Shival Bajpay
February 5, 2024

Why Invest In Sustainability?

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What Is The Atlas Sustainability Theme?

At Atlas, we believe that the push from individuals, corporations and nations towards a more sustainable future has fundamentally altered the investment landscape and will continue to influence capital allocation decisions over the next decade. The Sustainability Theme is an actively managed equity portfolio that offers targeted exposure to companies providing products and services that contribute to a more environmentally sustainable economy and more efficient use of the planet’s resources. This includes exposure to leading-edge sustainable technologies like battery storage, carbon capture, smart grid, renewables, green building and sustainable agriculture.

Why Invest In Sustainability?

1. The world’s largest nations have committed to net-zero emissions between 2050-2070 and will need to make significant investments in sustainability and sustainable technologies to get there

- More than 140 countries have set net-zero emissions targets, covering 90% of global emissions[1]
- The fragility of a fossil fuel-dependent energy system has accelerated government targets and reinforced the need to invest in sustainable energy
- In order to scale and enable full utilization of climate technologies, significant infrastructure investments will be required
- The cost to achieve net-zero emissions by 2050 is estimated at $5.5 trillion, including $1.6 trillion on energy alone
- The US government established a national goal to have 100% clean energy grid carbon free by 2035[2]. Adoption of renewable energy will drive economic output and an estimated 8 million new jobs in the US
- The EU has reached an agreement on the Corporate Sustainability Reporting Directive (CSRD) which expands sustainability reporting requirements to a host of companies that were previously exempt. The SEC has less adopted less stringent rules but US companies doing business in the EU may also be required to produce ESG reports to comply[3]

2. Leaders of the world's largest corporations increasingly view sustainability as a key strategic priority

- 66% of the Fortune 500 have net-zero emissions targets by 2030. There is growing demand from both shareholders and employees for companies to begin aligning their business purpose with sustainability commitments
- The prioritization of sustainability creates a flywheel for investment as operational efficiencies and cost reductions are realized (through decreased energy consumption, business travel, materials costs, etc.)
-87% of business leaders expect to increase their organization’s investment in sustainability over the next 2 years[4]. 83% said sustainability programs directly create short and long-term value for shareholders. And 80% said that sustainable investments helped them optimize business operations and reduce costs
- Over 50 oil and gas companies, including many of the world’s major oil companies (BP, Exxon, Shell, etc.) have set net-zero targets and agreed to fund emission-reduction projects. Large-scale carbon capture projects will continue to be launched in coming years by the oil majors and their partners (e.g., Exxon's recently announced underground site in Southwest Texas[5])
- Companies that prioritize sustainability will be better positioned to attract and retain top talent, further cementing it as a strategic imperative. 71% of professionals say they would take a pay cut to work at a company that aligns more closely with their values[6]. The Proportion of S&P 500 companies using "ESG" metrics in their employee incentive plans will continue to increase (from 44% today), driving further commitment and individual accountability to the sustainability goals

3. The electrification of transportation and the sale of both passenger and commercial EVs will continue to surge

- There are over 20 million passenger electric vehicles (EVs), a figure which is expected to quadruple to 80 million by 2025[7] behind 4 major drivers: 1) continued policy support; 2) improvements in battery technology; 3) deployment of charging infrastructure and 4) significant investment from automakers
- There is already massive global demand for EVs of all types and the US is beginning to catch up. China has 685,000 electric buses and 195 million electric 2-wheelers. Almost 40% of India’s massive 3-wheel fleet is already electric[8]
- The market has begun shifting from policy-driven tailwinds towards organic consumer-driven demand, with supply already being a larger constraint than demand for EVs
- EV battery demand is also rising sharply, with 2021 shipments 94% higher than 2020
- Nearly ~500m EV chargers are estimated to be in service over the course of the next decade, making EV ownership more convenient and providing a significant revenue opportunity for infrastructure manufacturers (i.e., Tesla)

4. Conscious consumers are increasingly likely to buy from brands and companies that have a broader purpose beyond just profits

- Over the past 2 years, sustainability has shifted from a “nice to have” to an essential part of the purchase journey that consumers have come to expect as a standard.
- 42% of Americans are already willing to pay more for sustainable products but Gen Z will be the ultimate conscious consumer. They want to support companies that share their core values and focus on the trifecta: people, planet and profit. Per recent surveys, Gen Z consumers are willing to pay 48% more to buy from purpose-led brand and willing to accept 20% less to work for one[9]
- Customers are further demonstrating a willingness to change their shopping habits to reduce environmental impact. 85% of people surveyed have shifted their purchase behavior towards being more sustainable over the last 5 years[10], with Millennials skewed even higher. As Millennials and Gen Z continue to make up a larger share of total spend, sustainable purchasing will only trend higher
- Similar pull exists for consumers for renewables, with almost half of US homeowners expressing interest in home solar panels[11], driving growing demand for panels and upstream manufacturing inputs

5. Venture investment in sustainability has surged, providing a substantial tailwind to innovation and valuations

- There is tremendous white space for revenue and market cap growth for sustainability companies (carbon capture, agriculture, green building, alternative energy technology, etc.) as underlying technologies all approach inflection points in terms of maturity, scale and adoption. These technologies are in position to finally achieve scale over the next 10 years
- Venture capital interest in climate tech has reemerged with strength following a period of low returns in the early 2000s. Fundraising has increased 3x and investment has increased 5x between 2015-2021
- In 2021, exit activity for climate tech companies reached $114 billion. The level of exit activity will continue increase in coming years, unlocking significant shareholder value and driving the sustainable investment flywheel

6. Sustainable funds continue to attract inflows in the public markets

- Assets invested in ESG ETFs increased over 22% in 2023 to $481 billion[12]. This is despite heightened noise around "ESG" along with ~1,000 European funds being pulled from the sustainable universe due to stricter rules on “sustainable” definitions
- Sustainably-linked bonds and loans are one of the fastest-growing segments of ESG, with issuance exceeding $1.6tr in 2021[13]. Growing issuance of sustainable debt offers projects an additional funding mechanism and source of capital that will allow the broader ecosystem of sustainable assets to develop
- The rise of full-stack capital markets for sustainable assets expands the TAM of potential projects significantly, attracting more capital to the space overall

References

  1. https://climateactiontracker.org/global/cat-net-zero-target-evaluations/
  2. https://www.belfercenter.org/publication/challenges-decarbonizing-us-electric-grid-2035#:~:text=The%20Biden%20administration%20has%20established,greenhouse%20gas%20emissions%20by%202050
  3. https://www.cooley.com/news/insight/2022/2022-10-28-eus-new-esg-reporting-rules-will-apply-to-many-us-issuers
  4. https://www.gartner.com/en/newsroom/press-releases/2022-11-14-gartner-survey-finds-87-percent-of-business-leaders-expect-to-increase-sustainability-investment-over-the-next-two-years
  5. https://energycapitalhtx.com/exxonmobil-carbon-dioxide-storage-project
  6. https://www.kornferry.com/content/dam/kornferry-v2/featured-topics/pdf/FOW_TrendsReport_2022.pdf
  7. https://bnef.turtl.co/story/evo-2022/page/3/2?teaser=yes
  8. https://assets.bbhub.io/professional/sites/24/2431510_BNEFElectricVehicleOutlook2023_ExecSummary.pdf
  9. https://www.prnewswire.com/news-releases/survey-finds-the-double-top-line--two-ways-gen-z-will-pay-for-purpose-301302944.html
  10. https://www.businesswire.com/news/home/20211014005090/en/Recent-Study-Reveals-More-Than-a-Third-of-Global-Consumers-Are-Willing-to-Pay-More-for-Sustainability-as-Demand-Grows-for-Environmentally-Friendly-Alternatives
  11. https://www.pewresearch.org/fact-tank/2022/10/14/home-solar-panel-adoption-continues-to-rise-in-the-u-s/
  12. https://etfgi.com/news/press-releases/2023/12/etfgi-reports-assets-invested-esg-etfs-listed-globally-have-increased
  13. https://www.bloomberg.com/news/articles/2022-02-03/esg-by-the-numbers-sustainable-investing-set-records-in-2021

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