or climate capability, which assesses the net zero of these companies.

  So the data provider first checks if the company has an ambition target. This is if there is an existence of a long-term net zero commitment by 2050, and then they try to see if those emissions are on track with the ambitions made. So if a company meets all these criteria, then it is seen as aligned with the global goal to achieve net zero.

   

• 17:54: Monitoring of companies' transition targets is vital

  IR: I mean, it's interesting that you say that there is a small percentage of companies that have had these science-based assessments. Is The whole field sort of in its infancy, or is there a really great data set that's beginning to set a trend for companies in terms of realistic goal setting and keeping their commitments?

  BR: Initially, as I said, the bare minimum was to disclose. Now, a lot of companies have started disclosing.

  I think the next step, which is a step that a lot of the companies are taking, is to get these emission targets verified. And we've seen that increase come through with the companies that are getting verified by SBTI.

• 20:04: How will the adoption of AI impact net zero?

  IR: It seems like no conversation these days can be had without including the looming subject of AI. We're not about to reveal some AI-powered investment strategy, but there are some revealing mechanics and stats in the context of energy that are worth noting.

  IR: With the rise of new technology, artificial intelligence is used as a mechanism to provide solutions in the energy sector. We also see mining and software companies, they're joining forces to develop AI software for the energy industry.

  However, there are concerns that AI uses significant water to run and cool data centers. A 2023 Google's environmental report stated that in 2022, the company's data centers used up to 5. 6 billion gallons of water. Now this water footprint raises concerns on the kind of impact AI might have on water and global energy.

  Are there any impacts that we might experience in the future if AI continues to be regarded as a solution?

  BR: So there's obviously a huge excitement around the A. I. theme. What is interesting is that there hasn't been as much light shine on how intensive AI Is around energy and water data.

  Energy consumption has been stable at around 1 percent off global electricity production. But this is expected to increase significantly with the rise and the demand to power faster processing units.

  Interestingly, these tech companies require a huge amount of water to cool down the equipment when processing large volumes of data. What is fascinating in the sustainability context is that all the companies that will be dominant and use AI have pledged to decarbonize and they've made climate commitments, but as the energy needs increase due to AI, we expect that they will continue to be a greater need for renewables.

  IR: But it's not just energy and water use that data centers are big on. There's also a need for metals, a very big need.

  CP: Over the last couple of years, we spent about 100 billion annually on new data centers. That number is now maybe 200 billion, but every billion dollars spent on a data center requires 7 billion to be spent on new electricity supply to that data center over the 20 year life that data center exists.

  That's a massive amount of copper, basically the copper intensity of data centers and AI and all that sort of thing. It's anything between 27,000 tons of copper per gigawatt of capacity in those data centers.

  That's a big number in terms of copper demand. And it's one we're watching very closely. 

• 22:42: Is AI a responsible investment?

  IR: Those stats are astounding! Barry, given the impact of climate change on the world's water resources, should we be more circumspect before we invest in AI?

  BS: I think absolutely it's an important area of growth. I think it's just up to each company individually to understand the environment they're operating in, to make sure that they domicile their manufacturing capability in areas where there aren't water shortages, where they aren't impacting the community around them, and where there is appropriate infrastructure in place.

  And I think that is what differentiates a good quality management team. It's making those assessments up front. I think the other part of it is, will be technological innovation. So while these chips right now do run hot, I think as technology advances, they'll be able to operate at lower temperatures as their technology evolves.

  So I think we can't stop progress. I think we just have to manage it carefully. 

• 23:31: 2022 Inflation Reduction Act and its impact

  IR: Zane, I want to go to the United States and the 2022 Inflation Reduction Act. It's considered groundbreaking legislation when it comes to addressing climate change. It offers funding to businesses and also supports programs that focus on speeding up the transition to cleaner energy.

  A number of businesses are set to benefit from this initiative. Are there any high quality companies in the U. S. and further that have a strong focus on sustainability in their investment approach?

  ZB: It is a seismic shift in policy in the U. S. By the Biden administration, there's discussion as to what extent parts of this act are at risk.

  But even the quantum 369 billion, it's not enough. It is below what the US Needs to be spending incrementally. Each year, we should be spending an extra four trillion. That's trillion with a T globally to achieve net zero.

  And China being by far the biggest investor, even in terms of if you aggregate everyone, we are still far below what we should be doing.

  But it is helpful. And we are, in terms of our portfolio and investment ideas, we are seeing benefits to certain companies. In terms of the wind market, we already seeing, uh, benefits accrue to some of the wind turbine manufacturers.

  These are investable and for illustrative purposes, there's a company called Vestas is it's a Danish company, but it pretty much operates in what is now a duopoly in the US in terms of the wind turbine manufacturing industry between itself and general electric.

  And in terms of the tax credits and the incentives, we are seeing a ramp up in orders, particularly from the U. S. to put down factories in the US and to make these wind turbines in the U. S. for consumption of the US wind power industry. So we are starting to see a ramp-up in demand stimulated by the Inflation Reduction Act.

• 25:27: Global Sustainable Equity Fund

  IR: Closer to home, Investec created the Global Sustainable Equity Fund. Boipelo mentioned it earlier. It provides investors with an opportunity to put money in companies that have business fundamentals guided by sustainable development goals and still make impressive investment returns. Zane and Barry explain.

  ZB: With our Global Sustainable Equity Fund, we continually I'm thinking about ways to invest in the energy transition and maybe just taking a step back from specific companies or even subsectors, we've broken it down pretty much into a value chain and this is the energy transition.

  Although it's been underway for some time, it's still very much in its infancy where you look at renewable penetration globally, it's around 15 to 20 percent of the energy mix are still far away from being a dominant source.

  But in terms of looking at the value chain, instead of us trying to get overly clever and trying to predict the future as to whether it's a VW or Tesla that wins out in the electric vehicle race, we look at the value stream and where we're seeing the demand or maybe safety and probability is upstream.

  That's where resources are very important because they are at the starting point of the whole value chain. There's also got to be complementary storage around that and what that looks like.

  And then there's the end-use application. So instead of guessing how quickly the end-use application is going to transition, you spend a lot of time thinking if we sit far upstream, that will provide us with a degree of safety. Because there will be winners and losers in the energy transition.

  Ultimately, what we try and stay true to, is we have this strong sustainability-linked agenda within the fund, but ultimately we still remain true to an investment philosophy because not all themes are profitable from an investment return perspective.

  And we try and pursue and see companies that demonstrate strong quality characteristics, which we defined as above cost of capital returns.

  So they value creating led by strong and aligned management teams, and then the energy transition as a growth opportunity provides that runway for compounding returns for our investors.

  BS: So what we try and do once we've reviewed all those companies from a fundamental point of view is to review them in terms of their contributions to the United Nations Sustainable Development Goals.

  So as long as the company on a net basis or in aggregate is contributing to the Sustainable Development Goals, either through their revenue or their operations, they then become investable to us.

  So it could be a company like Vestas that is manufacturing something in the renewable space, or it could be something like an Anglo American that is mining commodities that are going to be used in renewable systems ultimately down the line, but they do so in a responsible way.

• 28:15: Investing for good without compromising returns

  BS: So as long as they're contributing to the sustainable development goals and their value creating that makes them investable. Like I said earlier, that all boils down to the management team.

  So the sort of visionary management that understand that they don't operate in a vacuum, that they need to take all stakeholders into account and that they need to operate in a responsible and sustainable manner. We believe those are the companies that will succeed in the long term and will provide investors with the best returns.

  Our funds do often perform different to the benchmark MSCI will because a lot of the underlying constituents are not investable to us.

  They don't meet our criteria. In 2022, we outperformed the MSCR world. Last year we underperformed.

  I think there was a case that a lot of global equity funds also underperformed last year because the performance was concentrated in a small number of companies, namely the Magnificent seven. And unfortunately at.

  A number of those seven weren't investable for us, so they don't screen as sustainable. They accounted for probably half of the return on the market over that period.

  At the same time last year, which was also quite impactful for us, there was a big derating in the clean energy space. And there were probably two key reasons for that.

  Very high interest rates globally resulted in a lot of the big projects that were about to be launched being put on hold because of the economics of those projects.

  They just didn't make sense anymore in terms of providing a decent IRR. The other part was caution around the potential for another Trump presidency and the risk that he tries to undo a lot of the work done by the Biden administration, which was put in place through the Inflation Reduction Act.

  But we are at a point in the cycle where we believe rates are about to start turning down. Uh, and that change in the cycle, as well as the fact that we've seen this big de rating in the clean energy space, makes us quite optimistic about the future from here. I'd say over the long term, we should do well,. But we won't always do what the market does.

  That's because we have a high active share or simply we just look different to the index. 

• 30:09: Energy transition- the megatrend that offers a myriad investment opportunities

  IR: Net zero and the United Nations Sustainable Development Goals aren't just the purview of governments and big corporations. There are things that every citizen can do to help move the world to net zero. And as we've heard in this episode, there are ways to invest in this reality that will help lead the world into a sustainable future and can deliver profits while doing so.

  CP: This energy transition is the megatrend of our lives. It's going to influence lives in so many different ways in the next 20 years. It brings with it myriad opportunities for investors, right from the upstream side of things, from mining companies. All the way through carbon capture, nuclear and enabling companies.

  So I think there's a host of potential opportunities out there to invest in. That's what we're doing here. We sit every day and we think about them and we hope to introduce these to our clients in the years to come.

  BS: Energy transition is extremely commodity intensive. Projects have been delayed, but they haven't been cancelled. Net zero deadlines remain in place.

  In addition, there's a lot of traditional infrastructure that hasn't been replaced or upgraded for decades. This demand coupled with limited supply due to underinvestment in mines will be very beneficial for commodity prices and those countries that are commodity exporters.

  And that's fantastic for South Africa as we're a commodity exporter. And it's wonderful that there are a number of world class mines operating responsibly here that we're able to invest in.

  ZB: Well, what we are learning is that starting with a blank sheet of paper, humanity would have not created the energy system that we have now, knowing what we know now and the technologies available to us now and the cost of those technologies.

  And what excites us is we have what we've got, but ultimately where we need to go is very exciting for us. And for us as investors, we just need to be true to our investment philosophy and cognizant of the investment cycle.

  IR: Thanks for listening to this episode of The Current brought to you by Investec Focus Radio. In our next episode, we're taking a deeper look at the role that oil and gas have to play in the energy transition.

  You can find all the episodes of this series at www.investec.com/thecurrent  or wherever you get your podcasts.

  [00:33:15]      If you enjoyed this episode, please rate it. Leave a comment and forward it to your friends and colleagues.

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