There was an important lesson to be learned in Warren Buffet’s last Berkshire shareholder meeting. The lesson was; ‘A good investor invests in something that they have an edge in’.
Multiple people were probing Buffett and Munger about investing in companies and assets that they do not currently invest in. Their answer was simply ‘to invest in anything we have to ask ourselves, what do we know that others do not know?’ If you know something better than others; or know something that others do not know, then you got yourself an investing advantage. Today we will discuss some of the potential winners in the climate change business.
Making a buck on climate: The Unexpected Winners
The writing on the wall when it comes to fighting climate change says: Electrify Everything. This trend is much bigger than sexy electric Tesla cars and trucks. Electrification will create an increased demand for electricity by three folds, at minimum, over the next few decades. Those who have skin in the game know that the electricity generation market is messy. Solar, wind, residential solar with battery storage, nuclear, and hydro are all competing to drive down the cost versus reliability curve. On the other hand, what is less messy is the electricity transmission and distribution market, which is somehow regulated and monopolized in many areas.
Briefly going back to Berkshire’s meeting where they hinted at the massive economic opportunity in moving green electricity from where it is wanted to where it is needed. Those who are in this business know that severe utilization issues arise when you have a sharp increase in generation capacity, especially with the way electric grids are built. The opportunity in moving electricity via cross continental transmission lines will be for Berkshire as big as owning the railroads. In short, many electricity transmission and distribution corporations have a large upside because of this fact of life.
A good investor invests in something that they have an edge in.
Buildings produce up to 40% of Carbon emissions worldwide. A big part of this problem is that buildings use fossil fuel for heating in many of the coldest parts of the world. However, electricity, instead of fossil fuels. can be used to heat buildings. The best way to do that is to use heat pump machines. These machines are incredibly efficient and better than electric heaters in delivering heat to buildings. It is projected that billions of these heating machines will be sold in the next couple decades to replace all fossil fuel based heating equipment stock that are currently being used to heat our buildings. We see a large economic upside for companies that manufacture such machinery because of this trend. The figure below shows the number of units expected to be sold by 2050, which is approaching 1.8 billion units.
Rare Earth Metals
Finally, to produce clean electricity to power the future, generation equipment needs to be manufactured. The catch is that rare earth elements are critical to manufacturing all modern clean energy generation equipment. There projected demand for rare earth metals, especially PGM Metals, is multiple folds higher than the existing production capacity. Figure 2 shows demand increases based on existing policies and if sustainable development policies are implemented. The first time I looked at this chart I couldn’t believe the numbers, some metals have a projected demand increase of 1500%, at minimum. This represents a large economic opportunity for companies that mine such metals. It seems like it will be a problem for such companies keeping up with demand. This could be a catalyst for innovation in this space and the space of recycling such metals.