iCapital Market Pulse: A Clean-Tech Investment Opportunity

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Last week, the U.S. Senate passed a version of the $1 trillion infrastructure bill, which included spending on roads and bridges as well as select (if limited) climate initiatives. Also last week, the Intergovernmental Panel on Climate Change (IPCC) released a sobering report that decisively concluded that human activities led to a 1.07-degree Celsius increase in the planet’s average temperature between 1850 and 1900. The report further concluded that, if left unchecked, CO2 emissions will cause a 1.5-degree temperature increase over the next 20 years, leading to many more extreme weather events such as heat waves, severe drought, and hurricanes.¹
 
With climate change top of mind, this week’s Market Pulse commentary explores why the U.S. government can’t and shouldn’t go it alone (especially in the era of record budget deficits). While the government can throw hundreds of billions in infrastructure stimulus at the climate problem, it won’t be enough by itself to arrest rising temperatures. Private sector innovation and private investor participation are essential components of the solution. This represents a compelling opportunity to invest in the expanding universe of fast-growing, publicly traded and privately held clean-tech companies.
 

When $1 trillion or more is not enough

The International Energy Agency (IEA) estimates that to reach net-zero emissions by 2050, annual energy sector investment would need to increase from an average of $2.3 trillion to $5 trillion by 2030.²  “Green” initiatives in the infrastructure bill making its way to the U.S. House of Representatives amount to $112 billion³ and include provisions for power infrastructure; energy efficiency and clean tech; EV charging stations and fleet electrification; EV battery recycling and build-out of carbon capture, utilization and sequestration (CCUS) facilities; and hydrogen. While meaningful, this amount is unlikely to be a game changer, even if it is topped up in the $3.5 trillion budget plan, which likely has a decent chance of passing later this year.

The gap between current government policies and what needs to be done to achieve net zero emissions by 2050 remains very wide. BloombergNEF’s latest annual New Energy Outlook highlights that, under the current government Economic Transition Scenario, we will barely reduce annual emissions from just over 30 gigatonnes to 26 gigatonnes of C02 – a far cry from net zero.

What’s required to move us closer to the goal? In our view, strong government policies that support, promote, and encourage private sector innovation in climate tech, coupled with a strong appetite to invest in these new technologies by corporations and investors. I believe both of these conditions exist today and will continue in the coming years.

The private sector is leading the charge

Over 300 companies worldwide have committed to a goal of transitioning entirely to renewable energy (RE100%) by 2050 or sooner.⁴ As these companies switch to renewable electricity, convert fleets to electric, and de-carbonize their buildings, they are directly helping to drive revenues for clean-tech companies.

In the meantime, over $60 billion in private funding – a record amount – has been raised for clean-tech investments to help scale companies that offer renewables, electric vehicles, carbon capture technologies, clean hydrogen, zero carbon fuels and more.

Investors looking to participate in the clean-tech revolution have options in both the public and private markets. In the Q2 quarter of 2021, the total number of publicly traded, global clean-tech companies reached 1,168 versus 15,758 private companies. The numbers have shifted slightly toward public markets this year – 2021 has been the best year for clean-tech IPOs since 2014 – with 52 clean-tech companies globally becoming public 2021.

Still, private companies outnumber public by 13 to 1. As increasing institutional and retail dollars chase a limited number of publicly traded opportunities, the scarcity is driving up valuations. Indeed, public clean tech valuations nearly doubled from October 2020 to January 2021. So how should investors position?

How to invest in clean tech

First, I like the tactical opportunity represented by publicly traded clean-tech stocks. After the rise in valuations in late 2020, public clean energy valuations reset considerably – from 42x forward P/E on Jan 8, 2021, to 26.4x as of August 16.⁵ Clean energy stocks are down 19.4% year to date versus +18.5% for the S&P 500. But in the meantime, stellar earnings growth continues: The 2-year EPS CAGR for the S&P 500 Global Clean Energy Index is estimated to be 20%, or double the 10% expected for the S&P 500.

Additionally, many more positive catalysts are likely to emerge in the second half of 2021 and headwinds such as commodity inflation are likely to abate. Among the most important upcoming catalysts this fall are the potential extension of wind and solar energy credits, additional potential climate provisions in the $3.5 trillion U.S. budget plan, and the November UN Climate Change Summit (COP21) where governments worldwide are expected to commit to more decisive action given the shortfalls described above.

For private market investors, the numbers clearly demonstrate that many of climate tech’s most innovative technologies today are private. An increasing number of climate tech PE and VC funds are raising money to help fuel and scale this innovation – $111 billion in funds has been raised in the 2019-2021 vintage years versus $100 billion for vintage years 2016-2018.⁶ Given the $128 billion in SPAC dry powder,⁷ it is likely that some of this capital will be looking for clean-tech private companies to buy, benefitting private investors.