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Climate change is a global megatrend
Megatrends are powerful forces that can transform the trajectory of the global economy. They can have a meaningful impact not just on how we live and how we spend money, but also on corporate strategies and government policies. From an investment perspective, exposure to megatrends can result in significant returns.
Addressing climate change arguably will be one of the greatest megatrends of the next few decades, with substantial de-carbonisation dollars required to be spent to rectify the environmental problems the world faces, and support for net-zero emissions by 2050 provided by almost every global government.
It is estimated that the additional investment required to achieve a global zero-carbon emissions economy by 2050 will be US$1-2 trillion p.a., meaning we are likely to see plenty of winners created among companies that can show they are playing a meaningful part in making deep cuts to emissions.
Renewable energy generation is one high profile part of this, but the deep cuts to carbon emissions that will be required to limit global warming cannot be achieved by clean energy alone. The total solution is much broader – arguably the most immediate and deepest cuts will come from companies that can reduce carbon emissions, create energy efficiency, or make our energy grids smarter.
The BetaShares Climate Change Innovation ETF (ERTH)
BetaShares’ new Climate Change Innovation ETF (ERTH) provides exposure to a portfolio of global companies at the forefront of tackling today’s climate and environmental challenges.
ERTH provides holistic exposure to companies that are transforming the way we generate, store and consume energy, as well as companies that offer products and services that drive energy efficiency or avoid carbon emissions altogether.
To qualify for the index that ERTH aims to track, companies must derive at least 50% of their business from ‘green revenue’, being revenue associated with activities that enable the reduction or avoidance of CO2 emissions.
ERTH’s index methodology also applies a range of ESG screens to the portfolio, excluding companies directly involved in the fossil fuel industry, other companies with fossil fuel-related revenues above a threshold, and certain other negative business activities. BetaShares believes that for a climate change ETF to be true to label, it must screen out any company involved in the generation of fossil fuel power.
Not only does the inclusion of fossil fuel generators compromise an ETF’s ethical credentials, it also has the potential to have a negative impact on investment returns. There is a significant risk that these companies will have to write off current and future assets before the end of their economically useful life. In addition to this stranded asset risk, these companies are potentially exposed to future litigation from their fossil fuel activities (relating to both pollution and health).
ERTH’s index includes companies within five key sectors:
Source: Professor Guillen, M.; ‘2030: How Today’s Biggest Trends Will Collide and Shape the Future of Everything,’ published 2020. Data as at 28 February 2021.
Among the ~100 companies held in ERTH’s portfolio are businesses that have developed some truly astonishing products and services. Following is a quick look under the hood of four of the companies currently within the index that have shown true ingenuity in their efforts to combat climate change*:
- Beyond Meat (Sustainable products)1 – Up over 100% since listing on the Nasdaq in 2019**, Beyond Meat is a plant-based producer of meat substitutes. The company has an increasing range of products designed to emulate beef, meatballs, mince, sausages and burger patties. Key ingredients used to make the products include pea protein, rice protein, mung bean protein, canola oil, potato starch, apple extract, and beetroot juice (to give beef products the ‘bleed’ effect). A study by the University of Michigan compared the environmental impact of the Beyond Burger to a traditional quarter-pound beef burger and concluded that to produce a Beyond Burger required 99% less water, produced 90% less greenhouse gases, required 93% less land, and required 46% less energy!
- DocuSign (Sustainable products)2 – Up over 400% since listing on the Nasdaq in 2018**, and now capitalised at ~US$40B, DocuSign allows users to digitally sign important documents with electronic signatures, without the need to print, sign, scan and return. The company claims this results in an average saving of $36 in time and materials per agreement, with an impressive 50% of eSignature transactions completed in less than 15 minutes compared to the days or weeks that paper-based methods can take. DocuSign has been estimated to have saved more than 20 billion pieces of paper and 608,000 barrels of oil – a valuable contribution to the issues we face around deforestation.
- Infineon Technologies (Enabling solutions)3 – one of the world’s largest semiconductor manufacturers. Semiconductor chips are essentially microchips that are required to allow electronic equipment to function. Infineon’s technology spans many different sectors and products, including:
- Energy efficient products (e.g. car engines that power down when the vehicle is stationary)
- Renewable energies (solar panels and wind turbines can’t feed power to the grid without the use of semiconductors)
- Eco-friendly mobility (electric cars, bikes, buses, trucks etc)
- Smart cities, smart homes, smart cars (monitoring of traffic, office building temperatures, parking spot availability etc)
- Zoom Video Communications (Sustainable Products)4 – Up over 450% since listing in 2019**, Zoom offers online video conferencing and chat. Its mass adoption over the last year has had a tremendous positive impact on not only business efficiencies, but also the environment. Between January and October last year, Zoom estimated that it had helped save 45 million metric tons of CO2, or the equivalent of what around 10 million cars produce per year. The following infographic demonstrates the environmental benefits of a virtual meeting vs. in person when travel is involved:
Learn more about how you can access the climate change thematic via the BetaShares Climate Change Innovation ETF (ERTH).
Learn more about ethical investing.
There are risks associated with investment in ERTH, including market risk, international investment risk, sector risk and non-traditional index methodology risk. For more information on risks and other features of the fund please see the Product Disclosure Statement, available via the above link.
* No assurance is given that these companies will remain in the index or will be profitable investments.
** Cumulative return as at 16 March 2021. Past performance is not an indicator of future performance.
2. https://www.lifeandnews.com/articles/2018-transformational-leader-of-the-year-keith-krach-receives-unanimous-endorsement-of-the-senate-foreign-relations-committee/, and https://www.docusign.com/forests