Will decarbonisation be the mega-trend of the next decade?

US equities have led global stock markets higher over the past decade. In the last ten years, US equities have returned a stellar 292%, compared to just 73% for global equities (as measured by the MSCI USA Index and MSCI AC World ex US Index respectively, in US dollar terms, as at 31 August 2020).

As climate change moves up the political and social agenda, decarbonisation could be the mega-trend of the next decade. And we think many of the companies best placed for the transition to a low carbon future are listed outside the US.

Who are the major wind and solar players?

The US has a number of companies who are the dominant players in their field. But this isn’t always the case if we look at renewable energy.

Take the wind energy industry as an example (which is dominated globally by a handful of companies), only one of the major manufacturers is a US firm. The biggest global operators include a Denmark company and a German-Spanish group. Chinese firms tend to have a strong focus on their domestic market.

Meanwhile, the solar industry is heavily dominated by Chinese firms. China leads the way in the production of polysilicon, as well as in solar cell manufacturing capacity. This is a fairly commoditised industry, with limited scope for generating above-average profit margins. Nonetheless, if there is a boom in solar, then it is these Chinese firms who will benefit.

What about electric vehicles?

From a decarbonisation point of view, the important part of a battery electric vehicle is the battery. Here again, non-US firms are the market leaders. The battery supply chain is dominated by Asian companies.

US and European car firms may try to source more batteries locally as they ramp up production of BEVs, but for now the technical know-how resides with these Asian companies.

It is also the case that the main buyers of electric vehicles currently are Chinese and European consumers. This faster market adoption will bring economies of scale, development of technical knowhow, and faster growth in related services businesses to support the EV industry.

Non-US companies are leading decarbonisation

Our Sustainable Investment Team analysed over 10,000 global companies for their commitment to science-based target initiatives (SBTIs) on climate change. The regional differences are striking.

Despite accounting for only 13% of listed companies analysed, Western European companies account for 38% of the total number with science-based targets. North American companies only make up 22% of this group, despite being 26% of the listed universe.

There is also a higher proportion of listed companies in Developed Asia, Latin America, and Emerging Europe committed to science-based climate targets than there is in North America.

As we go into a phase where carbon taxes and carbon prices are likely to rise globally to address climate change, this head-start in reducing their own emissions will become a more valuable competitive and cost advantage.

The US stock market dominance of the past decade has largely been thanks to the strong performance of a handful of major stocks in a few key sectors. The FAANGs (Facebook, Amazon, Apple, Netflix, Google) have led the way.

These fantastic companies will likely continue to be leaders in their fields. However, with momentum growing around the need for a low carbon future, we think stock market investors should pay heed to the leadership role that non-US companies are taking in decarbonisation.


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