Pedro PalandraniTRANSCRIPT:
Millissa Allen:
Hi everyone, and thank you for joining us for today’s webcast, Investing in Sustainably Related Themes, sponsored by Global X ETFs. Today’s webcast will provide one CFP, one CIMA, and one CFA CE credit. If you have questions on credit, please give us a call via the number on the console. We welcome and encourage your questions. You can type a question into the Q & A box, and we’ll do our best to get to as many of your questions as possible.
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Lastly, in the event you miss any part of today’s webcast, or simply would like to watch it again, a replay will be made available, and all registrants will receive that information by email. And with that, I will turn the webcast over to Pedro Palandrani, Vice President, Director of Research at Global X ETFs. Pedro, please go ahead.
Pedro Palandrani:
Thank you. And hi, everyone. Good afternoon. Thanks for joining us today. Really excited to be talking about a topic that is really top of mind today, investing in sustainably related themes. And, thematic and sustainable investing are two areas that at first glance may seem independent from each other, but they’re not only far from mutually exclusive, but potentially actually synergistic and complimentary to each other in certain circumstances. And clearly, the things that we’re going to be talking about today are headline rubbers, especially in the context of the uncertain micro environment that we’re seeing with persistent inflation pressures, rising rates, geopolitical tensions, and a few others.
So, today we’ll chat about renewable energy sources, clean technology or clean tech, and also investing in well managed companies that achieve financial performance in a sustainable and responsible manner, and also tend to exhibit very positive ESG characteristics.
So, before we start talking about these themes, I wanted to introduce my two colleagues and Research Analysts that are joining me today, Yili Wu is our Sustainable Investing Strategist here at Global X, and Alec Lucas, a Research Analyst covering our climate change suite of ETFs.
Very briefly about Global X, we’re an ETF issuer based out of Manhattan. We’re currently managing around $40 billion in assets under management. We’re really expanding globally with UCITS funds, funds in Australia, LatAm and a few other places around the world. But here in the United States, we have over 90 different ETFs, and of course, we’re known for our thematic suite of ETFs. And I’ll show that in just a second. But we also have ETFs in areas like options, with covered calls; MLPs, and a few other related suites of high interest today.
As you can see here, clearly our main focus is ETFs, but we also have a great team of model portfolios. We also have institutional solutions like SMAs at the moment. And of course, we’re today here but as you can see, we really have a lot of depth in terms of investment related capabilities at Global X, not only from product development capabilities, but also model portfolios like I mentioned before, investment strategy, research, and institutional solutions. So please feel free to reach out to our team if you want to have discussions about any of these themes. If you want to chat about themes such as metaverse, such as digital assets, robotics, you name it, please reach out to our team. We’ll be more than happy to have conversations with you.
But here you can see really our thematic suite of ETFs, it’s the most comprehensive suite of thematic ETFs in the market.1 We currently offer 36 different themes. As you can see here, everything from disruptive technology to people and demographics to physical environment. Today, we’re going to be focusing a little bit more on the physical environment side of things, like I said before, in areas like renewable energy producers, in areas like clean tech, all of these areas that are definitely top of mind today. So, definitely very good opportunity to learn more about these strategies.
Very briefly, before we start talking about those themes, I just wanted to start at a high level about how we think about thematic investing here at Global X. And essentially, for us, thematic investing is really about the process of identifying disruptive macro level trends and then trying to understand what are the companies that tend to benefit from the materialization of those trends. So, as you can see here, it’s really a two-step process. At the top down, trying to identify those disruptive macro level trends. And then at the bottom up, “What are the companies that are best position to really benefit from that macro level trend?”
And as you can see here, there’s some key characteristics of thematic investing that in our view, are definitely key. So, number one: Thematic investing is long term by definition. This is very important. We believe that thematic investing should be part of the strategic asset allocation within a portfolio, not really within the tactical side of things.
Number two: A very well constructed thematic ETF should be unconstrained by geographic and sector definitions. So, that means that we’re not looking at the seat code of a company when we’re deciding what company we’re going to include in one of our funds, we’re really trying to take that global approach that we believe is really, really important when it comes to thematic investing.
Number three: These portfolios tend to be concentrated by definition. And this is very important because at Global X, we’re really trying to provide pure play exposure, so, we’re really looking for companies that provide direct exposure to the theme in regard. So, this is really important, and by default, the portfolios tend to be concentrated.
And finally, these are relatable concepts. It’s a lot easier to talk to a client about video games, the metaverse, blockchain, these are topics that are very interesting for them. They might ask you about electric vehicles or battery technology, maybe because they own a Tesla or they own another type of electric vehicle, and these are things that they understand. So, talking about thematic investing, it tends to have that relatable characteristics that are very important in our relationship.
And we often get questions about “What are the characteristics that we look at when deciding to launch a thematic ETF?” And it really comes down to this three-step process. First, we want to have a high conviction in the theme. So, we look at the total addressable market of the theme. We look at the existing penetration rate, the future penetration rate. We look at the expected revenue growth rate of the underlying companies within the theme. We look at so many different metrics to really gain a very strong conviction in that theme. So, when we do that, we really think that we can bring some ETFs or thematic ETFs to the market.
Number two, the investability factor is very important. That essentially means that we need at least 20 to 25 publicly traded companies to really use the ETF wrapper when it comes to these themes. And as you can think about it, this is often the deal breaker, because there are themes that just have a handful of publicly traded companies. So, we really wait for that theme to have enough companies to really bring that theme within the ETF wrapper.
And finally, timeframe. Like I said before, we’re really trying to capture thematic opportunities that are going to play out over the long term.
And that really brings me to the structural characteristics of thematic investing. Thematic investing tends to have or exhibit that structural shape, essentially trying to identify one of shifts that are changing an existing paradigm. This is very important. We actually believe that thematic investing can really mitigate a lot of the cyclical factors that we can see in our economy. That’s something that we’re seeing today. For example, with electric vehicles. Electric vehicle sales are expected to be over 10 million units in 2022 up from 6.6 million units in 2021. So, over 50% growth rates. And that’s on a year where, again, we’re seeing a lot of macro uncertainty from so many different directions, but electric vehicles continue to show that strength in the market. So, that’s just one example of this structural nature of many of these themes where, again, we believe can really mitigate a lot of the cyclical factors in our economy.
And that structural characteristic is really similar to the so-called S-Curve of adoption. That essentially is trying to identify the adoption level of one theme. And as you can see here, the steepness of the curve is really reflecting the speed of the adoption of that thematic, and then the height is trying to identify the total addressable market. So, we’ve done a lot of work at Global X in trying to identify all of those themes in the S-Shaped curve of adoption. And as you can see here, we have in the very early phases of adoption, themes like hydrogen, themes like metaverse, blockchain, autonomous vehicles, all of these themes that are really in the very early stages of adoption.
At the other end of the spectrum, we have things like social media. Clearly most of the population around the world today uses some form of social media accounts, so, that doesn’t mean that there are not opportunities in that thematic, it just means that the companies within that theme may have different characteristics. We actually believe that there are many opportunities and risks within each of these themes but again, all of these are solutions that we at Global X are offering within our thematic suite of ETF.
So, I think we’re ready to jump into the meat of the presentation, but before that, we have the first poll question. So, Millissa, over to you.
Millissa Allen:
All right, thank you, Pedro. Yes, our first poll question is, “Are you concerned with climate change?” “Yes”, “Somewhat”, “No”. You can select your answer by clicking directly on the screen, and then press submit. And while we wait for the results, I want to remind you that we will take questions from the audience at the end of the presentation, and you can type your questions directly in the Q & A box, and we’ll do our best to get to as many questions as possible.
So, again, that first poll question is, “Are you concerned with climate change?” “Yes”, “Somewhat” or “No” Let’s see. Oh, we’ve got a pretty good turnout on the polling questions, let’s see what the results are. 59% say they are concerned with climate change. So, Pedro, I’ll turn it back to you.
Pedro Palandrani:
Perfect. Thanks, Millissa. And this is clearly aligned with what we’ve seen. And again, talking about the relatable aspect of these strategies. I think it’s very common to hear from most people that climate change is really an issue, so it’s always important to think about this in the context of finding investment solutions and really, thematic investing can offer that. So, today, we’re really going to be talking about many of these thematic opportunities that are somehow climate change related, and those are, again, renewable energy producers, clean technology, and then we’re going to talk a little bit about companies that are well managed and taking into account a sustainable and responsible characteristic. So, with that in mind, I’ll pass it over to Alec to kick things off with the first theme today. Alec, over to you.
Alec Lucas:
Great. Thanks for doing that, Pedro. And sort of the format for the content portion of the presentation is we’re going to be giving an overview of sort of the climate change space in general with renewable energy and clean tech, and then we’ll be diving a little bit further into solar and wind as well.
But to start out, this is a great slide to illustrate this causal relationship that we’re seeing between human activity and climate change. So, we can see on these top two upper hand charts in the left here, that both in the context of several thousand years, and also just in the last couple of centuries, carbon dioxide concentrations have increased dramatically in the atmosphere. Between 1750 and 2021, CO2 concentrations have increased about 49%, and that’s almost entirely because of human caused activity. Around three fourths of that is coming from fossil fuel burning, and the rest coming from agriculture there.
Now, what happens with carbon dioxide, which is a greenhouse gas, is it blankets the atmosphere, it retains heat easier, and that translates into temperature increases, which are portrayed in that bottom left hand chart as well. So, what we’ve seen since pre-industrial times is about 1.1°Celsius of warming. And at those levels of warming, we’re already seeing fairly frightening climate change externalities. We’re already seeing temperature increases and high variance in temperatures and unseasonable natural disasters, we’re seeing drought, we’re seeing heavy precipitation events. So, already some frightening outcomes. And unfortunately, that situation is expected, but worsen. We’re on track for temperatures to increase anywhere between 2.2 and 3.5°Celsius by 2100, and that’s relative to pre-industrial times.
But, at just 2°Celsius, we would see even more drastic impacts. We’d see extreme heat events occur 5.6 times more often, and average much hotter temperatures. We’d see natural disasters that are increasing both in their intensity and their frequency, so certainly we’re on track for some concerning climate outcomes.
The good news is that many experts contend that if we’re able to hold long-term warming to about 1.5°Celsius, we can avoid a lot of these terrible climate change outcomes. And this 1.5°Celsius scenario, is one that’s often reference in policy that we’re seeing around the world, it’s a goal to keep that aspiration alive. And what would be required there is for net emissions to effectively reach zero by 2050.
So, on this slide, lots of different scenarios in terms of how climate policy and how climate change could play out. Again, that net zero emission scenario was a goal. Another scenario is the Announced Pledge Scenario which would entail if all the pledges that we’ve seen from governments around the world when they actually come to fruition, we’d still be looking about 2.1°Celsius warming by 2100. So, that’s sort of an idea of the different scenarios that are possible here.
And just to give some context in terms of the amount of investments that are needed, we see the bottom right hand chart, and if we were to hold emissions to net zero by 2050, hold temperatures to 1°Celsius, that would require about $131 trillion flowing into the renewable space, so important context there.
And of course, renewables are our main tool to power our world while mitigating these greenhouse gas emissions that we’re desperately trying to curtail. And there’s a few drivers that have allow renewables to sort of enter the conversation more recently. A point that I repeat at several points across this presentation is affordability. We’re seeing very positive trends in terms of how cost competitive these electricity sources are, not only against traditional fossil fuels, but sort of a comparison solar, wind, that there are some dynamics there as well. So, this positive trend in affordability has allowed not only governments to start to support renewables more fullheartedly, but also we’re seeing it on the corporate side in terms of companies like Amazon, Walmart, beginning to try to decarbonize and try to pay more attention to sustainability, which is something that ideally touches a bit more further in this presentation.
Another dynamic that we’re seeing increasing conversations around, especially in the context of the conflict between Russia and Ukraine, is this idea of energy independence. 75% of global populations live in countries that are net importers of fossil fuels. So, really, especially what we’re seeing today is that these countries, these people are beholden to importing commodities from other nations. And again, the situation has really highlighted some of the vulnerabilities in an energy economy that’s set up like that.
So, this conversation around renewable energy is shifting from not just one of morality, of affordability, but also private in terms of once you establish renewable energy sources, you’re not necessarily as dependent on other nations.
Another aspect we’re seeing is building out the labor force for renewables as well has been compelling for nations over the last several years.
And again, another huge driver has been cooperation and more creative policy from governments around the world. This idea that we can hold emissions to net zero by 2050, and hold that long term warming to 1.5°Celsius, really requires the cooperation of most major economies. So, it certainly is a positive tailwind that we’re seeing that policy is more and more geared towards renewables.
A few examples here on the left-hand side. Certainly, the Infrastructure Investment & Jobs Act, which was passed in late 2021, provides around 73 billion for electrification efforts and grid improvements. And certainly, there’s funding in there for research and projects for renewables. More recently, it’s not listed here, but the Inflation Reduction Act, also in the United States, goes a long way in terms of, for different incentives, for both the renewable energy production and also the manufacturing of relevant equipment. So, certainly some positive trends out of the United States lately.
In China, the most recent five-year plan calls for large mobilization of wind, solar, and hydro for what is referred to as clean energy bases. China’s going to be a very important market for renewables moving forward between 2021 and 2026, China should account for almost 50% of growth in renewables.2 So, an important market there.
Also, recently, in the European Union, again, in reaction to what we’re seeing between Russia and Ukraine, there are initiatives to move away from independence on fossil fuels from Russia. Traditionally, Russia accounts for about 45% of natural gas imports into the EU.3 So, certainly a big part of what’s called Re-power EU Initiative, which was put in place in March, 2022. A big aspect of that is in terms of increasing independence from fossil fuels imported from Russia. And part of this equation is increasing the ability to get renewable energy projects on grids over there. Now, perhaps the most substantial part of this policy is increasing renewable energy targets across the block.
Previously, there was a goal of having about 40% of energy produced from renewable energy by 2030. And, this initiative increases that goal 45% by 2030. So, certainly seeing positive tailwinds in policy.
Again, sort of a brief overview of the overall renewable and energy market here. When we’re talking about renewable energy, we’re talking about a source that derives energy from resources that replenish naturally, from operation, these sources do not contribute to greenhouse gas emissions, which again, we’re desperately trying to curtail to reach our warming targets here.
Primarily, we’re going to talking about wind and solar in this presentation. These are some of the least expensive and most scalable renewable energy sources. But, it is worth noting, we can see this bottom right hand chart that, traditionally hydro-power has accounted for the bulk of renewable energy capacity, and over the last several decades, wind installer has been more the high growth component of that market. Overall, renewable energy accounts for more than 30% of global electricity and up from about 19% in 2010.
And, a concept that we think is important to parse out here is cost dynamics are improving, but “What are some limitations to scalability? What are some opportunities and challenges that need to be solved for renewable energy adoption to continue to increase?” So, one idea here is the difference between electricity and power. So, I mentioned on that last slide that more than 30% of global electricity comes from renewables, but there’s certainly several other segments that require energy but are not electrified. Great example is transportation. As Pedro mentioned, electric vehicles are increasingly becoming a portion of automobile sales, but certainly that is a segment that is a long way from being completely electrified. A segment that’s overlooked is buildings; heating and cooling buildings accounts for one third of energy demand and about one fourth of emissions.4, 5 And that’s another area that’s not quite electrified yet. So, there is this element of, before being able to expose renewables to a segment, the segment must first be electrified. So, that’s one component.
Another component is variable renewable energy. This idea that renewable energy output fluctuates. And this is really the main advantage that fossil fuels have right now over renewables, is that you can effectively flip a switch, and you have this output on demand. Whereas, let’s take solar for example, if the sun’s not shining, you don’t necessarily have that on demand output. Now, this is an opportunity and a challenge that is increasingly being solved with smarter grids and more transmission lines and energy storage, which allows us to have more flexibility with which to direct surplus energy at a later time. But these are sort of the ideas in terms of why renewable energy doesn’t have a larger share already than it has today.
And then, the last real overview slide here before we jump into another poll. But in the context of the adoption curve that Pedro was mentioning earlier, we sort of split the whole clean energy space into two components. We think that renewable energy or the production of renewable energy on the utility side is sort of its own theme that’s a little further on in its adoption, whereas clean tech, which is more of the equipment and technology side that there is more room for that sort of value chain to grow. But still, this entire space is in early stages of adoption – there’s a lot of opportunity for growth. It’s projected that between 2020 and 2026, about 95% of all power capacity addictions will be [renewables, primarily] wind, solar, so incredible opportunity there for those energy sources in renewable energy capacity, it’s projected increase about 60% over that time period as well. So, just an overview of the whole renewable energy space here. I can pass to Millissa for a quick poll question.
Millissa Allen:
All right. Well, thank you very much, Alec. So, our next poll question is, “In your view, what renewable energy source has the most promise, Solar, Wind, Hydro, Geothermal, or Other?”
And today’s presentation is a reminder and other research by Global X ETFs is available for download and can be found by clicking the document box at the bottom of your screen.
I’ll read the poll question one more time. “In your view, what renewable energy source has the most promise, Solar, Wind, Hydro, Geothermal, or Other?” Okay. I want to give it just another few seconds to give you a chance to respond. All right. That’s a good response. 57% Solar, followed by 13% Other, and then 12% Hydro. So, I’ll turn it back to you, Alec.
Alec Lucas:
Great. And thanks again, that really reflects what we hear a lot. And certainly solar as we’ll discuss here, has been one of the more high growth components of the renewable energy market, so it’s good to see that sentiment be reflected here. So, for this portion of the comp, we are going to do a bit of a deeper dive into these areas of solar and wind. I’m sure I’m not going to go into all the technology on this slide, but for solar, the basic idea is these panels can harness photons from the sun’s light in what’s called the photovoltaic effect. You do hear the term PV cells be used interchangeably with solar cells, and you’re able to first convert the sunlight into direct current electricity, which then must be converted to alternating current energy to be used on the utility scale. I think the main takeaway on this slide here is we focus on this diagram on the right hand, is that there’s several opportunities for innovation for the solar systems. You not only have these several different layers in a solar cell, you have a reflective layer, you have multiple semi-conductive layers in some cases, but you also have the hardware that actually transports this energy to the grid, the inverter, the transformer that are sort of all part of the puzzle here when it comes to solar.
And, when it comes to solar panels, solar modules, there’s a lot of variations that exists, there’re lots of tradeoffs in terms of efficiency, applicability, cost, and we dive into this a little bit on this slide. The classic solar cell is called monocrystalline, it’s made of a single silicon crystal, and it’s sort of a hallmark in terms of higher efficiency, but also a higher cost. You have seen innovations in terms of poly crystalline, which are multiple silicon crystals. More recently we’re seeing solar cells with all sorts of augmentation. A couple examples. We have passivated emitter & rear cell or PERC, which is a solar panel that can actually capture the light that’s reflected off of the ground into the back of the cell, which is a really interesting innovation to increase efficiency.
You also have bifacial solar cells as well, that have multiple layers of semi-conducting material, which allows you to collect a wider wavelength of light.
And you also have what’s called concentrators, which are essentially lenses or mirrors that can focus the sun’s light into the cells, which also increases efficiency. So, there’s this whole class of solar cells that have these additions that are added to them that increase cost, but also increase efficiency.
And then, another newer innovation we’re seeing is thin film cells, which are already hyperflexible applications, which aren’t very efficient, relatively, but the whole value add is to be able to apply these very flexibly, scope them into different services, and I’ll touch on that a little bit more later.
But, over time, we have seen efficiency increase across the boards for solar panels, you can see that bottom left hand chart. These efficiencies are in lab conditions. The average commercial solar cell is going to return somewhere around 20% efficiency, so, certainly lab conditions are more favorable, but the idea here is that efficiencies have increased dramatically over the years.
In terms of some positive attributes for solar, certainly this idea that while solar systems are operating, there’s no direct emissions. It’s very positive. It’s exactly what we want from a renewable energy source. There’s durability, especially compared to perhaps a wind turbine where solar mobs require little maintenance and can last on average about 25 to 30 years. If you do have the requisite solar resources, there is a lot of flexibility in the different environments that you can install solar panels. You can more easily install solar panels close to a population center than perhaps wind turbines or hydroelectric. From a cost standpoint, we can direct our attention to that bottom right hand chart. Again, solar has over the years declined in cost, so it’s competitive with fossil fuel. In many markets and some of the cheapest electricity that can be put on the grid. So, a very important dynamic for adoption there. And then again, another comparison to wind. You have a higher degree of predictability when it comes to monitoring solar conditions versus wind. So, another useful trait there.
In terms of where solar stands, right now in terms of share of renewable capacity, solar and wind are actually very similar. Solar accounts for about 28% of global renewable energy capacity, whereas wind is less than 27%. So, right now, they are similar shares. But, if we notice in that top right hand chart that solar has certainly grown a little faster than wind over the last several decades here. Right now, solar accounts for about 3.3% global electricity [production], and that’s up from fractions of a percent in 2010, so certainly, the growth has been strong for solar.
And there’s several reasons for that. Again, decreasing costs have been perhaps the chief one. Levelized cost of electricity from utility scale solar has fallen about 90% between 2009 and 2021. Again, very important. The efficiency component is also very important to commercially justify the use of solar panels. The very first solar panels were about 1% efficient. Today, they ran from about 16 to 22% efficient with an average of 20%. Certainly government support, which I touched on earlier in the presentation has been vital. In the US, the solar investment tax credit is a 26% credit that’s applied solar systems that are being used for residential and commercial properties in the United States. And that’s one of those policies that’s been reinforced by that Inflation Reduction Act. So, certainly has been an important part of the policy there.
And then on the corporate side, something we’re seeing is that corporations are not only paying more attention to sustainability, but there’s actually some advantages to purchasing renewable energy. The mechanisms by which corporations purchase renewable energy is through what’s called a Power Purchase Agreement, (PPA), and these are long term contracts, often 10 to 15 years that are fixed. So, from the corporation side, there is this benefit from a budgeting perspective of being able to predict your cost dynamics from energy. So, all these factors have really driven this adoption in terms of new capacity for solar.
In terms of forecasts, we do expect to see strong growth. You could see solar capacity increased about seven times 2020 levels by 2030, which is a strong mark. Again, this is driven by the continuation of some of the structural ideas that I was mentioning on the previous slide. But, we could see other really interesting technologies that are listed on the left hand here, particularly, again, these thinner solar applications that are a departure from these more blocky solar panels that we’re sort of accustomed, these applications that are very flexible and able to be placed on windows and curve surfaces, could be a very powerful application, again, to increase capacity.
And then, another point on this cost dynamics is the economies of scale that we’ve seen develop for solar and renewables overall has been very impressive. Since 1976, solar module costs have declined an average of 20.2% for every doubling of capacity of solar. So again, seeing that capacity grow has been very important for driving down costs. As the technology has improved, as the manufacturing techniques have improved, that all pushes down costs to again, the point where they’re competitive with fossil fuels.
In terms of outlook, solar costs are projected to decline a further 55% from 2019 levels by 2030, and a lot of that now is being driven by increases to efficiency. Again, improvements to efficiency and operators able to increase output per unit of land, which is really important for commercial operations.
And also in terms of the hardware, there’s been a lot of improvements in manufacturing the hardware and the technology, but also we’re likely to see more of the service side of that market developed in terms of construction, in terms of engineering, shipment and maintenance as well. So, those are some of the factors that are likely to drive improvements in solar cost dynamics in the future.
Real briefly here in the next couple of minutes, I will touch on wind as well. This is the easier technology to understand than solar. It’s been a technology that’s been around for hundreds of years. And a lot of the innovation that we’ve seen, a lot of the cost improvement we’ve seen is because of improvement to the design of the wind turbine itself.
And it’s also important to distinguish between onshore and offshore wind energy because they have different dynamic profiles here. In terms of onshore wind energy, there is this degree of accessibility that you don’t have with offshore. The fact that these wind turbines are able to be installed on land, they’re easier to get to and they’re easier to actually connect to the grid, so there is that accessibility aspect. A lower maintenance cost aspect as well. As a result, installation costs are less than half that of offshore and you also find that for the operation side on wind is about half of as expensive as offshore wind over the life cycle of these energy sources.
Now, the tradeoff for offshore wind is because you’re able to place these wind turbines over water, you do gain access to more beneficial wind resources, higher sustained winds, more powerful winds, which also translates the more output and more efficiency, so that is a major benefit there. Because you don’t necessarily have to worry about sort of the limitations of property, you are able to build these wind turbines to be larger, which also improves efficiency and output. We see that middle chart there, that actually as turbine size increases on a wattage basis, the total installed costs go down, because of sort of the more efficient manufacturing processes that go into building these larger, bigger, better turbines.
And then overall, for wind energy, again, we’re looking at a sustainable energy source, you have more efficiency for wind turbines than solar – again, average turbine efficiency, about 35 to 50%, which beats out solar in many cases, and even coal in the majority of cases.
And then, on the cost standpoint, onshore is still some of the least expensive electricity that you can put on the grid, even though offshore is significantly more expensive as mentioned, it’s still cost competitive with many traditional energy sources as well. Again, a huge part of how installed cost have come down is improvements to the design of wind turbines. For onshore wind, turbines are about 64 to 84% of total installed costs. So, innovation there in both design and manufacturing improvement, have been a big part of how the costs have been able to come down so significantly for wind.
In terms of outlook, we could expect the levelized cost of electricity to decline about 45% from 2019 to 2030 for onshore winds, and a decline of 50% over that period of time for offshore wind as well.
So, that’s a little bit of expansion on the solar and wind spaces. And with that, I can pass it back to Millissa for another poll.
Millissa Allen:
Terrific. Thank you, Alec. So, our third poll question is, “Has ESG become more or less of a consideration for your firm’s investment strategy over the past 12 months? Much more of a priority, more of a priority, no change, less of a priority, or much less of a priority?”
Another reminder in the event you missed any part of today’s webcast or simply would like to watch it again, a replay will be made available and all registrants will receive that information by email.
So, that question, our third poll question is, “Has ESG become more or less of a consideration for your firm’s investment strategy over the past 12 months? Much more of a priority, more of a priority, no change, less of a priority, or much less of a priority?” Okay, we’ve got a pretty good return here. And 42% say it is ‘More of a priority’. Yes, so, when you add that with the ‘Much more’, it’s coming up to towards 50%. So, I’ll turn it back to you, Alec.
Yili Wu:
Hi everyone. My name is Yili and I’m a Sustainable Investing Strategist at Global X ETFs, and I can take it away from here. So, thank you so much for your poll responses, and it’s interesting to see how ESG may impact your firm’s investment strategy.
So now, so far we’ve learned about Global X’s approach to thematic investing and also some of our sustainable themes such as renewable energy and clean technologies. Now, I will walk through Global X’s approach to sustainable investing and also discuss trends in sustainable investing overall. So, sustainable investing encompasses multiple investment strategies that have different goals in terms of managing risks and opportunities related to ESG. So, within sustainable investing, we have three main types of strategies, and those include, Socially Responsible Investing, ESG Integration, and Sustainable Thematic Investing.
Sustainable Thematic funds are designed in the same method as all of Global X’s Thematic funds, which we discussed earlier today. And we seek to identify disruptive macro level trends related to sustainability issues that possess all of the characteristics that we discussed.
And moving on, another investment strategy employed is ESG Integration. And ESG Integration refers to incorporating environmental, social, and governance related data points or scores as part of the investment evaluation process.
The last category within the umbrella of sustainable investing is Socially Responsible Investing. And this was sort of the impetus of modern sustainable investing, giving investors the ability to invest alongside certain values, and this was typically executed through the usage of sector, company, or business activity exclusions embedded within the index. So, taking a step back and considering the evolution of sustainable investing overall, as mentioned, Socially Responsible Investing use primarily exclusions, and since then, investors have asked for greater sophistication in terms of evaluating and identifying companies that operate in a more sustainable or ethical manner. So, this has led to a shift in employing positive ESG inclusions as opposed to leaning on exclusions.
In addition to the fund or index construction process, many sustainable investing funds will also utilize ESG proxy voting as part of their overall investment strategy. And this is because some investors want the option to be able to invest in companies which may not score highly on ESG metrics at the moment but want to stay part of the conversation and engage with the company to improve moving forward.
So, at Global X, we have the Global X Conscious Companies ETF, KRMA, which is designed to give investors an opportunity to invest in well-managed companies that appear to achieve financial performance in a sustainable and responsible manner, using Concinnity Advisor’s methodology. KRMA is passively managed, and the index’s methodology evaluates companies based on the ability to achieve positive outcomes that are consistent with a multi-stakeholder operating system or MsOS. So, KRMA allows investors to invest in companies that see the benefit in valuing stakeholders in addition to shareholders.
So, what constitutes a conscious company? A conscious company is one in which management adopts a multi-stakeholder mindset in order to drive long-term value for investors. So, they do this by operating as a respectful member in the communities in which they operate in, create a positive work environment, all while minimizing negative social and environmental impacts from conducting business.
The multi-stakeholder operating system prioritizes five types of stakeholders. Number one, stock and debt holders are still highly valued, but are not the only stakeholder to keep in mind. Other important stakeholders include customers, suppliers, local communities, and employees. Stakeholder capitalism rose into the spotlight in 2019 when 181 CEOs of major U.S. companies signed the business round-table statement on the purpose of a corporation. Since then, the pandemic has further emphasized the importance of protecting employee safety, the climate crisis and supply chain issues. The quality of company management to take all of these issues into consideration has become more pertinent than ever.
So, the Index begins with an initial universe of U.S.-listed firms with a market cap of [at least] $2 billion, and then it goes through a three stage screening process. The first screen consists of over 40 information sources that recognize companies for achieving various positive outcomes expected from firms to employ a multi-stakeholder approach. The second screen utilizes a composite analysis assessing 12 categories related to environmental management, management quality, innovation, labor, human rights, and financial metrics. From this assessment, four aggregated scores are produced, which goes through multi-factor modeling techniques in order to result in a final MsOS score. These four scores include an overall ESG score; an ESC score, which stands for Employee, Supplier, and Customer; a quality of management score; and an intangible asset management score.
In addition to the MsOS score, a valuation score is assigned to each company through a set of fundamental financial ratios. These scores are then weighted to result in the finally MsOS list where the index is derived from.
There’s growing evidence that investors are interested in investing in a more sustainable and ethical manner. The number of sustainable investing fund options continues to grow rapidly in the U.S. This also includes the diversity of sustainable fund options, which employ different methodologies such as sustainable thematic, socially responsible, ESG and others. Global ESG AUM is expected to surpass $50 trillion by 2025, which would represent more than one third of total assets under management.
So, what’s driving this insurmountable growth? One of the first major drivers is the urgent timeline to meet Paris Alignment Goals from a corporate, investor and country level. Some of these net zero commitments may be due as soon as 2025 or 2030. And with the increasing frequency and financial costs of climate disasters, investors are also starting to see the importance in measuring climate related physical and transition risks as part of the overall financial risk management process. Additionally, regulators around the world are also developing standards for sustainable investing and an effort to combat greenwashing. And today we’ve learned about different sustainable investing options that are available to investors, particularly environmental themes and conscious companies.
Thank you all so much for your time, and I will now pass it back to Millissa for some Q & A.
Millissa Allen:
Oh, thanks so much, Yili. So, as a reminder, materials can be found in the document folder at the bottom of your screen. We appreciate your feedback. Please take a moment to fill out our brief survey also located at the bottom of your screen. Our speakers will be taking advisor questions. Please type your question in the box to the right of your slides, and we’ll get to as many questions as possible. But in the event your question is not answered on today’s webcast, a member of the Global X ETF team will reach out to you directly.
If you’d like to have a conversation to further discuss the ideas that were covered during today’s event, please click the one-on-one folder at the bottom of your screen and confirm that request. And with that, I will turn it back to you, Pedro.
Pedro Palandrani:
Thanks Millissa, and thanks everyone for tuning in today. I guess a couple questions that we got is kind of the tickers of the first strategies that we presented today. So, for the renewable energy sources, we have our RNRG ETF that’s really focused on that downstream segment, focusing on the renewable energy producers.
And then, moving up the supply chain, we have the CTech ETF, CTEC, that’s the ticker, and that’s a clean tech play. So, really looking at the upstream side of things with the companies developing the technologies that are used for solar, wind et cetera, kind of all of the companies in examples that Alec already provided. And like Yili presented kind of on the more core equity allocation with some filters, positive and negative screens for companies, we have the KRMA ETF, that’s KRMA.
So, I guess I’ll start with the first cam question here, and I’ll pass this to Alec. Alec you briefly mentioned the Inflation Reduction Act. So, how impactful really is this act for the renewable energy theme? Are there any other climate policy updates to be aware of?
Alec Lucas:
Yes, that’s a great question. And, the Inflation Reduction Act is a big deal for the United States. It does direct somewhere in the order of $380 billion towards boosting our efforts to fight climate change. It’s a bill that helps increase energy security, it’s a bill that’s geared towards lowering energy costs. And by a wide margin, it’s the largest ever US investment effort on this front. So certainly, a big deal. The major mechanism by which it targets and invests in renewable energy is by providing incentives and tax credits for – I did mention it briefly, but investments for everything from solar to wind. There are sort of specific tax credits that are geared towards both the production of energy as well as the manufacturing of the equipment that is used for these renewable energy sources. It’s a huge deal for green hydrogen, which is sort of a topic that deserves its own presentation. But, before the Inflation Reduction Act, U.S. green hydrogen was some of the most expensive in the world. If you take into account the new tax credits, it’s actually going to be very inexpensive compared to the market. So, certainly a bigger deal.
And I think recently, again, I’d called back to the European Union’s Re-power EU plan, I think that’s probably the most recent and obvious significant piece there, that really increases the targets for renewable energy generation in the near term – 2030 is not that far away, so, to see a pretty dramatic increase in that target is significant policy indeed.
Pedro Palandrani:
Awesome. Thanks, Alec. And I guess I’ll stay with you. There’s another question related, which is essentially, which segments of the renewable energy or clean tech space do you see the most immediate opportunities in?
Alec Lucas:
Yes. Again, we can harken back to the adoption curve. We do think overall the renewable energy space is in its early stages here and a lot of the energy capacity that’s going to be put on grid, that’s going to be renewable moving forward. That being said, I think offshore wind is sort of an underappreciated segment of the market right now; it accounts for only about 2% of total renewable capacity, but that’s a share that’s expected to expand. You do have over 25 gigawatts of offshore wind capacity already under construction. This is really an industry that’s likely to develop towards the middle of this decade and into the 2030s, so, there is a lot of potential for growth there.
Again, green hydrogen is a technology that we are excited about. If produced sustainably, hydrogen can be this carbon-free fuel source as well as an energy storage option. Certainly, Pedro mentioned this actually earlier in the presentation, that is the theme that perhaps we think is in its earliest stages of adoption. So, very early theme, but one that there’s hundreds of large scale green hydrogen projects in the pipeline that are likely to come online in the coming years. So, another sort of high potential area there in the clean tech renewable energy space.
Pedro Palandrani:
Awesome. Thanks Alec. I can see another question here. The question is, “How does an advisor figure thematic investing out when themes should be doing well but investor behavior takes over…?” And I think, this is a real really good question, especially this year, 2022, where a lot of the performance has been negative across the board. And I think, generally speaking, the most important aspect of thematic investing is to really have that long term view. A lot of the themes that we presented today and other themes, things like robotics and AI, cybersecurity, video games and eSports, are really in the very early stages of adoption, we’re seeing a lot of new tailwinds, especially long term tailwind that we believe are going to play out over the next 5, 10, 15 years, in some cases, really evergreen investment opportunities. So, we understand that a lot of these themes can have more volatility than your traditional kind of core equity allocation within the portfolio.
But, the idea with thematic investing is to really use that as a satellite approach to your core equity allocation. So, independently of the greater volatility, we believe that over long term, many of these strategies are really going to play out. And, especially today, we do see great entry points for many of these themes.12, 18 months ago, we were talking to advisors and the main concern was valuations. Today, valuations can be pretty much half of what they used to be just 12 to 18 months ago. So, in terms of entry point, the reality is that many of these thematic strategies are in very good place, especially because the fundamentals of many of these companies really remain intact, the strength in top line revenue growth, the strength in profitability in some cases remains intact. So, as an entry point, we really see that it being very powerful.
We have a couple more minutes here, so I guess one question for Yili. Yili, you were talking about the multi-stakeholder operating system within our KRMA ETF. So, what is the value of considering other stakeholders beyond a shareholders?
Yili Wu:
Thank you, Pedro. And yes, the value in considering other stakeholders beyond stakeholders is due to the fact that you are able to prioritize a longer time horizon that is giving value for other stakeholders, society, communities, and the environment. So, it also proactively prevents reputational risks, which if they’re not managed properly, they can cost a company significantly in down the road.
So, for example, if a company’s employees are undervalued, and if they were to go on strike, it could disrupt daily business operations, it link to many negative spillover effects. But when a company values its own employees, then this prevents these kinds of reputational risks and also helps reduce costs as a result of high turnover if employees are valued.
Pedro Palandrani:
Awesome. Thanks Yili. We’re at the top of the hour here. I want to thank everyone for tuning in. If you have more questions or you want more information, please go to globalxetfs.com/research. We publish all of our research in an open architecture setting so you can really see what we’re talking about, what we’re seeing, what we’re studying, and you can really take a look at that as well.
And also, please reach out to your sales representative if you want to connect with the research team, If you want to have deeper conversations for all of the things that we discussed today, or things that we didn’t discuss today, again, our research team is really available for you. So, with that, again, I want to thank everyone for your time and we’ll see you the next time. Thanks.
Millissa Allen:
Thanks Pedro. And as a reminder, there is a brief survey we ask that you fill out at the bottom of your console. And as Pedro said, if you want to have a conversation to further discuss the ideas that were covered during today’s event, please click the one-on-one folder at the bottom of your screen and confirm that request. And thank you all for attending today, and have a great rest of your day.
Related ETFs
CTEC – Global X Clean Tech ETF
RNRG – Global X Renewable Energy Producers ETF
WNDY – Global X Wind Energy ETF
KRMA – Global X Conscious Companies ETF
Click the fund name above to view current holdings. Holdings are subject to change. Current and future holdings are subject to risk.