The $50 trillion opportunity Munro is chasing

When even conservative estimates suggest $50 trillion in spend is going to be focused on decarbonisation in coming years, it's time to pay attention. After all, that's $50 trillion in potential revenue opportunities for companies that know what they are doing.

It's no surprise therefore that the opportunity is a big part of growth-oriented fund manager, according to James Tsinidis, Portfolio Manager of the Munro Climate Change Leaders Fund.

"It's an area that we want to be involved in because the companies that are ultimately assisting the world decarbonise and going through this energy transition, they're the ones that are going to get these opportunities to grow, to build all this infrastructure that's required" 

The Munro Partners approach looks at the infrastructure requirements and value chains involved in the transition, before incorporating revenue stream criteria as part of the stock selection process.

In this edition of Expert Insights, Tsinidis discusses why the decarbonisation transition is a significant part of Munro's investment universe, the selection process and criteria Munro Partners uses, and some of the companies which fit the bill.

Please note: This interview took place on 26 April 2023.

Edited Transcript

What are the key elements of your investment philosophy and how do they drive performance?

The key driver of performance is stock performance and ultimately stocks follow the earnings growth of the company. So, the EPS growth, the earnings per share of each company that they deliver. 

Our key role at Munro Partners is to try to determine which companies are going to grow and continue to grow faster than the market expects. 

At the end of the day, when companies that consistently grow and beat growth expectations, when they do that, they are rewarded with the higher share prices and they also hold their multiples or their multiples expand, their valuation multiples expand because the market doesn't appreciate the underlying growth that the companies have behind them. 

So that's what we do every day. We try to figure out how fast the company's growing, how long they're going to hold that growth rate for, and basically that's how we get our performance.

Munro's cornerstone is growth investing, what does that mean when it comes to the Climate Change Leaders Fund?

Climate is a big growth area. 

It's a big part of our universe. It's a growing part of the market. It's an area that we want to be involved in because the companies that are ultimately assisting the world decarbonise and going through this energy transition, they're the ones that are going to get these opportunities to grow, to build all this infrastructure that's required. 

There's a lot of different estimates out there as to how much this is going to cost. 

Some of the lower end estimates are about $50 trillion in spending over time, and that's a $50 trillion revenue opportunity to these companies that are going to be involved in this. 

Think about anything in energy efficiency. So retrofitting buildings like the one we're in today, all the heating and cooling that goes into that. Think about all the companies that are involved in basically updating those systems. When you're talking about the power grid, think about all the companies that are going from coal and gas and basically building wind and solar.

We're looking for the companies that are involved in this value chains and they're the ones that are going to benefit from this transition in spending, this $50 trillion opportunity. It's going to touch a lot of different parts of the economy. 

What are the key characteristics a company must have in order to make it into the portfolio?

Being a climate thematic fund, we need to be true to label. We need to be investing in companies that are actually addressing this key issue and enabling the decarbonisation of the planet. 

So what we're saying is first of all, to qualify for inclusion of the fund, the company needs to have at least 50% of its revenues from these decarbonisation initiatives within five years from now. 

The reason we're not a hundred percent today is because as you can imagine, there's a lot of industrial companies, a lot of utility type companies out there that still have portions of their business that are involved in, say, oil and gas or coal or whatever it might be. 

But they're shutting that down and they're transitioning over to, say, solar, wind, et cetera.

So that's why it's not 100% today. But at the same time, we don't want companies that are 99% still coal and whatever else and a very minimal amount in cleantech, for example. We want to have that reasonable benchmark of at least 50%. 

There's a lot of companies we invest in today that are a hundred percent but not all of them are there yet. 

As long as the company has a good view of how quickly it can transition, and as long as it hits that 50% threshold within five years, then we're happy to actually invest there. 

And hopefully what that means is you actually get a rerating in your stock multiple as well. Because as you know, there's a lot of ESG investors out there today that can't touch a stock because it has an element that might be destructive to the environment, to its earnings. Ultimately, if the company actually reduces that position or basically transitions that position away to something that's more environmentally friendly, then that stock multiple actually should rerate over time.

We can actually get ahead of that and it actually could be a way of driving the stock price as well as obviously driving the earnings of the company as well. 

Can you talk us through examples of stocks that have the characteristics just discussed?

The characteristics that I was just talking about, that's probably a perfect fit for one of our German companies, it's called RWE AG (ETR: RWE). It is a traditional utility company. 

People have probably seen German coal on the news. With the situation from what's happened with Ukraine, a lot of that's actually run by them. They've shut down the nuclear that was previously run by them. 

What they've done now is they have a plan to close down all of that coal and they're going to do that steadily over this decade and now they're actually the number one or two, depending on the segment, player in each of the clean areas. So think about onshore wind, solar, offshore wind as well. Think about them as a green energy major. 

We really think they're one of those companies for the future for this energy transition. We think these types of companies are your Exxons (NYSE: XOM) and your Chevrons (NYSE: CVX) of 50 years ago. 

So that's probably the most obvious example of that transitioning company. 

There's many that are 100% there today. 

As an example of a company that we invest in is one called First Solar (NYSE: FSLR). It is one of the dominant solar panel manufacturing companies in the US. That's really important now because obviously we have all these issues with supply chains, particularly with US and China. 

Previously, this company struggled against Chinese competition a lot. What's happened in the last few years with this de-globalisation effect is this company's basically going to be protected a lot more from Chinese competition by the US government. And they're a huge beneficiary of this inflation reduction act in the US that actually promotes on-shoring or reshoring of a lot of these industries. Solar being a key example, batteries for EVs, et cetera, being another example as well.

Access to a $50 trillion opportunity

The Munro Climate Change Leaders Fund is focused on creating a portfolio of climate winners that help enable the decarbonisation of the planet – those companies that are best positioned to champion and win from this structural change. Find out more below, or by visit our website.

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