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A great “forward leap”: seizing The Sustainability Revolution
Interview published on familybusinessnetwork.net, 7 July 2023
An ecological revolution is under way. Across all sectors of society we are transitioning towards environmental sustainability. As Michael Urban, Lombard Odier Group’s Chief Sustainability Strategist, explains, this transformation may have as great an impact as the industrial and digital revolutions. So companies, in particular family firms, need to be ready to adapt their business models to the rapid changes taking place. At the same time, as our energy system moves away from fossil fuels and towards renewables, this transformation presents a significant opportunity for investors, who can build portfolios of companies exposed to electrification. We look at the changes taking shape in what has become known as The Sustainability Revolution.
We’re seeing a transition towards a green economy. Can you explain what’s happening?
We believe that many factors are combining to create an environmental transition as extensive as the Industrial Revolution, in a forward leap as dramatic as the Digital Revolution. Sustainability policies are now supporting hundreds of innovations, and companies are rushing to increase capital expenditure in areas likely to offer future profits. We believe that this transition will take place by means of three large-scale systemic changes, associated with energy, the earth and the oceans, and our materials systems, which includes materials we make, like plastics, and the raw materials we extract from the earth. These systemic transformations are being assisted by the pricing of external factors, primarily in carbon markets.
Read also: Planetary boundaries: the safe operating limits of humanity
What do these changes imply for family firms?
Family firms need to ensure their business models are able to adapt to these changes so that they can seize new opportunities and prosper during the transition.
What type and size of investments do you expect to see?
The energy transition is highly capital intensive. According to Lombard Odier estimates, capital expenditure of USD 24.5 billion will be devoted to the electrification of energy demand (transport, industry and buildings), to energy provision (renewable energies, storage, batteries and recharging systems, etc.) and to upstream and downstream solutions (transmission and distribution networks, mining operations, etc.).
What role do investors have in the energy transition?
The financial recovery in the markets resulting from this systemic transformation is a unique opportunity for investors. Our investment research and analysis suggest that we can build a portfolio of companies highly exposed to electrification that will double capital efficiency and earnings growth with valuations matching the general market. This is incredibly attractive.
Read also: ‘Prosumer’ power: the rapid rise of decentralised energy
What does it have to do with environmental science? How are the economy and the science of climate change linked?
In a zero emissions scenario, the proportion of electricity in final energy demand needs to grow from the current 20% to over 70% by 2050. The crucial question is whether we can build an economic and financial case for this to happen. In the last ten years, the costs of solar, wind and battery technologies have fallen by anywhere from 60% to 90%. As a result, it now makes sense economically to electrify transport, industrial processes and buildings operations. Selling recharging services, extracting and recycling lithium, and producing batteries are now also worthwhile, as well as producing and selling electric vehicles.
You say that The Sustainability Revolution will disrupt current business models and create new ones. Can you give some examples of what this means in practice?
In 2017, 1 vehicle in 80 sold worldwide was electric. Now it’s 1 in 6, and it should be 2 in 3 by 2030. This is probably the most visible part of a much wider story that involves hundreds of billions of dollars of new revenues derived from the electrification of the economy, which includes things such as retrofitting buildings for energy efficiency, manufacturing and installing heat pumps, semiconductor production, power converter production, wind and solar utilities, software for chips and electrical systems planning. By contrast, we’ll probably see a contraction in markets related to fossil fuels, for example for cars powered by internal combustion engines, the construction and maintenance of natural gas infrastructure and services for the oil industry.
It’s clear that electrification is generating huge amounts of capital expenditure. How is this affecting profits?
To continue with the example of the electric vehicles sector, car sales will no longer be the sole source of earnings for auto manufacturers. For example, some of them are already aiming to vertically integrate the sale of recharging services in their business models. We believe this market will be worth USD 200 billion by 2030. Producers are already building battery recycling plants to reduce their dependence on raw materials. Others are spearheading IT mobility: products such as robo-taxis and autonomous vehicles should offer much higher margins than has traditionally been the case in the automobile industry.
Read also: Batteries under threat: supply crunch looms for lithium
How can firms prepare themselves?
To benefit from these changes, investors and companies must first analyse these systemic changes in depth to understand the technological innovations, the transformations in the value chain and the shifts in the profit pool. This will enable them to determine the business models which are best positioned to profit from the recovery. They can then identify key investment opportunities that can be translated into strong business and investment convictions.
Important information
This document is issued by Bank Lombard Odier & Co Ltd or an entity of the Group (hereinafter “Lombard Odier”). It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful, nor is it aimed at any person or entity to whom it would be unlawful to address such a document. This document was not prepared by the Financial Research Department of Lombard Odier.
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