RBC GAM to grow green infrastructure exposure across all EM equity portfolios

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RBC Global Asset Management (RBC GAM) is building its exposure to green infrastructure across its emerging markets equity portfolios, with a focus on renewable energy, electric vehicles, and transmission metals.

Royal Bank of Canada’s asset management arm, which manages more than USD465 billion in assets, wrote in a recent research paper that environmental risks represent “increasing sources of both opportunity and risk” for investors.

“We believe [green infrastructure] is a multi-decade growth story and we want to increase our exposure to this theme across all our portfolios,” says Zeena Dahdaleh, a portfolio manager on the EM team at RBC GAM.

Green infrastructure growth is expected to be driven by ongoing trends including global warming, the impact of climate risks on people’s health, and increasing government focus on green infrastructure, according to RBC GAM.

The research notes that emerging markets are “disproportionately affected by climate change,” with these countries bearing greater physical and financial risks. 

A study from Pictet Asset Management and University of Oxford in 2020 found that Brazil and India could lose up to 60 per cent of their GDP per capita by the end of the century if global warming continues unmitigated.

However, there remains a large funding gap for the clean energy transition in emerging markets, with the International Energy Agency (IEA) saying a seven-fold increase in annual clean-energy investment in developing countries is needed in order for the world to achieve carbon neutrality by 2050.

RBC GAM is focusing on energy consumption. “Energy consumption accounts for 73 per cent of man-made greenhouse gases. Of that 73 per cent, and specifically looking at CO2 emissions, electricity, heating and transport account for the majority of CO2 emissions,” writes Dahdaleh.

Renewable energy, electric vehicles (EV) and transmission metals are the most attractive sectors for investment, according to RBC GAM.

Other sectors such as energy storage, food and agriculture, and hydrogen are “also interesting ways to play the theme and may be key areas to investigate in future” but currently these sectors have “very few investable names.”

Within renewable energy, Dahdaleh highlights the producers of rotor blades for wind turbines as having both high returns and “scope not only to grow their market share domestically but also globally.”

RBC GAM is also considering opportunities in high-quality “pureplay” solar manufacturers in China.

Electric vehicles represents another growth sector, with Goldman Sachs predicting that their portion of total vehicle sales could grow at a compound annual growth rate of 15 per cent over the next few years.

According to RBC GAM, automakers are the “least attractive part of the value chain” in electric vehicles due to low returns and high levels of competition in the market.

RBC GAM is instead looking at opportunities in component manufacturers, including thermal management technology. Electric vehicles expend 20 per cent of their total energy on air conditioning, since they cannot use waste heat from the engine for inside heating as conventional cars do. 

“These companies have pricing power, are high return businesses and will not be exposed to the heavy capex cycle and competitive environment that we see in other parts of the value chain,” says Dahdaleh. 

“We expect the EV heat management market will rise at a CAGR of over 35 per cent for the next four years which is significant growth."

Battery manufacturers are another area where RBC GAM sees opportunities, with South Korean battery manufacturers currently boasting the largest market share and most advanced technologies.

The final way to play the green infrastructure theme, according to RBC GAM, is through raw materials that will aid the transition to a cleaner energy world. 

“The main challenge to moving away from hydrocarbons is that many alternative raw materials will be required to make the transition, with aluminium and copper at the top of the list,” says Dahdaleh.

RBC prefers aluminium and copper for commodity exposure partly because these companies tend to have a strong focus on ESG factors. 

“The evaluation of ESG practices (for example, water usage, waste management and community relations) is crucial in the metals and mining space and that is something we focus on when looking at the best ways to play this theme,” says Dahdaleh.

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