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When people think about investing in the energy transition, they often consider buying into renewable energy companies, carbon capture solutions, equipment manufacturers and other businesses related to reducing greenhouse gas emissions. But there’s another way to play what by 2030 will become a US$4.5-trillion-per-year investment opportunity1: owning the energy consumers.
For Andrew Simpson, Senior Vice President, Portfolio Manager and Head of the Mackenzie Betterworld Team, this means owning companies that are making a concerted effort to become more sustainable rather than exclusively purchasing the shares of climate solution product companies.
“These businesses don’t have to buy solar panels, they don’t have to source renewable energy, but they’ve chosen to, and they’ve integrated sustainability into their business processes,” says Simpson, who runs the Mackenzie Betterworld Global Equity Fund.
Focusing on the end user – which he points out isn’t related to the average person buying an electric vehicle or installing LED lights, though that’s important for the transition, too – is critical because “you don’t have innovation unless there is a market and support for it,” he explains.
These companies have the resources to make large purchases and can allocate capital to different solutions. “They’re important to making things happen,” he adds.
Leveraging large caps
Simpson, who has managed sustainable investment mandates for more than a decade, is always on the hunt for large-cap companies that can effect change (his portfolios hold some small caps, too). Companies like Microsoft, Amazon and Costco – names not usually associated with the energy transition – are ideal candidates for his portfolio because they’re not only making a positive impact by reducing their own emissions, but they’re also proven, often multinational, businesses with strong cash flows and a record of business success.
“They have the ability to make things happen at scale,” he says. “They have the corporate wherewithal to do an analysis and say, ‘This is the best solution for us.’”
Microsoft, for instance, has been 100% powered by renewable electricity through direct purchases and renewable energy credits since 2014. It’s committed to carbon neutrality by 2030 and an even bolder proposal by 2050: “They actually want to reduce all the carbon they’ve emitted since they became a public company in the 1970s,” Simpson notes.
To reach these goals, Microsoft has signed 25-year power agreements with renewable producers – binding contracts that make it impossible for the next CEO or board of directors to abruptly change course – for facilities, including its huge data centres. That includes delivering more than 10.5 gigawatts of renewable power capacity to Microsoft facilities in the U.S. and Europe between 2026 and 2030. The company is also spending an estimated US$806 million on two carbon removal contracts.
As for other end users, in 2023, Amazon, the world’s largest corporate purchaser of renewable energy for four years in a row, announced 74 renewable power purchase agreements amounting to 8.8 gigawatts of capacity. While that’s certainly helped Amazon’s energy efficiency, it estimates its solar and wind farms have also generated more than US$12 billion in economic activity globally from 2014 to 2022.
In Canada, grocery giant Loblaws announced that by 2025, all its stores in Alberta will be powered with renewable energy, reducing the company’s carbon emissions by 17%. It’s accomplishing that feat by buying solar, wind and hydro-generated power from TC Energy Corp.
More broadly, over 430 multinationals have joined RE100, a group committed to obtaining 100% of its power from renewable sources by 20502. Together, they consume more than the entire generation capacity of Scandinavia, and they’re not yet halfway to their goal of carbon neutrality. In Canada, major banks and grocery chains have made similar pledges.
As a portfolio manager attuned to environmental, social and governance (ESG) criteria, Simpson places a lot of weight on these actions. “We’re focusing on companies with sustainable business models,” he says. “The behaviour of companies is an important part of our review.”
Expanding the market
While the list of end users is growing, more companies must follow Microsoft and Amazon’s lead if the global economy will reach net zero by 2050. Simpson is confident more businesses will make sustainability part of their strategy, especially as consumers increasingly choose to spend money with companies that share their values. That means investors and fund managers like Simpson will have more options for their portfolios.
“There is still a long way to go on this, but companies have gotten on board,” he says. “There’s an opportunity for them to do more, especially for companies that haven’t yet made that commitment.”
Because of technological advancements, businesses that may not have been considered end users can now become them. For instance, the waste industry emits a lot of methane, which is one of the worst greenhouse gases, notes Simpson. Now you have waste companies spending money to convert that gas to power, which they can use for their own trucks or sell to other operations.
“You can have a company in health care or financials or waste contributing because they’re making investments or commitments to source renewable power,” he says. “There are – and will be more – opportunities across every sector.”
Considering the end user as part of the energy transition opens up a new crop of companies to investors. It also means you can own a large-cap diversified fund and still take ESG into account.
“A diversified investment strategy is still contributing toward the energy transition,” explains Simpson. “You can still feel good about investing in these types of companies. They’re not creating solar panels, but they’re contributing to the solution.”
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1 International Energy Agency, net zero roadmap, 2023
2 Bloomberg New Energy Finance
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