‘EU taking the lead on net-zero path’
What connects a graphite mine in Northern Sweden, a small German engineering company that specialises in electric motors, and a Nordic wind turbine installation company? All are set to benefit from the tectonic shifts brought about by the global energy transition, but few will be well known to investors.
As the global race to net zero gathers pace, all eyes are on Europe as the model for a sustainable future. The region leads the world in adopting climate policy, integrating renewable energy and the shift to electric vehicles. The European Union is the first major economy in the world to set out a detailed roadmap for how to reach net-zero emissions. Long seen as a slow-moving economy burdened by politics and bureaucracy, the continent is now setting the pace in one of big issues of our time – the path to carbon neutrality.
As Europe embarks on its ambitious quest to be climate neutral by 2050, entire industries and value chains are being redrawn. Europe is seeing world class renewables companies springing up and entire value chains devoted to supporting the fast-growing EV sector. If the UK’s petrol shortage is anything to go by, EVs could be the norm sooner than ever imagined. But for this to happen, an enormous supply chain needs to be built. By 2030, more than 30 gigafactories are expected to come online across Europe as the industry ramps up to meet the surging demand for batteries.
Volkswagen alone is planning to build six huge battery factories as it aggressively pivots away from the internal combustion engine. Lithium, cobalt, manganese, graphite and a raft of other materials are critical in this transition. The black powder of rare metals coming from end-of-life batteries looks set to usurp oil as the black gold that will power economies in the decades to come.
The geopolitics of this transition will feature a new type of global competition, one centred around access to renewable technologies and rare resources. With China dominating the production and processing of many of these upstream materials, supply chains are potentially vulnerable. Some of these metals can be sourced from outside China but the economic viability is often unsure and can come with its own ESG concerns. For example, lithium production is concentrated in some of the driest areas in the world, and there have been concerns around water stress and environmental damage. The largest reserves of cobalt are in the Democratic Republic of Congo where investigations have uncovered human rights abuses and the use of child labour in the supply chains. With demand for electric vehicles ramping up, the EU needs to develop alternative supplies and localise supply chains. This, we believe, could be a great opportunity for investors willing to hunt up and down value chains to find the pinch points.
The flurry of thematic fund launches, huge flow of assets and punchy valuations (many of which have since corrected this year) suggests crowded positioning among investors. The opportunity is clearly large, but so is the valuation risk in what is still a nascent market.
It also raises countless ESG challenges. An apparently clean play on EV batteries could be muddied down the supply chain depending on where and how its raw materials are sourced. Unpicking these conflicts is tricky, but one suited to genuine active management and company engagement.
What connects the Swedish graphite mine, the German electric motor play and the Nordic offshore wind installation company? All are in the sweet spot of capturing the opportunity but so far have been off the radar of many investors. For those prepared to look more widely, this is where we feel the best opportunities currently can be found in Europe.
This article was originally posted in Investment Week.
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