Henning Padberg of Nordea Asset Management highlights three areas that are likely to benefit from ongoing trends such as the sharp rise in energy demand.

Thanks to initiatives such as the Inflation Reduction Act in the USA and the European Green Deal, the market penetration of technologies such as hydrogen and battery recycling is likely to increase sharply in the coming years. This is good news for investors, explained Henning Padberg, portfolio manager of Nordea’s Global Climate and Environment Strategy, at a presentation in Zurich: “From an investment perspective, it often makes sense to focus on technologies that have already achieved a certain level of market penetration. Only then is it possible for companies to generate a stable cash flow.”

New opportunities in energy efficiency

For example, he sees great investment opportunities in the area of energy efficiency – a keyword that is often used in connection with the enormous resource requirements of increasing technologization and the use of artificial intelligence. By 2030, the total electricity demand of information and communication technologies is expected to rise to more than 8,000 terawatt hours – more than double the current figure1. The share of data centers in particular is likely to rise sharply, but networks are also consuming more and more electricity.

Semiconductor designers have the necessary solutions to reduce the energy requirements of new technologies. As such, semiconductors are a central component of the green transformation for harnessing, converting, transferring and storing renewable energy with minimal loss of power and also for reducing energy demand of electronic devices.

More investment to support renewable energy

Although renewable energies are being promoted around the globe, they still account for a small proportion of global energy use. Oil, coal and gas still account for 40,000 to 50,000 terawatt hours each.2 Hydropower – the most widespread of the renewable energies – accounts for just over 10,000 terawatt hours.2 Nuclear power, wind and solar energy and others are far below this.2

And although both solar and wind energy have grown strongly in recent years, the curve for fossil fuels is no less steep. Padberg is convinced that the key to changing this is the efficiency of renewable energies. This includes the fact that smart grids are currently still a major bottleneck. These intelligent electricity grids can react in real time to fluctuations in energy supply and demand. They also increase system reliability and facilitate the integration of renewable energies and electric vehicles.

However, the existing infrastructure is not sufficient. For example, it is currently not possible to use or store all the electricity produced on a sunny day across the board. To solve this problem, annual investments in smart grid infrastructure amounting to USD 750 billion would be required by 2030.3 However, only USD 330 billion will actually be invested.3 For investors, however, this opens up opportunities with companies such as MasTec. The largest smart grid construction company in the USA has so far completed projects in the renewable energy sector with a capacity of more than 47 gigawatts4 and has an order volume of USD 13 billion.5

Circular economy creates growth potential

Padberg sees further potential in the waste industry. According to the United Nations Environment Programme , only 14% of the world’s plastic waste is currently recycled.6 “Yet many resources such as metal ores, fossil fuels, biomass and non-metallic minerals can be recovered from it,” Padberg points out. “And for everything that cannot be recycled, better waste incineration plants are needed to produce energy from the waste.”

Republic Services is heavily involved in this area in the USA. With 147 recycling and waste incineration plants, the company prevented 40 million tons of CO2 emissions in 2022.7Despite its dominant position in the US market, the portfolio manager believes the company has further potential for growth, which should go hand in hand with its increasing focus on the circular economy.

Overall, the portfolio manager advises not to focus too much on short-term events, which can quickly lead to overreactions. In addition, caution is advised with companies that focus on a single technology or solution: “History has shown that it is difficult to build a solid business model in this way. In such cases, it is not uncommon for companies to become too dependent on individual raw materials such as lithium, whose prices are very volatile,” says Padberg.

Reference to companies or other investments mentioned should not be construed as a recommendation to the investor to buy or sell the same but is included for the purpose of illustration.

1“Data Center Energy Use Trends and Efficiency Strategies”, AKCP, 2023
2Statistical Review of World Energy, Energy Institute, 2023
3“Unlocking Smart Grid Opportunities in Emerging Markets and Developing Economies”, International Energy Agency, 2023
4Energy Transition Solutions, MasTec
5“MasTec Third Quarter 2023 Earnings Call Presentation”, MasTec, November 2023
6“Plastic recycling: an underperforming sector ripe for a remake”, United Nations Environment Programme, 2019
7 “Unlocking a Sustainable Future”, Republic Services, November 2023