Human ingenuity and responsible investment are crucial to addressing climate change and resource depletion.
Concern about our use of the world’s finite resources is by no means new. In 1798, the economist Thomas Malthus famously warned of population growth outstripping food production, triggering a population collapse – a ‘Malthusian Catastrophe’.
Needless to say, this hasn’t happened. In Malthus’s day, the global population was around 800 million. Today our planet supports 8 billion people who have a much higher standard of living than people of the c.18th. Yet our planet remains finite: 75% is ocean, with only 10% of the earth’s surface being used for crops, livestock and dairy.[1]
This remarkable population growth has been made possible by an array of technological advances delivering higher agricultural yields and increased efficiency. Human ingenuity has enabled more people to live longer and enjoy a better standard of living, but can this continue?
The thematic opportunity
We have reached a point where the environment – the natural capital that we need to live – can no longer cope with current levels of exploitation. Thankfully, policymakers are taking action through measures such as the Kunming-Montreal agreement of 2022. This outlines concrete measures to halt and reverse nature loss, including putting 30% of the planet and 30% of degraded ecosystems under protection by 2030.[2]
We need to shift away from resource-intensive activities towards those that are resource-light. In doing so, we must apply human ingenuity to almost every aspect of our lives, from how we source energy, to how we travel, what we eat and how we need to adapt the built environment.
We believe this transformation of the global economy represents the greatest investment opportunity to date in human history. Looking at climate change mitigation for example, more than $12 trillion in annual sales is expected in 11 different ‘value pools’ such as transport and hydrogen production by 2030.[3] Our thematic process is well positioned to identify businesses that should perform well in this environment by assisting the transition to a lower-carbon and less resource-intensive economy.
Living in a warming world
Increasing climate awareness is already creating significant shifts in capital as economies begin to decarbonise and people adapt to living in a warmer world. This includes ensuring that our built environment remains comfortable to live and work in while also becoming more energy efficient.
1903 - The New York Stock Exchange becomes one of the first commercial buildings to install air conditioning
Daikin, which we invest in under our Climate Change theme, is a leading producer of high-quality heating, ventilation and air conditioning (AC) systems. AC is not a new technology: the New York Stock Exchange was one of the first commercial buildings to install it, in 1903. However, demand is ever increasing. The world’s largest AC installation is in Saudi Arabia at Al Haram Mosque, where it circulates and cleans air for the mosque and over 100,000 tents, which can house over 1 million people.[4]
Daikin is also a leader in heat exchangers, technology that will help in replacing gas-fired central heating. In the UK, where 95% of homes have central heating[5], gas heating for new houses will be banned by 2025. More and more homes will rely on electricity and renewables for their heating and hot water, and this mass transition to low-carbon heating must happen before 2030.
Unlike its peers, Daikin is a fully integrated manufacturer and therefore less susceptible to supply chain disruptions or the trend to re-shoring (bringing production back to a company's home country). Peers who are mainly assemblers, however, could face periodic disruptions that increase risks and may impact returns.
Working smarter
With finite resources, we need to integrate new processes and technology into our lives to become more efficient and productive. The companies that feature in our Automation and Digitalisation themes are beneficiaries of this.
Microsoft, for example, has three core business areas that enhance productivity and efficiency: MS Office, the Windows operating system and its cloud business, Azure. Our team particularly likes Microsoft for its cloud business, which is growing at 25% per annum[6]. More and more businesses choose not to invest in expensive hardware that is costly to maintain and rarely fully used. Instead, they opt to access these services online, via the cloud. Microsoft Azure has a 23% global share of cloud services[7] in a market that has much further to grow.
In addition, through its investment in OpenAI, the developer of the Dall-E image generator and ChatGPT, Microsoft also benefits from the surge in demand for artificial intelligence and machine learning applications. These could vastly increase productivity and improve access to services such a healthcare and legal representation.
Better healthcare for longer lives
The population of over 60-year-olds is expected to double by 2050[8], with huge implications for healthcare. This leads us towards innovative companies such as CSL, which uses blood plasma to develop therapies for conditions such as auto-immune disorders.
Starting life as a maker of vaccines for the Australian government, CSL is now is one of the world’s largest collectors and processors of blood plasma. At its 300 collection centres in the US, Europe and China, CSL collects around 17 million litres of plasma a year, accounting for around a third of all plasma collections.[9]
CSL’s edge lies in an unusual approach to drug discovery that uses products derived from blood plasma, which is non-toxic for humans. This makes for easier, faster trials and lowers developmental risks, all of which translates into financial benefits.
The average internal rate of return (IRR) for research and development for the pharma industry over the past 40 years is around 12%. By contrast, CSL’s average IRR since it was listed in 1994 has been about 24%.[10] The company currently derives $500 per litre of plasma, and this figure has the potential to increase 10-fold.[11]
Winnowing the investment universe
These are just a handful of the 120 companies we have selected as potential investments out of the thousands of companies listed on world markets. Our analysis identifies these companies as winners in the seismic global transition that is under way. These companies are combined in client portfolios to provide diversification in terms of investment themes, corporate characteristics and their areas of expertise.
Whether their focus is on helping us adapt to a changing climate, responding to the needs of an ageing population, or maximising productivity gains in an automated and digital world, we believe that the companies in our portfolios are well placed to generate attractive long-term returns for our clients.
[2] McKinsey, At COP15, new urgency on what governments and companies can do to restore natural capital, January 2023
[3] McKinsey, At COP15, new urgency on what governments and companies can do to restore natural capital, January 2023
[4] The Islamic Information, Saudi Arabia Installs World’s Largest Air Conditioning Station at Masjid Al Haram, April 2022
[5] Department for Business, Energy and Industrial Strategy, 2022
[6] Bloomberg, March 2023
[7] AAG IT Services, The Latest Cloud Computing Statistics, June 2023
[8] World Health Organisation (WHO), Ageing and Health, October 2021
[9] CSL, Annual Report 2022
[10] Bloomberg, March 2023
[11] CSL, Annual Report 2023
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