ESG Themes for 2023

02 février 2023

Solar panels and wind turbines generating renewable energy.

Sustainability Theme 

One of the sustainability themes that we will be closely paying attention to in 2023 is company alignment to green CAPEX. In other words, capital expenditures (i.e., investments in physical assets such as buildings, equipment, and infrastructure) made with the intention of improving the environmental impact of a company’s operations. We believe this will be an important theme to watch on the back of the many positive regulatory changes in 2022, and those expected in 2023. In August 2022, for instance, the United States passed its Inflation Reduction Act (IRA), injecting close to $370 billion to support energy security and climate change programs. Many believe that Europe will follow suit in the coming months to help stave off a migration of Europe-based firms seeking to benefit from the American program. Ursula von der Leyen, President of the EU Commission, recently indicated that such plans are indeed in the works. Speaking last month at the World Economic Forum in Davos, she said the EU is looking at drafting a law similar to the IRA to support clean and green technologies across various value chains in Europe. This new law is said to be called the Net-Zero Industry Act. We will closely monitor these developments. 

Green CAPEX 

Green CAPEX can include investments in renewable energy sources, electrification, and other technologies or practices that help to reduce greenhouse gas emissions and improve resource efficiency. Green CAPEX is an important part of the energy transition as it enables organizations to invest in the infrastructure and technology needed to support the shift to cleaner and more resource-efficient operations. This also helps investors monitor the scale at which a company is committed to making these changes. Green CAPEX acts as a positive signal, as it shows that a company is ready to inject real capital and make the necessary financial moves to reach its goals beyond statements and empty claims. 

There are many reasons and benefits why companies would want to make investments of this kind. These benefits are explored in more detail below: 

  1. Cost savings: Green CAPEX investments can help companies reduce costs associated with energy consumption, water usage, and waste management. For example, investments in energy efficiency can help reduce energy consumption, leading to lower energy costs. 
  1. Risk reduction: Green CAPEX investments can help companies mitigate risks associated with environmental regulations and carbon pricing. For example, investments in renewable energy can help companies avoid potential penalties for emissions violations. 
  1. Reputation enhancement: Companies making green CAPEX investments can improve their reputation with customers, investors, and other stakeholders. This can be particularly important for companies that operate in sectors that are highly dependent on public opinion, such as consumer goods and services.  
  1. Increased competitiveness: Green CAPEX investments can help firms gain a competitive advantage over companies that do not invest in environmentally friendly assets or technology and stay ahead of competitors as environmental regulations accelerate around the world. For example, the EU reached a provisional agreement on their carbon border adjustment mechanism which will be “taxing” all imports based on their carbon footprints. Companies working to reduce their carbon footprint will benefit from lower financial pressures compared to higher emitting peers.   
  1. Long-term benefits: Green CAPEX investments can help companies adapt to future environmental challenges, such as climate change and dwindling natural resources, by providing long-term solutions and avoiding stranded assets. It also increases their resilience to unforeseen circumstances.  

Green CAPEX is relevant for most companies, but some will require more commitments than others. This is particularly true for the harder to abate sectors such as energy, transportation and materials.  Firms in these sectors leverage green CAPEX investments to find less carbon-intensive ways to produce the same goods. They could also use new materials, or design products which are more resource efficient. In in other words, making more with less. They can then transition to decarbonization through technologies such as carbon capture and storage (CCS) or use alternative fuels such as hydrogen or ammonia. Finally, these firms can invest in breakthrough technologies that may not yet be at the commercial scale, thereby giving themselves – and those early-stage technologies – a boost.   

From an investment perspective, we look at this theme through two lenses: 

The first is by identifying companies that have aligned their CAPEX plans with their environmental goals.  

Evaluating the extent to which they have capital committed can signal their level of potential improvement. Such a measure is still a fairly new concept and may not be reflected in the company’s valuation or appreciated by the market. However, finding traces of this kind of alignment can present interesting investment opportunities.   

Secondly, we look for companies that enable others to embrace green CAPEX.  

Finding companies that have those breakthrough technologies required to reach environmental goals will benefit. They will not only see an accelerated rate of investment, but they will also receive policy support as we saw in the U.S. As other countries and regions step up their own energy transition plans, we expect this theme to gain even more relevance going forward.  

Gestion d’actifs Global Alpha Ltée
février 2nd, 2023