DR.CHENJIAZI ZHONG

Energy consumption is the largest source of greenhouse gas (GHG) emissions globally. This includes fuel combustion for transportation and the generation of heat and electricity. Therefore, carbon capture has become a significant part of the transition to achieve net-zero emissions. 

To achieve such climate goals and targets by 2050, annual capital expenditures across renewables, electrification, infrastructure and energy efficiency would need to be approximately US$3.2 trillion per year through 2050 (Meng et al., 2022). Clean technology (cleantech) investing supports the development and adoption of technologies aimed at reducing negative environmental impacts, including climate change and resource depletion. Cleantech investments provide resources to scale up low-carbon technologies with a significant potential for long-term GHG emissions savings. 

From the perspective of investment portfolios, cleantech investment solutions are generally designed as long-biased equity strategies, with a focus on energy transition opportunities in cleantech and renewables. The goal of cleantech investment portfolios is to generate attractive absolute returns through investments across renewable generation, decarbonization and the circular economy. 

Cleantech Investment Universe and Opportunities

The investment universe of cleantech solutions is large and is interconnected across the three verticals mentioned above (i.e., renewable generation, decarbonization and the circular economy):

1. Renewable generation: investment opportunities from renewable generation can be from wind, hydrogen, solar and biofuels
2. Decarbonization: investment opportunities from this aspect include carbon capture, fuel cells, batteries, electric vehicles and storage 
3. Circular economy: these investment opportunities are from activities such as waste management, water treatment, recycling, chemical recycling and waste to energy    

Cleantech Investment Philosophy and Approach

Decarbonizing the world represents the largest wealth transfer in human history. An effective cleantech investment strategy looks at the most economically successful and enduring businesses that work to decarbonize the world while shorting those unable to benefit from the transition. As such, in constructing a long-term-oriented portfolio, investment ideas and selection should be focused on systemic winners and enduring disruptors over a multi-decade time horizon. 

Some good investment ideas to consider:

• Companies in clean energy transition, which have opportunities across the industries experiencing increased capital flows
• Early-phase companies and industries that are positioned for an accelerated growth
• Companies that evolve with technology, which can improve their cost structure, leading to potential margin expansion and earnings growth
• Companies with compelling upside from the perspectives of cleantech ecosystem and liquidity 

In the individual company research process, after completing management screening and scrutiny, an effective approach to cleantech investment solutions should follow a technological viability assessment. In this phase, portfolio managers or analysts can utilize various channels, such as hiring engineering and product experts in the relevant field, interviewing users, analyzing competitors with similar technologies and modeling market dynamics with inputs from subject-matter experts. 

Short-selling techniques can enhance portfolio alpha incrementally. Portfolio managers can short single names idiosyncratically and capitalize on the opportunities across the companies facing headwinds as a result of the clean energy transition. For example, companies with structural decline, balance-sheet disconnection or unproven technologies that may have led to inflated valuations.  

Oversight of corporate execution is equally important. Portfolio managers or analysts need to closely follow up on any progress and track the reduction or avoidance of GHG emissions, installed renewable energy capacity, increased energy efficiency, etc.

A good comprehension of regulatory frameworks is also crucial. Throughout the investment process, it is a common practice to leverage expert networks and conduct subject-matter consultation to gain a better understanding of the speed and adaptation of regulatory changes.   

Portfolio Risk Management

Similar to all other investment strategies, the risk-management process for cleantech portfolios can be categorized into position risk, portfolio risk and firm risk. Generally, the keys are to analyze and account for risk for each position across multiple levels of the enterprise, employ prudent leverage, construct portfolio frameworks, establish a strong alignment of incentives with the investor base and compliance and operation practices.   

Keywords: clean technology, cleantech, net zero, carbon capture, investment portfolio, international portfolio investment, risk management, Paris Agreement, cleantech investing, cleantech funds, cleantech solutions, investment ideas, investment opportunities

References

Meng, F., Wagner, A., B. Kremer, A., Kanazawa, D., J. Leung, J., Goult, P., . . . M. Cullen, J. (2022). Planet compatible pathways for transitioning the chemical industry. ChemRxiv. doi:10.26434/chemrxiv-2022-hx17h