Five Reasons to Invest in the Resource Transition
This article was originally published on ETFTrends.com.
By Naomi Zimmermann, Product Analyst and Shawn Reynolds, Portfolio Manager, Natural Resources, Environmental Sustainability
The resource transition continues to progress as financing, climate goals and consumer demand drive the shift towards a more sustainable economy.
Resource Transition Quarterly Update ā Q1 2023
The resource transition continues to progress as financing, climate goals and consumer demand drive the shift towards a more sustainable economy. The resource transition spans the entire natural resource sector and includes the energy, mining, agriculture and land use industries. In this quarterly series, we are exploring how this global shift is driving investment opportunities. In each succeeding quarter, we will be updating the major themes that we observe as they continue to evolve.
1. Ever-Growing Climate Ambitions
Countries and companies are setting progressively more ambitious climate goals which will support substantial investment into the sectors driving the resource transition. Over 70 countries have pledged net zero greenhouse gas (GHG) targets, including the U.S., Europe and China, which together account for more than 75% of global emissions.1 In the private sector, over a third of the worldās largest companies have a set goal to reach net zero by 2050.2 Financial actors have also stepped up their climate commitments, including the establishment of the Glasgow Financial Alliance for Net Zero (GFANZ), a global coalition whose members have pledged to transition the emissions of their financed portfolios to net zero by 2050.3
As climate goals ramp up, the investment to reach them will need to grow. The International Renewable Energy Agency (IRENA) estimates that $132 trillion in cumulative investment is needed to reach net zero by 2050, up from their $110 trillion projection in 2021.4
Cumulative Investment Needed to Reach Net Zero by 2050 ā 2020 vs. 2021 Projections*
2020 Projections
2021 Projections
Source: IRENA. Data as of April 2020 and June 2021.
* Projections per IRENAās āTransforming Energy Scenarioāāan energy transformation pathway based largely on renewable energy sources and steadily improved energy efficiency (though not limited exclusively to these technologies). This would set the energy system on the path needed to keep the rise in global temperatures to well below 2 degree Celsius (Ā°C) and towards 1.5Ā°C during this century.
2. Government Funding: A Green Catalyst
In Europe, the Green Deal is expected to mobilize more than ā¬1 trillion towards the resource transition in the coming decade as it aims to make the continent the first to achieve net zero greenhouse gas emissions by 2050.5 The EU has set an intermediate goal of reducing emissions by 55% by 2030 (from 1990 levels) and has passed a set of policies called Fit for 55 to work towards this target.6 The UK has also set a net zero by 2050 goal under its Climate Change Act.7
In the U.S., the funding provided by the Inflation Reduction Act (IRA) is a critical catalyst that will accelerate the development of the resource transition sector. The IRA provides close to $400 billion in tax credits and infrastructure funding in the next decade,8 which will enhance the economic viability of, and amplify the investment opportunities in, industries across the resource transition ecosystem in the U.S.
Double the Headline Figures: While the headline figures for the spending included in the IRA are significant, the uncapped nature of the tax credits means that the total public spending could likely reach double the figures. The federal spending will likely catalyze private investment, which may send total climate spending to well over roughly $1.7 trillion over the next decade.9
3. Company Opportunities Across the Resource Transition Ecosystem
Opportunities to invest in companies managing their environmental impact, internally and externally: The investment team for the VanEck Global Resources and Environmental Sustainability Strategies can identify companies that are managing their own environmental impact whilst enabling sustainable development globally.
Spotlight on Equinor10: Historically a traditional energy company, Equinor is transforming itself to support and accelerate the energy transition and ensure a competitive and resilient business model in line with the Paris Agreement. It is working to reduce emissions from its oil and gas production, expanding its wind and solar capacity and developing low-carbon solutions, including hydrogen and carbon capture, utilization and storage (CCUS) on an industrial scale.11
Spotlight on Nouveau Monde12: The graphite producer is working towards developing carbon-neutral graphite materials. The company aims to supply to the worldās leading battery and automotive manufacturers while promoting sustainability and supply chain traceability within its own business model.13
4. Made in America: U.S. Poised as the Leading Clean Energy Provider
Already the largest traditional energy producer,14 the runway of federal funding combined with the existing competitive advantage of low-carbon energy make the U.S. well-positioned to become a global leader in the clean energy sector.
The IRA ā Unlocking Opportunities Across the Clean Energy Supply Chain: The funding from the IRA will unlock opportunities for the U.S. to become an exporter of clean energy technology and infrastructure. These opportunities span the clean energy supply chain, beginning with the mining of critical minerals for renewable energy technologies, to the generation of renewable energy from solar modules and wind turbines, to the transportation and storage using battery technologies, all the way to the sequestration of emissions with CCUS.
Inflation Reduction Act: Annual Capital Investment in Energy Supply Related Infrastructure
Source: Princeton University. Data as of August 2022.
5. Supply Chain Risks Necessitate a Diversified Natural Resources Portfolio
Supply chains for materials involved in the resource transition face numerous risks, including volume shortages, price volatility and geographical sourcing dependency.15 In the U.S., the number of critical minerals needed to meet the projected increase in demand for renewable energy technologies cannot be mined with current capacity. Globally, Russiaās invasion of Ukraine has resulted in a spike in energy and food prices. Supply chain risks underscore the importance of having a diversified natural resources portfolio while the resource transition powers forward.
An Active Approach ā Expertise in an Ever-Evolving Environment
Technical and Financial Expertise Provide Key Insight into Investment Opportunities
The investment team for the VanEck Global Resources and Environmental Sustainability Strategies has extensive experience in traditional commodities. The investment team includes trained geologists and engineers as well as senior analysts with deep sector experience. Further, the investment team has extensive experience investing in companies in the natural resources sector. Taken together, this technical and financial expertise lends itself well to the investment team having key insights into the risks and opportunities as the sector shifts towards sustainability, not least to meet regulatory mandates and to adapt to changing consumer preferences.
Identifying the Winners: Opportunities to be Captured Across the Market Cap Spectrum
The investment team for the VanEck Global Resources and Environmental Sustainability Strategies is able to identify and capitalize on the companies that are poised to benefit from the shift towards sustainable development. The strategy allows investors to access opportunities across the market cap spectrum, from innovative disruptor companies which may not be established enough to be captured by indices to well-established companies that are pivoting towards more sustainable business models.
Engagement Drives an Active Approach
The investment teamās engagement with companies drives its active approach. The investment team engages with company management on an annual basis, and oftentimes more frequently, to discuss a companyās environmental, social and governance risks, track-record and opportunities.
We highlight the most compelling reasons to invest in the resource transition and the expertise of the VanEck Global Resources and Environmental Sustainability investment team in accessing the opportunity presented by the multi-decade transition in its early beginnings. In future quarters, we will continue to explore the themes emerging from this global shift and how they are driving investment opportunities.
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Originally published 2 February 2023.
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