Investors seeking positives in these bleak times can reach for green infrastructure.
Green infrastructure – Britain’s chance to build back better
Our guest writer, David Harrison, Manager of the Rathbone Global Sustainability Fund discusses green infrastructure and provides some insights into the fund.
Green infrastructure: the phrase is on the lips of politicians from Asia to the UK, the US and European Union, as countries pursue massive, unprecedented spending to drive the economic recovery from Covid-19.
Green infrastructure investment is emerging as a response to the economic damage wrought by coronavirus because it satisfies several needs. It helps countries meet climate pledges in the UN Sustainable Development Goals, offers ongoing national dividends, and supports employment – 730,000 UK jobs have been lost alone since lockdown as companies lay off workers and freeze hiring.
Looked at closely, green infrastructure has several key components: renewable energy, energy efficiency, and policies to promote the circular economy. Companies working in these areas are already seeing increased demand for their goods and services.
Renewable energy sources – particularly wind and solar power – are becoming increasingly important in global energy production. The old argument that renewables are expensive is no longer true. Wind and solar are now at cost parity with fossil fuel-generated energy in many countries. They also produce radically lower emissions. We think the trend towards renewables is still at an early stage, which presents a number of interesting investment ideas to us.
In recent months, we heard the chancellor Rishi Sunak’s New Green Homes Grant will give up to £5,000 in vouchers for insulation and double glazing with the view that UK homeowners who retrofit their properties will see tangible savings. Energy efficient commercial properties are, arguably, more attractive to renters. Now more than ever projects and businesses that can deliver these cost-savings make for attractive investments.
The circular economy
The circular economy remakes towns and cities to ‘design out’ waste and pollution, and keep products and materials in use rather than throwing them away. For example, the deposit return scheme in Denmark where you only get your three kroner back (about 26p) if you return your single use plastic pop bottles to the shop you bought them from for recycling.
Investors like me can’t just buy the ‘green theme’. Instead, we look for companies that produce something tangible and that are easy to get to grips with. Think about solar energy 10 years ago. This was a fantastic theme, but back then many of the companies failed to make profits. We seek out well managed businesses that dominate in their market, that we think will be around in a good few years from now. There are still plenty of opportunities in areas you can see and touch, like wind turbines. The bottom line is we avoid anything you need a PhD to understand!
Vestas, the Danish wind turbine maker, fits what we are looking for. It has strong market share globally and continues to see an excellent order pipeline for its products. We think that ‘wind’ as a percentage of the global energy mix will continue to grow steadily in the next five years or so. Vestas is likely to be a beneficiary of this. There is also a diversified revenue stream, thanks to Vestas’ strong service business. Customers often want to outsource the servicing of highly complex wind turbines, and we see this as a real competitive advantage that will only get stronger.
Another company we invest in is Kingspan. Ireland-based, it makes residential and commercial buildings energy efficient, with a focus on insulation products. That £5,000 UK homeowners are getting to retrofit their properties, well, we think Kingspan is likely to see increased demand because of this. The company is also benefiting as commercial buildings become more energy efficient. It enjoys strong brand and heritage in the commercial space, reflecting management’s long-term focus and continual product innovation
Job creation, economic benefit, environmental and social good. Now is the most opportune time we have seen in over a decade of looking at green infrastructure to really drive it forward, and attractive returns could be there for investors.
There is a phrase we’re starting to hear a lot that encapsulates this moment – let’s not just build back, let’s build back better.
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