Artemis: Three stocks to promote – and profit from – a 'just transition'

Getting to net zero will demand trillions of dollars of private-sector capital. But financial returns and positive environmental impacts need to be complemented by outcomes that support the needs of society, give communities affected by the energy transition a voice – and a share in the profits. The drive to net zero should not come at any cost.

Summary

• As the energy transition accelerates, there is increasing focus on ensuring that it is a ‘just transition’.
• The drive towards a ‘just transition’ creates risks investors need to understand...
• ... while also creating opportunities for entrepreneurs and established businesses to pivot into a number of high-growth, multi-trillion-dollar markets.

Because fossil fuels are so all-pervasive in our economies, the drive for net zero touches on... everything.

Trillions of dollars (and euros, yen, rupees, pounds, renminbi…) in investment will be required to decarbonize our economy.

Bloomberg New Energy estimates that getting to net zero (‘climate mitigation’) will require investment of $6.7 trillion per annum (a significant proportion of that will be accounted for by electric vehicles)¹.

The IMF, meanwhile, estimates that the funding gap for climate adaption – the need for water sanitation, irrigation, flood protection - is even wider².

Crucially, however, society also needs to be on board; it needs to believe the move to net zero is also a 'just transition'.

To state that the just transition is a complicated issue is to dramatically underplay its complexity.

We have previously written about what it is and why it matters, particularly to the sorts of companies we invest in (even when they are the right side of the structural change that is occurring). We have also looked at why it is so important that the energy transition creates high-quality jobs. But there is more to consider...

How can we conceptualize something as inherently complicated as the just transition? And, as impact investors, how can we act on it? The Impact Investing Institute recently provided a useful framework in the form of its Just Transition Criteria. The analogy the Institute uses is a three-legged stool, with the three legs being:

Like the proverbial stool, all three of these elements are equally important – but how is our portfolio aligned with them?

Criteria 1. Climate and environmental action

The investment opportunity presented by the multi-trillion-dollar energy transition is enormous and, while government policy and regulation will be critical, net zero won’t be met by public spending alone.

That's where investors come in. It wasn’t long ago that there were limited opportunities to invest in listed companies aligned with decarbonization. That is no longer the case. The last decade of technical development, scaling-up in production and the accumulation of industrial experience have seen solar, wind, battery storage and electric vehicles reaching a point where they are either outcompeting their fossil-fuel burning counterparts on an economic basis – or are about to.

Investors with a range of risk appetites can now invest across the whole decarbonization value chain. Manufacturers of wind turbines or solar panels or developers of renewable energy projects are no longer the only investment options. As we have previous outlined, the scale and the breadth of the decarbonisation value chain is such that you can adopt the picks and shovels approach.

Example – Valmont Industries

Valmont Industries is ‘hardening the grid’ in the Florida Everglades by engineering transmission structures that are designed to survive severe weather (© 2023 Valmont Industries, Inc)

The wholesale decarbonization of our energy systems and the physical impacts of an already changing climate are creating business opportunities. In our portfolio, Valmont Industries is a direct beneficiary of the need to make the US energy grid more resilient to the impact of stronger winds, flooding and fire. It provides a range of transmission, distribution and substation equipment.

The economic impacts of storm damage are enormous. In the US, weather-related events cause about 78% of the major interruptions to energy grids. Figures from NextEra suggest that, in the territory its subsidiary Florida Power and Light serves, recovering from storm damage one day more quickly can be worth up to $2 billion in economic output for the state of Florida³. Meanwhile, the impacts of storm damage are felt most acutely by low-income, uninsured individuals. So mitigating their impact also improves social equity (see Criteria 2, next).

Criteria 2. Improving socio-economic distribution and equity

Positive climate and environmental outcomes need to be complemented by outcomes that support the needs of society. Net zero should not come at any cost. Nor should the benefits of the energy transition disproportionately accrue to one part of society – or the world.

As investors in clean energy, we also need to be alive to the supply chain risks the renewables industry faces as it scales up. And while allocating capital to clean technologies is an important part of the just transition, there are other ways for investors to support the deployment of renewables.

Example – Airtel Africa

We have previously written about how Africa is building a ‘mobile first’ economy. Access to basic, affordable, pre-paid mobile handsets has revolutionised telecommunications, opened up basic banking services to millions of users and transformed African society. It is also playing a critical role in enabling individuals to gain access to relatively low-cost solar energy.

Airtel Africa’s networks are enabling ‘pay-as-you-go’ solar power (Source: Shutterstock)

Pay-as-you-go solar is a wonderful concept: it answers the problem of the upfront cost of high-quality solar products by enabling a 'rent-to-own' system. This can create numerous positive outcomes:

• Improved access to energy
• Health benefits (from avoiding kerosene combustion4)
• Education and economic development
• Reduced CO2 emissions
• Individuals save between 20-30% of household income they previously spent on kerosene and mobile phone charging

Many pay-as-you-go solar transactions take place through mobile money payments services, which connect the consumer and the solar provider. In our portfolio, Airtel Africa is a major provider of mobile telecommunication and mobile money services across Sub-Saharan Africa. 

Criteria 3. Community voice

Living next door to a fossil-fuel plant is not particularly nice. But that doesn’t mean that communities will necessarily welcome having wind turbines or solar arrays in their backyards either.

In contrast to the traditional, centralized, fossil-fuel-based model of energy generation, distributed renewable generation is usually generated closer to its point of use. But not always. Some renewable energy will need to be transmitted over long distances using high-voltage transmission lines. In many countries, the permitting of these lines is a significant impediment to the rapid build-out of renewable energy. Giving local communities a voice -- and the ability to participate in the financial benefits of the energy transition -- is therefore a critical component of the just transition and the streamlining of the permitting process.

Bristol City Leap, a partnership between Bristol City Council and Ameresco, aims to decarbonize the city, find significant energy savings and create jobs for local communities (source: Bristol.gov.uk)

Example – Ameresco Inc.

US-listed Ameresco is a clean-tech integrator and a developer of renewable energy assets. It works in partnership with a range of clients – including public-sector organisations – to develop energy-saving projects, to perform energy 'retrofits' and increase the use of renewables. It is typically compensated by sharing in the economic benefits of the reductions energy consumption it generates for its clients.

In the UK, Ameresco is the lead developer for Bristol City Leap. This is a 20-year concession to decarbonize the city – its schools, universities and hospitals – which aims to bring significant energy savings and create local jobs. The company (and the city) believes that Bristol can be a template for other European cities.

¹The $7 Trillion a Year Needed to Hit Net-Zero Goal | BloombergNEF (bnef.com)
²Scaling up Climate Finance for Emerging Markets and Developing Economies (imf.org)
³Source: NextEra June 2022 Investor Presentation_Website_vF.pdf (nexteraenergy.com) (slide 76)
⁴Adverse health impacts of cooking with kerosene: A multi-country analysis within the Prospective Urban and Rural Epidemiology Study - PMC (nih.gov)

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