Wim Van Hyfte, global head of RI at Candriam
While electric cars are becoming more competitive, responsible investors should not underestimate the opportunities in the hydrocarbon chain.
The transport revolution is here. Electric cars are more powerful, more efficient and soon will be cheaper than petrol-burners. That does not mean responsible investors need to ignore the whole hydrocarbon chain: there are sustainable companies in every industrial sector.
Revolutions of any kind are typically volatile, and the advent of electric vehicles (EVs) is proving no exception. The share price of Tesla, the world’s most well-known electric car producer, has yo-yoed 30% since late February. Heroism and hyperbole accompany most ventures guided by Tesla’s CEO, Elon Musk. But analysts are now concerned lest the company crashes in debt before it fulfils its order book – approximately 450,000 Model 3 saloons alone. Whether Tesla survives its own rapid growing phase is debateable: there is absolutely no doubt that EVs will eventually dominate our roads.
The science is compelling from two aspects. First, battery engines are five times more energy efficient than combustion engines: up to 95% of battery power gets converted versus 17% to 21% for gasoline. Second, EVs mitigate climate change. Sure, much of the electricity powering them might come ultimately from hydrocarbons. How much depends on the speed of adoption of wind and solar. But if EVs force petrol and diesel cars off the road – or from even being built – not only does the transport sector become greener, oil extractors and sellers start losing their second-biggest customer base. In the case for stranded assets, a collapse in revenue hits oil producers hard.
The quantum of revenue collapse is a matter of estimation, reflected in the volatility around EV adoption and the share price of related businesses. Bloomberg New Energy Finance predicts 7.3 million barrels of oil a day will be displaced by EVs by 2040.
Bill Gates once said that we overestimate change over two years but underestimate it over 10. That adage seems pertinent to the situation right now for EVs. Globally, there are just over 1 million electric cars on the road right now. But remembering Gates’ adage, this could all change very quickly. Bloomberg New Energy Finance reckons there will be 30 million electric cars by 2030.
One of the remarkable features of battery engines is their simplicity. They only have 20 parts, compared with about 2,000 moving parts for a contemporary combustion-engine car. This relative simplicity cuts maintenance costs but puts greater onus on those few parts, and none more so than the battery.
The battery is an EV’s key component, reflected in the rising prominence of battery manufacturers and the eagerness of car-makers to create joint ventures with them.
One aspect of battery manufacturing that interests Candriam is the component metals. We see opportunities for client investors to benefit from the growth in usage of lithium, nickel, manganese and cobalt related to battery development.
Other metals Candriam likes include copper, platinoids, aluminium and high-resistance steel. Copper will be an obvious beneficiary of more EV sales. We reckon EVs could command 6% of global copper usage by 2025.
The appeal of aluminium and high-resistance steel relates to the preponderance of the battery in EVs. They can weigh up to 500kg – more than one-quarter the entire vehicle’s weight. So not only are the the vital component, they also necessitate as light a frame as possible to reduce total car weight and boost fuel efficiency. Aluminium will find new markets in car manufacture. High-resistance steel will have its place not only because it is currently cheaper but also stronger than aluminium for crash protection.
Platinoids – platinum, palladium and rhodium – are an exception to our grouping as their value lies in combustion engines. They make the process less dirty, ensuring nasty side-effects such as carbon monoxide and nitrogen oxide are mitigated, thereby satisfying rising requirements on exhaust emissions (not just cars but cargo ships are now subject to more onerous standards).
We include platinoids in our analysis because Candriam takes a holistic view of the investment world in our ESG analysis. Petrol-burning engines are not going to disappear overnight. The majority of new cars will use them until the late 2030s. So for two decades car manufacturing will occupy a hybrid position.
Candriam’s policy is to identify those stocks which are best-in-class in a changing world. We do not invest exclusively in companies that seem deep green. This can lead to skews in portfolio composition that are not prudent because this opportunity-set is not representative of the economy. Sectors such as banking and insurance appear to be very green until one takes a closer look at the business of their clientele, which is what CO2 Scope III emissions are supposed to do.
Candriam is a signatory to the 2015 Montreal Pledge on Carbon Disclosure so we firmly believe in transparency accounting of direct and indirect energy expenditure. Unfortunately, carbon emissions are still only reported by fewer than half the world’s listed companies. Scope III emissions, defined as those caused upstream and downstream beyond the company itself, are the least accurately reported. Not only does this leave a huge amount of work for external analysts. They then have to put reported levels into context. Thus, Microsoft, Pfizer and Vestas all have similar footprints. Does that mean these three companies ought to be treated similarly, even though Vestas is building wind turbines? The carbon footprint tells us precious little about either a sector or specific company’s direction and speed of travel, i.e. how willingly is it adapting to a changing world.
If we go back to car frames: there are arguments for investing in steel rather than aluminium manufacturers. The former can be less carbon-intensive but much depends on whether renewables are used in the extraction and smelting process. A tonne of aluminium in the US is extracted using almost a tonne less carbon dioxide than some factories in India or China. Then there is the remarkable recycling of aluminium to factor in: 95% of it gets reused at just 5% of the original energy cost. Responsible investors must do a lot of research to reach informed decisions. Simply screening out hydrocarbons by avoiding oil producers and energy utilities incentivises none of those enterprises to change their ways. Likewise, manufacturers of petrol-drinking machines. The preferred method of Candriam is to discover which businesses are making the most effective strides towards sustainability in a low-carbon world and engage with them as best-in-class enterprises. This is much more involved and complicated but it reflects the current energy transition we are all experiencing.
