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Schroder Global Climate Change
Climate change investment themes
A thematic equity strategy
2 | Schroder Global Climate Change Investment Themes
Long-term policy goals to cut greenhouse gas emissions require nothing
short of an industrial revolution to engineer a low-carbon economy
capable of sustainable growth. We believe transitioning to a low carbon
world will have far-reaching consequences for a broad range of industries
and companies, and require investments across multiple sectors, not just
renewable energy. In this document, we outline the broad climate change
themes that characterize our investible universe.
Climate change investment themes
Sub-theme
examples
Investment
opportunities
Energy
Efficiency
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Sustainable
Transport
 Energy efficiency in transport
 Mass transport systems
 Alternative transport modes
 Tires, turbochargers,
transmissions
 Railroad and infrastructure
 Hybrid and electric vehicles
 Batteries, fuel cells
Environment
Resources
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Agricultural productivity
Biofuel
Food retail
Carbon removal/storage
Water
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Agricultural equipment
Ethanol
Food retailers
Forestry
Water supply/infrastructure
Clean
Energy
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Wind
Solar
Hydro
Nuclear
Renewable power
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Wind turbines
Solar supply chain
Electricity generation
Nuclear power
Renewable energy providers
Low
Carbon
 Gas value chain
Theme
Industrial efficiency
Built environment
Light-weighting
Electricity grids
Information and communication
Automation
Insulation and Lighting
Carbon fiber/specialist coatings
Online retail
Sharing economy
 Gas transmission and
distribution
Schroder Global Climate Change Investment Themes | 3
Energy efficiency
A significant shift in investment is required within the energy sector to limit global warming to 2oC.
The International Panel on Climate Change (IPCC) estimates that over $600 billion will be invested
globally in energy efficiency solutions between 2010 and 2029. In contrast, reductions of over $300
billion per annum are estimated for fossil fuel power plants and extraction (see Figure 1). In addition to
reducing carbon emissions, these energy efficiency investments also offer rapid payback for companies
able to make them, even more so than renewable sourcing. As the chairman of Google, Eric Schmidt,
wrote in his blog: “the cheapest energy is the energy you don’t use in the first place”.
Figure 1: Changes in annual investment flows 2010-2029 (Billion USD2010/yr)
800
700
600
500
400
300
200
100
0
-100
-200
-300
-400
Total electricity
generation
OECD
Renewables
Non-OECD
Nuclear
Power plants
with CCS
Fossil fuel power
plants without CSS
Extraction of fossil Energy Efficiency
fuels
across sectors
World
Max
Median
Min
Mean
Source: IPCC AR5 WG3, 2013: Summary for Policymakers. In: Climate Change 2013: The mitigation of climate change
Opportunities to improve energy efficiency can be identified in a wide range of sectors and
processes, including:
Industrial companies
Industrial companies are often highly energy intensive, with equipment and processes requiring vast
amounts of heat and power. There is significant scope for energy reduction through technological
improvements, sensors, automation, precision operating, electrification of heating and processes,
reduction in wasted energy and more effective pumps and air compressors.
Building sector
The commercial and residential buildings sector accounts for approximately 30-40% of global energy
emissions and between 60 and 70% of electricity consumption and indirect emissions. Energy
efficiency requirements for buildings are a key feature of all G8 countries’ energy efficiency policies.
This is particularly true in the EU where minimum energy performance standards in new buildings
are mandatory. Policies targeting retrofit of existing housing stock are also emerging. As a result, we
expect to see an increase in the scope and stringency of minimum energy performance standards,
the introduction of energy-smart buildings and the technology and equipment to support them.
House-builders are increasingly seeking to create low or zero emission products, driving penetration of
components such as insulation, LED lighting, heat pumps, integrated solar heating and generation.
4 | Schroder Global Climate Change Investment Themes
Aviation
Aircraft use large amounts of fossil fuel. As there is no easy substitute to this at present, it is essential to
improve efficiencies. Aviation fuel consumption can be dramatically reduced through decreasing aircraft
weight and enhanced engine efficiency. In the case of the former, this can be achieved through using
lightweight materials (e.g. carbon fiber, titanium and composite plastics) and improving aerodynamics.
Engine efficiency, on the other hand, relies on innovation in technology and flight control systems.
Lighting
LED lighting is far more energy efficient than traditional incandescent light bulbs and lasts up to 10 times
longer than compact fluorescent light bulbs, leading to tangible financial savings in the long term through
lower electricity usage. Rapid technological advancements and improved manufacturing processes
have increased the viability of LED usage in multiple sectors, from architecture to automotive,
while bringing costs down dramatically such that they are now competitive with older, less efficient
alternatives. Governments around the world have passed measures to phase out incandescent light
bulbs, including the EU, Australia, the US, China and Brazil. The widespread adoption of LEDs will
significantly reduce electricity demand from lighting, and is reshaping large parts of the lighting fixture
and building design industries.
Retail
Traditional brick-and-mortar retailers are highly energy inefficient and are associated with a high carbon
footprint compared to online retail business models, which have lower inventory requirements, product
waste and obsolescence. Online retailers are able to utilize their supply chain and logistics network
to better distribute goods while also deploying energy efficient fleet delivery vehicles. We expect this
advantage over the traditional retail business model to grow stronger as carbon and urban planning
policies increasingly support the efficient distribution of goods.
Sustainable transport
Greenhouse gas emissions from transport are increasing at a faster rate than any other energyconsuming sector, with road transport the main contributor (see Figure 2).
Figure 2: Transport related greenhouse gas emissions (1970 to 2010)
GHG Emissions (GtCO2 eq/yr)
8
7
6
5 Total Direct and Indirect 2.9
(Total Direct 2.8)
4
3
2
1
0
1970
1975
Total Direct and Indirect 7.1
(Total Direct 7.8) +2.11%
Total Direct and Indirect 4.9
(Total Direct 4.7)
32.06% 100%
1.60%
2.38%
2.16%
6.53%
4.10%
9.26%
1.91%
1980
Domestic Waterborne
International Aviation
Rail
1985
1990
1995
International and Coastal Shipping
HFC & Indirect N,O
Road
2000
2005
2010
Domestic Aviation2
Pipeline etc.
Indirect Emissions from Electricity Generation
Source: Sims at al (2014, Citigroup)
Around the world, governments are aggressively targeting fuel efficiency standards, as illustrated in
Figure 3. This has spurred companies to undertake substantial investment to improve the efficiency
of incumbent technologies, such as lightweight materials or turbo-charging smaller engines.
Innovative technologies have resulted in better tires with lower road friction and rolling resistance,
Schroder Global Climate Change Investment Themes | 5
improving vehicle fuel efficiency, particularly for heavy trucks. Similarly, innovations in transmission
mechanisms and components and have improved traditional internal combustion engine vehicles.
Figure 3: Fuel efficiency standards are tightening fast
Miles per Gallon Equivalent (CAFÉ/Local Test Cycle)
70
E.U. Proposed
65
60
55
China Proposed
50
U.S. Proposed
E.U. Enacted
45
Japan Enacted
40
35
30
China Enacted
25
20
U.S. Enacted
2005
2010
2015
2020
Source: International Council on Clean Transportation
2025
Year
However, in order to meet challenging emissions reductions targets, our view is that road transportation
needs to be completely revolutionized, not merely made more efficient.
Electric vehicles have emerged as the most promising solution and technological winner. Both
governments and the auto industry are betting on a large scale shift from combustion engines to electric
drivetrains, and this is leading to rapid growth for companies that can offer the necessary battery and
electric power train components. Government funding is helping to drive this shift; for example the
US government is allocating funding to advance the development of batteries and other electrochemical
storage devices to facilitate electric car penetration.
Environmental resources
Despite efforts to reduce emissions and transition to a low-carbon economy, some degree of warming
is thought inevitable. This warming, along with more extreme weather events, is expected to have an
overall negative impact on agricultural yields, pushing up prices globally and driving a need for greater
investment in agricultural productivity. Some parts of the world, particularly the sub-tropics, will be
more negatively affected than others.
In addition, the quest for renewable fuels is leading to an increasing amount of biomass (e.g. corn, oil
seeds, energy crops and forestry products) being used for heating, electricity and fuel rather than food.
This is also putting pressure on productive agricultural land and contributing to further upward pressure
on prices.
As a result of these impacts, there is greater focus on investment in agriculture. The agriculture value
chain, from farm machinery and irrigation systems to crop science and seeds businesses, will all
benefit from increased demand, innovation and pricing power. Furthermore, the penetration of new
technology in these areas has a very long way to go outside developed markets.
Another beneficiary of the inflationary impact of climate change is food retail. For most food retailers,
increases in food prices are simply passed through to consumers, and it is well established that
inflationary pricing is much better for a retailer in any particular category than deflation, best exemplified
by the relentless struggles of consumer electronics retailers worldwide. Inflationary pricing enables
retailers to leverage their fixed cost base more effectively, resulting in higher margins and ultimately
higher prospective earnings growth.
6 | Schroder Global Climate Change Investment Themes
Meanwhile, rising demand in combination with supply constraints means that water is becoming
increasingly scarce on a global basis. A lack of water availability has severe economic implications,
and businesses will need to demonstrate that they have assessed the long-term sustainability of their
business models through water risk assessments of their supply chains, their business process (and
location) and future consumer demands. Firms will also need to develop water management programs
to counteract the risks posed by water scarcity.
The situation offers opportunities to businesses developing new sources of water (e.g. desalination and
recycling), those improving the supply of freshwater reserves through infrastructure upgrades, those
improving the efficiency of water use, those producing more water efficient consumer products and
those are who focused on reducing water pollution.
Finally, forestry has enormous potential to reduce emissions and mitigate the impacts of climate change.
It is a renewable energy resource that is uniquely able to capture and store carbon, and can be used as
a low-carbon building product and a cleaner alternative to burning fossil fuels. As these properties are
increasingly recognized and valued by policymakers, we expect forestry asset prices to be well supported.
Clean energy
Achieving the emissions reduction needed to limit global warming to 2oC requires a significant shift in the
energy mix. Renewable energy, such as wind and solar, has a crucial role to play in the transition to a
low-carbon economy to mitigate climate change. Over the next five years, renewable energy is expected
to represent the largest single source of electricity growth, with costs falling (see Figure 4) and rapid
expansion amongst emerging economies and developing countries.
Figure 4: Falling costs of solar as technology improves and capacity ramps up
Installed photovoltaic capacity (cumulated at year-end in GW)
(Bar chart, left-hand axis)
PV Module Price Index (2000=100)
(Line chart, right-hand axis)
25
140
20
120
15
100
80
10
60
United States
Japan
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
20
1997
0
1996
40
1995
5
Germany
Source: Enerdata, from SolarWirtschaft, IEAPV, EPIA, Observer, SEIA. Capacity is shown as a bar chart, and corresponds to the left-hand axis.
Prices are shown as a line chart, and corresponds to the right-hand axis.
Growth in renewable energy has been strong, with 2014 standing as a record year for both wind and
solar installations. The International Energy Agency (IEA) expects renewable energy additions to reach
700 gigawatts (GW) globally by 2020, with wind and solar representing almost half of the total global
power capacity increase. This compares to wind installations of only 15GW and solar installations of only
6GW in 2006. By 2020, the IEA estimates the amount of global electricity generation from renewable
energy will be greater than the combined electricity demand of China, India and Brazil today.
In particular, we believe that solar technology has gone past a point of no return in terms of the
development curve and is now poised for very widespread adoption indeed, with costs having now
Schroder Global Climate Change Investment Themes | 7
fallen so rapidly as to make this form of generation highly competitive. Further innovations in residential
and utility scale battery storage technology are highly likely to provide further support to this market.
Low carbon
Within this theme, the strategy is able to invest in companies involved with the transmission and
distribution of gas.
We exclude companies that report significant ownership of fossil fuel reserves (e.g. oil, coal,
gas, tar-sands, shale-gas) from our investable universe. While natural gas is the preferred complement
to renewable energy by policymakers and is considered the cleanest burning, and therefore lowest
emitting, fossil fuel, we exclude natural gas extraction and production companies due to two main
reasons. Firstly, over the next 10 years, emissions reduction targets will become more difficult to
achieve, and gas-based emissions are likely to come under greater scrutiny, taxation and regulation
than they have in the past. Secondly, with the improvement in reliability and fall in costs of battery
storage, this alternative technology is becoming a more viable long-term option for the back-up of
renewable energy production on the electricity grid, threatening the traditional role of “peaker” natural
gas power plants.
Other
Not every technology or trend affected by climate change falls neatly into the above themes, though
they represent approximately 85% of the investable companies in our universe. New climate-related
insurance products, the simple efficiency of many ‘sharing economy’ business models, and treatments
for certain climate-related diseases such as malaria and asthma are examples of additional industries
and structural trends that we invest in. Our approach is to assess climate-related trends with a truly
open mind, and to identify companies in any part of the economy where climate change is having a
significant positive affect on the business outlook.
S C H R O D E R
G L O B A L
C L I M A T E
C H A N G E
Investment philosophy
Tackling climate change will have a powerful impact on the global economy. Long-term policy goals
to cut greenhouse gas emissions require nothing less than an industrial revolution to engineer a lowcarbon economy. Adapting to some climate change that is already inevitable and mitigating further
climate change through the transition to a low-carbon economy will, therefore, affect all industries over
time. What is distinctive about our philosophy is our appreciation that the effects of climate change
will be far-reaching and affect a great many more companies than those purely involved in renewable
energy, energy efficiency and environmental resources. As such, we believe that a dynamic and evolving
universe across all sectors is the best way to capture the investment opportunity.
The Schroders Global Climate Change Team has undertaken a fundamental analysis of every major
sector of the economy in constructing our investment universe to determine those companies whose
long-term business outlook, we believe, will be impacted by efforts to mitigate or adapt to climate
change. Our comprehensive investment universe comprises over 700 stocks across developed and
developing markets from which to select our best ideas. This broad investment universe enables us to
always focus on great investment ideas, not just the stocks or themes currently in favor. Only the highest
conviction stock ideas make it into the portfolio, and we are not afraid to exclude whole sectors if they
become overvalued.
While the path to a low-carbon economy is predictable, we do not believe it is well understood,
or discounted, by the equity market. As a result, the fast-changing growth and relative valuation
opportunity that climate change presents to investors represents a significant opportunity for alpha
generation. We believe that companies that recognize the threats and embrace the challenges early,
or that form part of the solution to the problems linked to climate change, will ultimately outperform the
broader global equities market.
Important information: The views and opinions contained herein are those of the Global Climate Change team, and may not necessarily represent views of Schroders.
These views are subject to change over time. This newsletter is intended to be for information purposes only and it is not intended as promotional material in any respect. The
material is not intended as an offer or solicitation for the purchase or sale of any financial instrument mentioned in this commentary. The material is not intended to provide, and
should not be relied on for accounting, legal or tax advice, or investment recommendations. Information herein has been obtained from sources we believe to be reliable but Schroder
Investment Management North America Inc. (SIMNA Inc.) does not warrant its completeness or accuracy. No responsibility can be accepted for errors of facts obtained from third
parties. Reliance should not be placed on the views and information in the document when taking individual investment and / or strategic decisions. The information and opinions
contained in this document have been obtained from sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties. The opinions
stated in this document include some forecasted views. We believe that we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently
know. However, there is no guarantee that any forecasts or opinions will be realized. Past performance is no guarantee of future results. All investments involve risk, including the risk
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