The move to a greener economy could work out well for the resource sector, says Ninety One founder and CEO, Hendrik du Toit.
During the Covid-19 crisis there has been an acceleration in the move away from the use of fossil fuels and though such a shift might be disruptive to many business models, it could work out well for players in the resource space, says du Toit, who was speaking on the group’s results for the year to end-March.
His views somewhat echoed that of Sibanye-Stillwater CEO Neal Froneman who said last week that there was a potential supercycle coming in the mining sector.
Froneman said the shift was particularly good for platinum group metals, which are used in the making of greener fuel cell-based energy.
Resources get a boost
Du Toit made the same point that the rejigging of the economy away from fossil fuels will support the resource sector.
“Where will the palladium and platinum come from that you need for batteries?” he asks.
Platinum group metals are not the part of the resource sector that stands to gain.
“Think of simple things like steel. Wind farmers use huge amounts of steel.”
He adds: “The commodity producers are going to help us transition the global economy to a better one.”
In Du Toit’s view, despite the newfound urgency to move away from fossil fuels, carbon-based energy will still be around for a while, as this conversion will likely take up to 30 years. This means as this switch happens, more effort will be put into mitigating the negative impact of using these fuels.
Green fund pays off
The speed of this shift to a green-based economy, along with the disruption brought by the Covid-19 crisis, however, has made it difficult to make a call on the market implications of these events.
Even so, Ninety One has tapped into this trend with its Global Environment Fund, which invests in businesses that contribute to “positive environmental change through sustainable decarbonisation”.
This fund, which was only started at the end of February 2019, now has over $1 billion in assets under management and has risen in value by 75.8% for the year to end April.
The move to a green economy, nevertheless, possess a challenge for Ninety One as it invests in businesses that it has no direct operational control over.
“We own shares in companies that may or may not do new things. What we require from the companies is a transition plan. If the company has a credible transition plan … that is up to them.”
No easy answers
This could see some businesses adapt to the coming greener economy. Others, however, could opt to “run down the business” and still generate “significant cash flow” for the shareholder, which will in turn invest in more eco-friendly companies.
This means Ninety One is not asking for an “exclusion of all emitters” from its portfolio because they could easily end up very cheaply in private hands, which might care more for the cash than the environment.
Du Toit gives the example of a mining house spinning out its coal operations. As the mining house no longer has carbon-generating coal mines on its books, it looks like it has reduced its carbon footprint.
In truth, the mines are still operating, but just under new owners.
The new owners could give the go-head for the mining company to open new mines, which will actually have a negative effect on the environment.
Du Toit says when it comes to making this transition, stakeholders have to be practical and understand that there are implications, especially for the developing world.
If the investment community no longer puts money into any project that generates emissions, it could see technology attract all the investment, while projects in emerging countries engage backing from questionable actors.
“They will be more reliant on bad projects.”