Temporary market frictions not enough to short-circuit energy revolution.
The energy sector is in an exciting stage of transition as economies move towards net zero emissions. A confluence of favorable structural trends makes Roman Boner, portfolio manager for the RobecoSAM Smart Energy Strategy, eye the decade ahead with rational exuberance.
COP26 saw world leaders, corporate conglomerates, and financial institutions reconvene and recommit to fighting climate change by decarbonizing their economies, operations and portfolios. While Roman concedes there’s still a policy-reality gap, he believes it sends a strong signal to market participants that the decarbonization agenda is pushing ahead. He says, “it’s the direction of COP26 that matters, not measuring the specific statements or outcomes.” Underscoring his view are the major policy and financing efforts already underway including the EU’s Green Deal, the passage of a trillion dollar infrastructure plan in the US, and emission crackdowns in China.
Roman emphasizes policy shifts, particularly the Green Deal’s reduced carbon credits and coal phase-out, are hitting markets hard, “we are already seeing its impact play out in higher energy and electricity prices across Europe.” China too witnessed an energy crunch that contributed to global supply shortages. China and Europe’s experiences prove that renewable energy supplies are insufficient and must dramatically expand: “according to the IEA, gigawatts of installed renewable capacity needs to grow exponentially to hit net zero goals,” he cites.
Roman warns regulators and shareholders are watching. “No one wants to be the sector laggard. CEOs now have sustainability in their KPIs and they’re looking to reduce emissions in an efficient way that guarantees the highest return.” He says it can easily be done in the next decade by switching transport fleets to EVs as well as gas and coal-fueled boilers in factories and buildings to electric heat pumps. Moreover, using better insulation materials and installing rooftop solar are also accessible, affordable ways for companies to reduce their carbon footprint.
Roman is convinced in the next decade measures like these will accelerate the energy transition and create huge opportunities for the supply chains behind clean and energy-efficient technologies.
Per Roman, the RobecoSAM Smart Energy Strategy’s design and structure is compelling and future oriented. “We aren’t investing directly in the energy sector via investments in nuclear, gas, utilities or fossil fuel companies that want to be cleaner. We invest in companies furnishing the technologies that enable these companies to make the energy transition in a smooth way … we don’t want exposure to stranded assets or legacy operations.” Explaining the Strategy’s low exposure to traditional utilities and renewables he says, “these stocks are often commoditized with lower barriers to entry, lower margins and lower valuations.”
We invest in companies furnishing the technologies that enable these companies to make the energy transition in a smooth way … we don’t want exposure to stranded assets or legacy operations.
The Strategy’s strong IT tilt allows it to capture returns in both up and down markets. “We are really focusing on disruptive technology – the tech enabler – and we use this tech-calibrated lens to assess stocks across the entire energy value chain, from generation to transmission to consumption. We invest less in the operators and more in the companies selling smart grid technologies – the switches, meters, sensors, actuators and converters that supply the ‘intelligence’. These business models have high barriers to entry and good returns.”
The Strategy benefits from being out in front of the transition, investing in stocks with an early mover advantage. Still, he says he keeps a safe distance from early-stage technology which can easily crash and burn from misguided assumptions. “Our focus is on tech companies already earning their cost of capital and capturing the growth that comes with electrification and the energy transition.”
In addition to tech stocks, the Strategy is also invested in industrial companies which supply equipment for clean and energy-efficient solutions as well as some renewable energy producers and utility operators which benefit from steady growth and stable cash flows.
Boner says the energy market is charged for high growth thanks to advances in technology that have driven down costs and enabled mass market production. “From electric vehicles to solar panels, heat pumps to wind turbines, clean tech is moving on the S-curve, going from high-cost, innovative, start-ups to real, scalable businesses.” From a purely economic perspective, renewable technology costs are already lower (and still falling) in many regions compared to fossil fuels alternatives (See Figure 1).
Boner says inflation and the prospect of rising interest rates, though concerning, have not curbed his excitement for the decade ahead. “Higher inflation and interest rates raise the costs for all energy producers including fossil fuels, so you only have an incentive to accelerate the transition to cleaner options.” However, rate hikes tend to hit growth stocks particularly hard, so he concedes managing the tech-heavy, growth-oriented smart energy portfolio won’t be a smooth sail in 2022.
Though challenges await, he points out that the Strategy is long-term and structured to anticipate fluctuations and downturns in the business cycle or other disruptive events. “We are not focused on young technologies that sound great and innovative but which disappear down the road when capital dries up or shocks hit that disrupt their business model execution.”
Roman is convinced these temporary challenges aren’t enough to short-circuit the strong currents sweeping across the global economy. “Energy has reached an inflection point for rapid growth. A decade ago, new energy technologies were driven by subsidies. Now, we only need subsidies to accelerate the change. The mid-term outlook has never been brighter.”
Despite short-term obstacles, “Energy has reached an inflection point for rapid growth”
Since taking the helm in August 2021, Roman says the market has “rolled over” from its previous highs. However, he says his nearly two decades worth of experience managing global equities in up and down markets (including the clean tech bust just after the financial crisis) has prepared him. That experience extends from managing global thematic equity climate funds to a multi-themed sustainable innovation strategy. He says, “I was focused on renewable energy, energy and resource efficiency, mobility and transportation, so there was obviously a lot of overlap in terms of investment ideas and universe constituents when I took over [the Strategy].”
Roman has also built up his team with technology and sector analysts that complement his wide-angle lens on climate change and global energy markets. Leveraging decades of investment and technical expertise, the Strategy is well-equipped to successfully steer through the volatile tides and swift currents that both buffet and accelerate the energy revolution.
1 (LCOE) Levelized cost of energy is the ratio of lifetime costs to lifetime electricity generation, discounted back to a common year using a discount rate that reflects the average cost of capital.