Three Growth Opportunities With a Climate Tilt

‘ESG’ has been a buzz in recent years, from government policies and corporate boardrooms to investment opportunities around the world. But how do you incorporate ethical elements into a portfolio without compromising on potential returns? The key is looking for growth along the value chain backed by long-term, structural tailwinds. In a climate-focused context, this means identifying areas of the market which are helping to address climate change and net-zero goals.

Green Metals to Forge a Path to Clean Energy

Green metals broadly refer to minerals which are critical for the clean energy transition. Demand for these metals including lithium, copper, nickel, cobalt and rare earth elements is steadily increasing alongside global expenditure on clean energy infrastructure and technologies. The investment opportunity lies in the dislocation between rising demand and supply constraints which is set to create advantageous market conditions for the miners, producers and processors in the space. Compared to fossil fuels, significantly larger quantities of green metals are needed to build and run renewable power sources, according to the International Energy Agency (IEA).

The transition to clean energy is largely being driven by world-wide initiatives to help fight climate change – such as the Paris Agreement. As a result, governments and companies alike are committing capital in areas such as green metals to reach net-zero carbon emissions by 2050. Clean energy accounted for almost three-quarters of total energy investment in 2022 – equalling around US$1.4 trillion. Plus, the IEA predicts if existing climate goals are honoured, demand for clean energy technologies backed by green metals could quadruple by 2040.

Green Hydrogen’s Colourful Future

Hydrogen is well on its way to getting a green makeover and has the potential to replace fossil fuels in key areas of the economy. The trick is ensuring you are investing in the right “colour” of hydrogen. Green hydrogen is the cleanest because it uses a process called electrolysis to zap water with electricity to split it into hydrogen and oxygen. The electricity used to make green hydrogen comes from renewable sources such as solar or wind power – meaning it does not produce any greenhouse gas emissions. Whereas other varieties of hydrogen like brown, grey and blue still require coal or natural gas inputs.

Green hydrogen can be used in a number of traditionally carbon-heavy industries including steelmaking, ammonia production and shipping. Therefore, governments and businesses alike are investing in green hydrogen, according to the IEA. For all its merits, green hydrogen has two shorter-term downfalls – high costs and storage challenges. As it stands, green hydrogen production costs are too high to be competitive with fossil fuels. However, investment in supporting technologies means it will be possible to reduce costs to a scalable level in the coming years. Storage issues are also being overcome by turning the gas into its liquid which can be used in instances were electrification is not an option.

Battery Tech Charges up Global Valuations

Speaking of electrification, battery technology has a range of applications, particularly when it comes to clean energy. Two areas which are seeing notable growth are electric vehicles (EVs) and battery storage for renewable energy sources like solar and wind power.

Lithium is vital for both uses, which has sent valuations for the resource soaring. Globally, lithium prices increased 13-fold between July 1, 2020 and July 1, 2022 – topping out at US$67,050 per tonne. In China, the price of lithium carbonate per tonne skyrocketed 357% from 105000 RMB to 475500 RMB between August 20, 2021 and August 19, 2022. Lithium producers, rather than explorers, have capitalised on the soaring demand. Miners such as Pilbara, Mineral Resources and Allkem have all benefitted from the historically high commodity price. ETFs which aim to capture the full value chain of battery tech have also been popular among Australian investors who want to leverage growth in the industry.

Related Funds

GMTL: The Global X Green Metal Miners ETF (GMTL) provides exposure to global companies which produce critical metals for clean energy infrastructure and technologies, including lithium, copper, nickel and cobalt.

HGEN: For investors seeking to access companies that stand to benefit from the advancement of the global hydrogen industry, the Global X Hydrogen ETF (HGEN) offers a solution. Gain exposure to companies involved in hydrogen production; the integration of hydrogen into energy systems; and the development/manufacturing of hydrogen fuel cells, electrolysers, and other technologies related to the utilisation of hydrogen as an energy source.

ACDC: For investors wanting to access the full lithium, electrification and EV value chain, the Global X Battery Tech & Lithium ETF (ACDC) offers a solution. ACDC invests in companies throughout the lithium cycle, including mining, refinement and battery production, cutting across the traditional sector and geographic definitions.