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A long/short way to play the decade-long green transition theme

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This is a sponsored article from UBS Asset Management.

A green energy future is on the horizon for major economies as the use of renewable energy increases.

This energy transition will play out across geographies and sectors, which we believe represents one of the most compelling and durable investment opportunities over the next decade.

Energy themes span sectors and sub-sectors

Source: UBS O’Connor, Nov-2021

Companies affected by this transition will emerge as winners or losers, and investors who take a long/short approach to equity markets can find compelling investment opportunities.

But how can investors assess a company’s ability to transition?

“It’s crucial to be forward-looking to see how companies are evolving their businesses,” says Kevin Russell CIO at UBS O’Connor.

He explains that the data some investors use, to gauge emissions footprint for example, is backward looking. These metrics do not take into account their capex spending needs on new technologies that enable the green transition.

Kevin stresses that “to help the environment transition to battery storage, electrification, and renewables, we estimate that $1 trillion a year spend is needed and some companies will be able handle it while others will not”.

Copper industry – essential to a green future

The copper industry has traditionally not scored well on ESG screenings because of the mining sector’s carbon footprint: copper extraction and processing can be energy intensive and environmentally damaging.

But copper-intensive products and technologies are necessary to facilitate the global transition to a lower carbon footprint and are needed for both “electrification” and energy efficiency.

Through O’Connor’s proprietary scoring methodology, the team believes that copper’s positive contributions outweigh the negative environmental impact from extraction and processing.

Fossil fuel – another counterintuitive example of green investing

While the oil and gas industry will play a significant role in the global economy for years to come, the industry is on the wrong side of the decarbonisation theme.

As the cost of capital for conventional oil and gas projects increases, the industry will likely struggle to maintain production, particularly in the face of rapidly declining rates for unconventional reserves.

Despite these challenges, O’Connor believes that fossil fuels will remain important in various “difficult to decarbonise” industries. In addition, advances in decarbonising technologies, such as “carbon capture and sequestration” (CCS) hold some promise of revitalising certain industry players.

The industry will remain investible for years to come, presenting opportunities on both the long and short side, as the cyclical nature of oil prices creates compelling trading opportunities.

Additionally, investment opportunities may emerge as traditional energy companies reposition their businesses into more carbon friendly growth areas.

Utilities, once a “sleepy” sector; now a dynamic growth industry

Utilities contribute over 40% of energy-related CO2 emissions globally, while holding the key to decarbonising other sectors of the economy through electrification.

The precipitous decline in the cost of renewable generation has opened the door to large scale, commercial decarbonisation more quickly than many anticipated.

The decarbonisation of the power generation sector is an indispensable component of the energy transition. Utilities are entering into a long-term growth phase, as they transition their generation fleets away from fossil fuels and towards renewables. We can argue that the traditional valuation metrics may no longer apply and utilities should be valued through more of a “growth” lens.

In fact, many companies making the capital investment are commanding higher valuations with lower costs of capitals.

The UBS O’Connor Environmental Focus strategy, (launched June 2020), is a low net equity long/short strategy that focuses on companies contributing to the energy transition. It takes a top down/bottom-up approach and focuses on themes/sub themes that span sectors and geographies.

Speak to UBS Asset Management on our long/short environmental focused strategy.

This is a sponsored article from UBS Asset Management.

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