WHEB Commentary

George Latham

From No 10 to BP – it’s all moving very fast


The term “Net Zero Carbon” (NZC) sounds technical and boring.  But it could herald the start of a race to the top in efforts to combat irreversible climate change. It was only in May 2019 that the term really entered the public domain.  Committing the UK to achieving NZC by 2050 was the last act of Theresa May’s government.  It was a bold statement and one that we were very excited to see[i].  Since then, we have seen the European Union make a pledge to get to NZC by 2050, and during the UK’s general election, the different political parties competed with one another to announce the most ambitious targets.

Yet it is in the corporate world where we have seen the most dramatic shift.

In January 2020 Microsoft announced that it intends to become a carbon negative business by 2030[ii]. By 2050 it plans to have removed all the carbon from the atmosphere that it has emitted since 1970. In early February Sky pledged to become NZC by 2030[iii]. I learnt recently that watching an hour of Netflix a week uses the same amount of energy over a year as it takes to power a refrigerator for two years[iv].  This puts Sky’s pledge into some focus. But that is nothing when placed next to BP, who has also committed to achieve NZC, although in their case by 2050[v]. While not uncontroversial, it is nonetheless enormously significant to have the heavy carbon emitters recognise the challenge and make such a commitment[vi].

These are important commitments. However, they do not make any of Sky, BP or Microsoft investable companies for WHEB’s portfolios.  We are focused exclusively on companies whose product or service is solving a sustainability challenge.  We want to see a ‘lock-step’ relationship between unit sales growth and a positive impact on society and/or the environment.  Sky’s sales growth is still related to media consumption, BP’s to fossil fuel products, and Microsoft is mostly still computer software.  We can’t describe these companies’ core business as enabling and benefitting from the shift to a zero carbon and more sustainable economy.  This doesn’t represent a revenue opportunity for them. What they are doing is impressive and laudable. But it is ultimately a defensive strategy to manage the risk which the transition represents to their future profitability.

What Sky, BP, Microsoft and others’ commitments will do however is drive demand for the products and services supplied by many of WHEB’s portfolio companies.  To achieve their ambitions, corporate leaders will need to purchase services and tools that enable them to reduce their carbon emissions.  What is more, BP, Microsoft and Sky’s corporate commitments require them to push carbon abatement up and down their enormous value-chains. This isn’t just about these individual companies, but the industrial ecosystems that interact with them. This in turn will drive growth across almost all of the end markets in WHEB’s environmental themes.

For example, all three of these leading corporate commitments require reductions in carbon emission from vehicle fleets. This will drive demand for battery electric vehicles (BEVs) and for the BEV components manufactured by Aptiv, Infineon, Littlefuse and TE Connectivity, portfolio holdings in our Sustainable Transport and Safety themes. More efficient offices and TV studios will require better insulating materials like those produced by Kingspan, which we’ve held since 2014, as well as more efficient heating, ventilation, air conditioning and water systems like those provided by AO Smith, Lennox, Daikin and Xylem, which are in our Resource Efficiency and Water Management themes.  Intense pressure for more efficient manufacturing will drive demand for products supplied by companies like Daifuku, IPG Photonics, Keyence, Linde and Renishaw, all stocks the WHEB strategy has held for some time.

We think we’ve crossed a tipping point. Net Zero Carbon has gone mainstream. The broad outline of how companies will achieve their ambitions is now becoming clearer. And it is not even twelve months since Theresa May made her announcement.

 

[i] https://twitter.com/SebBeloe/status/1138794610766024704

[ii] https://blogs.microsoft.com/blog/2020/01/16/microsoft-will-be-carbon-negative-by-2030/

[iii] https://www.skygroup.sky/sky-zero

[iv] https://www.tech-pundit.com/wp-content/uploads/2013/07/Cloud_Begins_With_Coal.pdf?c761ac=

[v] https://www.bp.com/en/global/corporate/who-we-are/reimagining-energy.html?gclid=EAIaIQobChMIx9Lgj5yN6AIVRbTtCh1LKQZrEAAYASAAEgKKDPD_BwE

[vi] For a useful deciphering of BP’s announcement see https://carbontracker.org/bps-net-zero-ambition/

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