Morgan Stanley
  • Thoughts on the Market Podcast
  • Apr 20, 2021

Earth Week Investing Themes

With Jessica Alsford and Adam Virgadamo

Transcript

Jessica Alsford: Welcome to Thoughts on the Market, I'm Jessica Alsford, global head of sustainability research at Morgan Stanley.

Adam Virgadamo: And I'm Adam Virgadamo, U.S. equity strategist. And on this special Earth Week episode, we're going to be diving into some key green investment themes for investors. It's Tuesday, April 20th, at 8:00 a.m. in New York

Jessica Alsford: and 1:00 p.m. in London.

Adam Virgadamo: So, Jess, Earth Day is coming up, which gives us a natural opportunity to talk about some of the ways in which industry is finding an opportunity to go green. Decarbonization technologies like renewables or like electric vehicles are probably well known, but perhaps a lesser known area is something like carbon capture and storage. Our colleague Devin McDermott, he covers oil and gas for us here in the US, recently wrote an interesting piece on carbon management. Could you maybe walk us through what this potential solution looks like?

Jessica Alsford: Sure, absolutely. And CCS, as it's known, is a really interesting technology. So what it essentially is doing is capturing carbon from different sources of emissions and then sequestering that carbon permanently in underground storage, such as depleted oil and gas reservoirs or saline formations, for example. Now, we first wrote about it quite a few years ago, and back then there was a lot of skepticism from investors about whether CCS would really take off or not. But we're really seeing that change.

Jessica Alsford: The first pushback that we always got was that CCS doesn't actually prevent greenhouse gas emissions. And clearly, if we think big picture that is the end goal is to reduce greenhouse gas emissions, carbon emissions to net zero by 2050. However, I think now there is just a much better appreciation that CCS actually has to be part of the solution. If you think about sectors like chemicals or steel or cement, there are certain industrial processes involved in those industries that just require fossil fuels and so it's actually incredibly difficult to decarbonize them completely. What carbon capture and storage does is actually provide a solution for greening some of these activities. If you think about power, given the intermittent nature of renewables, it's really difficult to see how you get totally carbon free power. You're still going to need some element of baseload reliability from the gas fired power plants. And again, CCS would enable the emissions from the fossil fuel power generation to be completely removed from the atmosphere.

Jessica Alsford: Now, the other concern that we heard from investors was over cost. CCS isn't cheap and the costs themselves do vary significantly depending on the application, but you can be looking up to about $170 per ton of CO2 if you add the CapEx and OpEx together. What we're seeing, though, is that through some of the recent project announcements that costs are reducing. If you take an LNG developer next decade, for example, they formed a low carbon subsidiary to develop this CCS technology. And you're looking at all-in costs of around $63-74 per ton.

Adam Virgadamo: So that all sounds encouraging. I think I want to stick with the theme of production of different kinds. And I think another big theme where there may be some encouraging signs is in plastics. Now, we have a colleague again here in the US, Vincent Andrews, who covers chemicals for us. And he recently wrote that North American plastics producers and customers are really working to improve recycling rates, working to reduce waste and working to invest in recycling capacity. How should investors think about the outlook for plastics in a greener world?

Jessica Alsford: Yeah, so plastic's about 4% of total oil demand, so it is a contributor to climate change, but it's worth making the point that actually plastic has a lot of positive uses. So it can be used to help improve safety, it can improve energy efficiency, and it can be reducing food wastage as well by protecting products. But there is this downside, and historically, you've had really low levels of single-use plastic being reused and recycled. It's estimated that nearly 13 million tons of plastic are entering the world's oceans every single year. Now to put this into context, that would mean that by 2050 there could actually be more items of plastic in the oceans than fish.

Jessica Alsford: Now, there has been a concerted effort to change this over the last few years. And we're now seeing a lot of consumer goods companies with targets for increasing the recycled content in the plastic bottles or the food packaging that they're using. Some of the most common targets might be to reach 25% recycled content in plastic packaging by 2025, 50% by 2030, for example. To actually achieve this, though, does require a change, as you implied in your comment. So what you need is you need more post-consumer plastic to be collected and then you also need that investment in the recycling technology so you can take the discarded plastic drinks bottle and recycle it and then put it back into a new bottle that can then be sold. Now, Vincent, our colleague in chemicals, in his recent report, he's estimating that to reach an average recycled content of 25% would mean a 56% collection rate in the US and over $900 million of investment. And you are starting to see this investment coming through. So whilst chemical companies has often been viewed as being part of the problem, I think it's also really clear that they're now part of the solution as well, because they are investing in these new recycling technologies and increasing the capacity to do the recycling as well.

Adam Virgadamo: So I don't think our conversation can’t really be complete unless we also address the agri-food system here. And I say that because food production, I think, accounts for something on the order of a quarter of global greenhouse gas emissions. What are some of the changes that investors may be able to look out for that could help reduce or mitigate some of the impact of the agri-food system on the environment broadly?

Jessica Alsford: Yeah, I think it's an important part to talk about really, because there is a huge amount of focus on the energy part of climate change, and rightly so. But as you say, food production is also a major contributor and it's also probably the most complex area that we all need to be trying to address. If you think about the autos industry, absolutely you have a massive shift underway to move from the combustion engine to the electric vehicle, but it's a very consolidated market. So you've got a limited number of players that you do need to see changing their behaviors and you can also use regulation to adjust those relative price differentials between the higher and lower carbon options. If you think about the food sector, though, you're starting with 500 million farmers and from a cost perspective, I'm not sure how much you can really use carbon pricing with the potential implication of inflating the cost of food.

Jessica Alsford: I think there are some interesting investment opportunities, though. Precision agriculture stands out. So here you're seeing industrial and data-based companies using technology to help farmers maximize their yields whilst also reducing the amount of fertilizers, which again are high in greenhouse gas emissions. Alternative proteins is another growth area at the moment, plant based meat or dairy products which are growing in huge popularity. Cultured meat, where you're actually growing meat that is genetically the same as the meat that we eat but growing it in a lab, is a new innovative area to be watching out for. And then you've also got the sustainable feed element. Again, the chemical sector providing a solution, developing alternative feeds to reduce the amount of dependency on fishmeal, on fish oil for the aquaculture industry, for example, and instead to develop alternatives that might use algae or insect meal or single cell proteins. So a lot of innovation going on to reduce the environmental impact of the agri-food system.

Jessica Alsford: And so, Adam, I now want to turn it to your coverage area. You sit on our strategy team and lead the thematic investing effort there. So when we go through this list of topics, how do these themes play into your investment outlook?

Adam Virgadamo: I'd say there are three comments I'd want to make here. I think the first is that investors are constantly on the lookout for long-tailed themes, where a growing addressable market can give a company today a lot of run room for growth in the future. I think each of the green paths you talked about today, whether it's precision ag or carbon capture and storage for some companies in the market, may be doing just that. The second point I'd make is that we spend a lot of time on the strategy team, in connection with our macro colleagues, thinking about the path for productivity on a going forward basis. We've made the case in the past that the economy is really due for a productivity boom. We think part of what is driving that is companies investing in new technologies to do things like reduce cost, to reduce waste. And the last point I'd make is that one of the issues with productivity is that it's really hard to measure. So what may happen is it may miss things like changes in quality of life. And while it's hard to measure, I have to believe that a healthier environment means healthier people and to me that means a more productive working population which feeds into the better outlook for growth on a going forward basis.

Jessica Alsford: Great. Thanks Adam, for taking the time to talk today.

Adam Virgadamo: Any time, Jess. Great to talk with you.

Jessica Alsford: And as a reminder, if you do enjoy Thoughts on the Market, please take a moment to rate and review us on the Apple Podcasts App. It helps more people to find the show. 

Green investment is on investors' minds this Earth Week: Today, a look at key investment themes across carbon capture, plastics, and agri-food developments.

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