Hamish Chamberlayne

Janus Henderson Investors Portfolio Manager Hamish Chamberlayne explores how, in a world marked by geopolitical upheaval, artificial intelligence (AI) is transforming traditional economic forces, presenting both opportunities and challenges.

In today’s world, characterised by heightened confusion and unpredictability, geopolitical dynamics are increasingly overshadowing traditional economic forces. Nations worldwide grapple with declining workforce participation, ageing demographics, unproductive government expenditure, and substantial fiscal deficits. Yet, within this turbulent landscape the secular drivers of sustainable investing remain intact.

Secular investment trends around electrification, renewable energy, digitalisation, AI and reshoring are progressing uninterrupted

Last year, investment in the green transition reached unprecedented levels, surpassing US$2 trillion for the first time. The majority of this funding was directed towards established technologies such as renewable energy, energy storage solutions, smart grids and electric vehicles (EVs).

Despite the recent stagnation of US climate initiatives, Europe and China are intensifying their clean energy and broader sustainability efforts. Global EV sales this year are forecast to grow by 25% (22 million) compared to 2024, with China accounting for almost two thirds, followed by Europe (17%). Even in the US, EV sales are set to grow by 7% this year despite the Trump administration’s withdrawal of federal support.

Meanwhile, President Trump’s ‘Big Beautiful Bill’ will provide significant government funding, grants and tax incentives for companies investing in the US. Reshoring manufacturing and developing supply chain resilience in critical minerals are set to underpin a prolonged investment cycle, which is further fuelled by the gigantic levels of investment going towards AI infrastructure.

The large tech companies dubbed the ‘Magnificent 7’ are spending in excess of half a trillion dollars annually in the race for AI supremacy. All of this investment is resource and labour intensive and we see sustained growth in demand for power and electrification infrastructure to support it.

The role of AI in decarbonisation

These high levels of investment provoke questions about environmental sustainability.

The build out of all this AI and electrification infrastructure is also carbon intensive and we are paying close attention to the fact that carbon emissions are not going in the right direction. Although we are concerned by this uptick in emissions, we are optimistic that AI will ultimately play a beneficial role in decarbonisation efforts through advancements in innovation and productivity; and we remain confident that the growing demand for energy will be met with increased investments in clean energy solutions.

We are maintaining close engagement dialogue with our investee companies regarding their decarbonisation pathways. Thus far, we are pleased to report that we have seen no evidence from the companies we invest in that their corporate sustainability initiatives are slowing.

In fact, we see that companies worldwide keep setting net-zero targets and pouring capital into efficiency, waste reduction and supply-chain resiliency, providing durable foundations for our sustainable investment themes.

Running hot – a fiery economy ahead?

Coincident with these high levels of investment, government deficits are expected to remain large, and this is supportive of corporate profitability and asset prices. When combined with easing monetary policy, and pro-growth changes to banking regulation, we believe this is a positive backdrop for global equity markets.

Therefore, despite geopolitical uncertainties, we believe the stage is set for the global economy to run hot, and investors should be concentrating on these clear and significant investment trends which are marching ahead regardless.

These trends are inherently long-term and driven by technological advancements and societal needs rather than political shifts or individual country policies.

Sustainable fundamentals

Our team continues to concentrate on companies positioned to benefit from these enduring sustainability trends. For example, we favour sectors such as industrials and information technology – areas replete with innovators solving efficiency and climate challenges.

Companies within electrical equipment, professional services, software, renewables, automotive technology and infrastructure are exposed to the secular themes of electrification, digital services, AI and decarbonisation.

These companies are capitalising on booming demand and are exactly the kind of “picks-and-shovels” providers enabling this digital, electric and green future that the world is transitioning towards.

We believe it is important to seek out high-quality businesses with strong free cash flow and durable growth. This discipline tempers volatility during market shocks. It echoes lessons from 2020, when companies with robust financials and sustainable moats (competitive advantage that helps protect a company’s profitability) proved far more resilient.

By “staying on the right side of disruption” – i.e. investing in firms driving change rather than those at risk from it – we believe investors can better weather turbulence and capture superior growth over time.

This means being incessantly forward-looking in approach. Our thesis is grounded in the principles of durability allied with innovation – as Peter Drucker, the Austrian American author and consultant who helped develop modern management theory, reminds us: “The greatest danger in times of turbulence, is not the turbulence, it’s acting with yesterday’s logic.”

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Hamish Chamberlayne

Hamish Chamberlayne, Head of Global Sustainable Equities at Janus Henderson Investors, considers the seismic changes that are happening to make renewable energy the new back bone of the global economy.

Key takeaways

• The pace of investment in clean energy is fast outpacing fossil fuels, and it is forecast that renewable energy will become the largest source of global electricity by 2025.
• Such a shift in the global energy mix will require large scale changes and solutions to the current challenges around renewable energy, including successfully scaling capacity, managing renewable waste and ensuring effective energy storage.
• There are a host of innovative companies across the entire renewable infrastructure supply chain that offer solutions to today’s challenges. We believe that investing in these companies can keep us on the right side of disruption.

Global growth in demand for oil is set to slow significantly by 2028, according to a recent report by the International Energy Agency (IEA). The study suggests that oil demand will peak within the decade as countries actively move away from fossil fuels – a shift that has been expedited by the fallout of the war in Ukraine which has spurred policymakers to bolster energy security by finding alternatives to Russia’s energy supply.

In stark contrast to slowing oil demand, the pace of investment in renewables energy is rising much faster than people realise. The IEA forecasts that renewables will account for over 90% of global electricity capacity expansion, with output growing by almost 2,400 GW over 2022-2027 (see chart 1). By 2025, it is expected that renewables will become the largest source of global electricity generation while the electricity share generated from oil, coal, and natural gas declines. Of the renewables share, wind and solar are forecast to provide almost 20% of global power generation in 2027, with wind capacity doubling and solar capacity tripling.^[1]

Chart 1: Renewables are making up an increasingly larger portion of electricity capacity

These sizeable forecasts are the result of aggressive policy initiatives put in place to strengthen energy security and meet net zero goals.

Notably, the EU’s Green Deal and the US Inflation Reduction Act (IRA) seek to invest €1.8 trillion^[2] and US$370 billion^[3] respectively into the green transition while China’s 14th Five-Year Plan aims to increase renewable energy generation by 50% from renewables by 2025.^[4] Meanwhile India’s green policy is targeting 50% of electricity requirements from renewable sources by 2030.^[5] These initiatives will see the US, China and India double their renewable capacity expansion over the next five years, accounting for two-thirds of global renewables growth.

Such a seismic shift in the global energy mix will require large scale changes and solutions to some of the current sticking points surrounding renewable energy. As active investors, we take a forward-looking and practical approach when assessing these challenges.

Here, we explore some of the hurdles that must be overcome in order for renewable energy to become fully integrated the global economy.

Scaling manufacturing capacity to meet targets

Renewable companies have responded to government incentives with major plans to expand current operations and develop new low carbon projects. In the UK, SSE recently announced plans to invest up to £40 billion in low-carbon energy infrastructure.^[6] Similarly in Europe, Iberdrola has committed €47 billion to investing in projects which are driving the energy transition.^[7] While these ambitions are positive for the climate agenda, the challenge will be finding the capacity to meet these goals. As seen in chart 2. companies have already exhibited the potential to perform beyond their own targets but the four-fold ambition to 2025 will be a real test.

Chart 2: High hopes for growth in renewables

Long-term partnerships with suppliers is one way to boost manufacturing capacity and protect against volatility in supply chain prices. One example of such a partnership is Danish power company Ørsted’s recent strategic partnership with German steel producer Salzgitter. Ørsted will supply the renewable energy needed for Salzgitter to produce green steel and Ørsted will use the steel to build its wind turbines.

These kinds of relationships are key for renewables companies to be able to build out the infrastructure necessary to meet electricity demand. Other critical infrastructure includes solar photovoltaics (PV), electric vehicles, charging points and energy storage. We expect to see similar capacity growth in the US, with the IRA allocating US$30 billion in production tax credits to supply chain-specific manufacturing in the renewables space.

Is the carbon payback for renewables a problem?

Some critics have suggested that the embedded carbon required to ‘make’ renewable infrastructure – from material mining to manufacture and construction – could diminish the potential carbon saved from using renewables. However, studies have shown that the life-cycle emissions of wind and solar are much smaller than the remaining emissions from existing fossil fuels plants. Various calculations suggest that the carbon payback period (the amount of time required to recover all energy costs associated with manufacture) can range from around seven to nine months for wind turbines and one to two years for solar PV. ^[8,9,10] This, in our view, is a small and short-lived price to pay for renewables to become the backbone of the world’s energy supply.

In addition to an attractive carbon payback timeframe, renewables also exhibit a favourable energy return on investment (EROI) – the ratio of the amount of usable energy acquired from a particular resource to the energy expended to acquire that energy – compared to other energy sources. Research finds that a coal-fired power station has an EROI of 9:1. In contrast, wind has an EROI of 44:1. To put this more simply, it means that 44 units of energy can be yielded from one unit of energy invested in wind, versus nine units yielded from coal.^[11]

Over the long term, the potential benefits of renewable power far outweigh the immediate carbon cost. As such, there is a clear long-term case for renewable energy in creating a low carbon economy.

Circular principles and effective waste disposal

Currently, wind and solar infrastructure have fixed lifespans of 20-30 years, which poses the problem of what to do with projects when they reach the end of their lives. Turbine blades piling up in landfill and toxic solar panel waste are counter to the positive impact that renewable energy promotes. With growing concern about waste associated with the disposal of renewable infrastructure, companies must consider the way all resources are managed from start to finish.

Boralex, a Quebec-based company which develops and operates renewable power facilities in Canada, France and the US, is responsible for overseeing renewable infrastructure over an entire lifetime. At the outset, Boralex’s activities consume very few raw materials directly, with the company instead choosing to integrate a circular approach to its resource management wherever possible. For used turbine materials, the business is exploring several options, including sales on the second-hand market, refurbishment and recycling. These practices reduce the overall reliance on new materials, thus easing pressure on both the supply chain and waste landfill.

New solutions are also emerging to tackle components of renewable infrastructure that are less easy to dispose. Turbine blades for example contain complex composite materials which create lighter and more aerodynamic blades but pose challenges when recycling. Danish wind turbine manufacturer Vestas recently announced a new chemical technology to break down old blades into liquid before extracting high quality materials to use in new blades. In the solar space, the first specialist recycling facility is opening in France to manage the large amount of waste that is anticipated as the uptake in solar panels increases, with the intention to recycle 99% of components. In addition to recycling, constant innovation in solar panel design is gearing towards a more circular approach to panel manufacture.

Smart energy storage

Storing energy will also be vital to achieving a low carbon economy when the sun isn’t shining and the wind isn’t blowing. Batteries, thermal energy storage and pumped hydro allow for energy to be stored and accessed when it is needed. SSE recently announced plans to convert an old hydro power station in Scotland into pumped storage, which involves pumping water uphill at times of low energy demand and releasing the water through turbines to create electricity when it is needed. The new Sloy hydro-electric power station could provide constant flexible energy for up to 160 hours, enough to power around 90,000 homes for up to one week.^[12] This will play a significant role in managing the energy supply and is an example of how firms can upgrade existing infrastructure to meet today’s needs.

While pumped hydro makes up the majority of current energy storage, grid-scale battery growth is on the rise. According to the IEA, grid-scale battery growth is projected to account for the majority of storage growth worldwide. In 2021, grid-scale battery installation increased by 60% compared to 2020, with the US leading the way. Despite these changes, the IEA states that more progress is needed in this area to facilitate the hour-to-hour variability of wind and solar electricity generation required for a net zero scenario.8 China is the leader in battery making today but Canada, which has the necessary minerals and skilled workforce, is emerging as the next competitor in battery production.

What does this mean for investors?

The growth runway for renewable energy is huge; not only is it backed strongly by governments across the globe, but the pace of investment in clean technologies is much faster than many have anticipated. As such, we expect to see seismic shift from fossil fuel-based to renewable industries in the next decade.

It is important to note that renewable energy companies are only one aspect of achieving a low carbon economy. Electrification and digitalisation are two highly important vectors for decarbonisation and there are many different companies playing a part in these trends.

As sustainable investors, this presents many potential investment opportunities. We take a forward-looking, practical approach to find companies which are innovative and offer solutions all the while maintaining robust balance sheets. This approach, we believe, helps us to stay on the right side of disruption.

———

Footnotes:
[1] International Energy Agency, Renewables 2022 Analysis and forecast to 2027, December 2022
[2] European Commission, European Green Deal, December 2019
[3] The White House, November 2022
[4] Energy Foundation China, China’s 14th Five-Year Plans on Renewable Energy Development and Modern Energy System, September 2022
[5] International Energy Agency, India’s clean energy transition is rapidly underway, benefiting the entire world, January 2022
[6] SSE, SSE announces plans to invest up to £40bn in low-carbon energy infrastructure, May 2023
[7] Iberdrola, Strategic Plan 2023-2025, June 2023
[8] New Scientist, What is the carbon payback period for a wind turbine, September 2019
[9] Vestas, Energy Payback & Return on Energy, 2023
[10] Carbon Brief, Solar, wind and nuclear have ‘amazingly low’ carbon footprints, study finds, December 2017
[11] SSE, ‘SSE unveils redevelopment plans for Sloy hydro-electric Power Station, May 2023
[12] International Energy Agency, Grid-scale storage, September 2022

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Hamish Chamberlayne

Hamish Chamberlayne, Head of Global Sustainable Equities, explains why investors should not be wrong-footed amid increased volatility in 2022.

Key takeaways

• We anticipate heightened market volatility in 2022 as the global economy contends with inflationary pressures associated with the COVID-19 pandemic.
• We believe that inflationary pressures will benefit long term secular growth trends associated with efficiency, clean technology and renewable energy.
• The outcomes of COP26 should further accelerate the transition to a low carbon economy and we are excited by the range of opportunities in 2022 and beyond.

As was the case for much of 2021, we expect the 2022 market environment to be characterised by ongoing tensions between secular growth companies and the post-pandemic ‘reopening’ trade. To our mind, we believe that the powerful secular growth trends of digitalisation and electrification should dominate the market narrative over the next decade as decarbonisation of the global economy gathers pace. We expect heightened volatility, however, as the global economy contends with inflationary pressures stemming from the dislocations caused by the COVID-19 pandemic.

Inflation acts a tailwind for efficient businesses

When we consider the opportunities to sustainable equities in this environment, it is very important to remember that inflation often contains the seeds of its own destruction; higher prices incentivise businesses to invest in efficiency, substitution and technology. This can often make the economics of clean technologies, electric vehicles and renewable energy more attractive. We believe, therefore, that an inflationary backdrop will act as a tailwind to many of the businesses we invest in. In addition, we generally seek out companies with strong franchises which offer a compelling value proposition around their goods and services; because these types of companies should have pricing power which enables them to pass on higher input costs.

Do not be wrong-footed amid the volatility

It is important to remember that inflation is not synchronised. Rather, it tends to ripple through markets, creating volatility as different companies are impacted at different times and then recalibrate themselves. As such, we expect to see market gyrations between value and growth from quarter to quarter as sectors are hit by inflation at different times. In the midst of this volatility, we urge investors not to be wrong-footed by the inevitable and short-term flip-flopping of growth versus value. In our view, the long-term secular trends associated with the transformation to a more sustainable global economy will be the most important determinant of investment returns.

So, we believe a period of inflation may ultimately be beneficial to the growth of many of the names we are invested in as it makes the economics of sustainable businesses more compelling and accelerates the level of investment into the low carbon energy transition.

Alignment for a sustainable global economy is accelerating

Keeping to the theme of the low carbon transition, we take a positive view on the outcomes of the recent COP26. The climate pact has secured greater ambition in emissions reductions from key countries including India and China. Importantly, all countries have agreed to revisit their nationally determined contributions (NDCs) annually rather than every five years. With countries held to greater account, we expect the process of emissions reduction to speed up. In fact, we anticipate that the transition to a low carbon economy may be faster than individual national net-zero timelines as innovation and clean technology cost reductions enable governments to press harder on the policy accelerator.

From an investment perspective, we are most interested in the direction and rate of travel than we are of the snapshot view, and COP26 has clearly signalled global alignment on the necessity of accelerating decarbonisation. In 2021 alone we saw significant progress in the low carbon transition, with electric vehicle (EV) sales markedly higher in the first half of 2021 versus 2020 (chart 1), highlighting the quiet rate of progress that we are making towards a decarbonised economy. We do not anticipate this trend slowing, with higher oil prices and government initiatives further boosting demand for EVs. In addition to the above, COP26 has seen great progress on carbon trading markets and transparency for the accounting and reporting of targets and emissions, and commitments to finance developing countries’ transitions. These developments may be a powerful incentive for change.

Source: The global electric vehicle market overview in 2022: statistics & forecasts, Virta, data as at end June 2021. Electric vehicles comprising of Battery electric vehicles (BEVs) and plug-in hybrid electric vehicles (PHEVs).

We remain focused on the digitalisation, electrification, and decarbonisation trends as they become the driving features of our global economy, and this continues to guide our investment decisions and portfolio construction. Our approach is all about identifying the companies that are aligned with long-duration sustainable development investment themes, and that are playing a positive role in the transformation of the global economy towards a more sustainable footing. We spend our time looking for the companies that will have exciting growth opportunities as a result of this, that have cultures of innovation, and have built-in financial resilience. We are as excited as ever by the range of investment opportunities we see in 2022 and beyond.

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Matt Gaden

Janus Henderson Investors has announced the Australian launch of the Janus Henderson Global Sustainable Equity Active ETF (Managed Fund) (ticker ‘FUTR’). The new active ETF draws on the firm’s 30-year heritage of sustainable investing and builds on its commitment to providing differentiated ETF solutions.

FUTR will seek to invest in global companies that are positioned to confront the challenges posed by megatrends (such as climate change, resource constraints, population growth and ageing populations), and those seeking to transform the industries in which they operate to support a sustainable international economy.

The launch of FUTR follows the recent publication of an IPCC report warning the urgency of collaborative action against climate change and the Responsible Investment Association of Australasia’s (RIAA) report^[1] highlighting that the market for Australian responsible investment is growing at fifteen times the rate of the wider investment market. FUTR provides Australian retail investors the opportunity to invest in companies whose activities benefit from the transition to greater global sustainability.

Matt Gaden, Head of Australia at Janus Henderson said: “The migration towards a more sustainable global economy is creating a myriad of investment opportunities. While our clients still demand investment solutions that will outperform over the longer term, they also want to know their investments are making a difference to make the world a better place – that you can generate strong returns and do good at the same time. Those words and beliefs are now being translated into action and the demand we’re seeing for quality, sustainable investment strategies shows no sign of abating.”

The ETF will also be available as a managed fund and will be managed by London-based Head of Global Sustainable Equities, Hamish Chamberlayne and US-based Portfolio Manager, Aaron Scully. The investment team will be supported by a dedicated analyst team (including a sustainability analyst), as well as by a new and growing global team of ESG specialists, led by Janus Henderson’s Head of ESG Investments, Paul LaCoursiere.

The market-leading Global Sustainable Equity strategy is Janus Henderson Investors’ largest dedicated ESG offering. The Fund is currently AUD$4.7 billion in size and assets under management have tripled over the last two years due to global market demand for the solution. The Fund is ranked in the top Morningstar decile over both three and five years. The Janus Henderson Global Sustainable Equity Fund also recently received a “Recommended” rating from Zenith Investment Partners. In its research report, Zenith noted the Fund is ‘an attractive offering for investors with a sustainability/ethical focus’.

New ETF helps Australian investors stay on the right side of disruption

The Global Sustainable Equity ETF (Managed Fund) aims to provide capital growth over the long term by investing in companies whose products and services are considered as contributing to positive environmental or social change and thereby have an impact on the development of a sustainable global economy. The ETF’s high-conviction portfolio of 50-70 companies carries a carbon footprint that is 85% less than that of the MSCI World Index.

Janus Henderson Investors strongly believe investing through a lens of sustainability combined with fundamental research, aids in the construction of a high conviction portfolio with an attractive risk profile. To that end, FUTR invests in companies that make a positive impact on the development of a sustainable global economy, avoiding companies invested in fossil fuels and those that stand to be disrupted by the transition to a low-carbon economy. This allows FUTR to provide investors with access to equities with strong ESG characteristics and serious consideration of Triple Bottom Line^[2].

Hamish Chamberlayne, Head of Global Sustainable Equities at Janus Henderson said: “2021 marks the 30-year anniversary of the Global Sustainable Equity strategy. Environmental and societal megatrends are putting the global economy under enormous pressure and have very real investment implications. Intentionality and transparency are core attributes of sustainable investing and over many years we have developed a clear framework for integrating sustainable development issues into our investment decision making. Our active approach has sustainability embedded the whole way through our investment process from universe definition to portfolio construction and active ownership. We consider a strong engagement ethos as being essential to any truly sustainable investment strategy.

We see a close alignment between sustainable development, innovation and growth. We start with the question “Is the world a better place because of this company?” because we believe companies with goods and services aligned with the development of a sustainable economy are more likely to grow and generate strong investment returns. And because ESG risk factors are both complex and varied, our culture of deep fundamental research ensures effective integration into investment analysis.”

As part of its ongoing commitment to responsible investing Janus Henderson Investors will be an active participant at the 2021 United Nations Climate Change Conference (COP26) scheduled to be held in Glasgow in November. COP26 brings heads of state, climate change experts and campaigners together to agree on a plan to address climate change. Janus Henderson will host a panel discussion on 8th November on the topic: “Does decarbonisation have to be bad for emerging markets?”.

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