Sustainable Future: From rock bottom to rebound

Allocation preferences

Understanding Sustainable Future

The Sustainable Future strategy provides targeted exposure to sectors benefiting from the energy transition. The strategy aims to identify companies best positioned to capture growth opportunities in their respective end markets and industries. It spans a broad range of areas, including low-carbon power generation (such as solar, wind, and alternatives), power delivery (focused on transmission and distribution, supported by hardware and software solutions), energy storage, green mobility (including electric vehicles and biofuels), efficiency in building and industrial processes, and natural resource management (covering water, waste, recycling, foodtech, and agritech).

While the investable universe is broad, comprising over 1,200 stocks, the current portfolio is concentrated in 25 positions. The strongest convictions focus on power grids, energy storage, and power generation, which offer the most significant opportunities in the accelerating energy transition.

Macro environment and positioning evolution

After three consecutive years of negative performance, 2024 has seen a measured recovery for the strategy. Since early February, performance has aligned with broader market indices, reflecting a stabilizing environment for cleantech investments and gradual improvements in investor sentiment.

Throughout the year, several strategic adjustments were made to sectoral exposures. Exposure to the residential solar segment was significantly reduced due to persistent inventory challenges and the negative impact of high interest rates on payback periods. While inventory levels normalized in the U.S., they remain elevated in the EU, where demand is sluggish. The segment remains under close observation as challenges persist.

Demand for electric vehicles (EVs) continues to grow; however, the competitive landscape among automakers has intensified. Consequently, the strategy shifted its focus away from car manufacturers and toward leading battery producers, which operate in a more concentrated industry and are better positioned to benefit from the broader EV adoption trend.

The most significant conviction this year, and still today, lies in the power grid segment. Significant investments were made in companies providing solutions for modernizing and upgrading grid infrastructure. Grid capacity has emerged as the bottleneck of the energy transition. A smart, resilient power grid is critical to integrating more intermittent renewables and supporting rising electricity consumption, whether for electric vehicles, heat pumps, data centers, or other applications.

Themes of reshoring and green protectionism were also central in shaping 2024 positioning. In the U.S., our strategy prioritized companies focused on the domestic market and local manufacturing to align with policies emphasizing supply chain resilience. In China, the focus shifted to leading domestic players, favoring those not reliant on the U.S. for growth. Some of these companies also expand their presence in the EU by establishing European manufacturing facilities, aligning with the EU’s ambitions to localize production.

Hot Topics

Trump’s Clean Sweep

The question dominating discussions recently is how the Trump administration will impact the renewable energy sector. Trump is not widely regarded as a champion of climate action, having expressed skepticism about global warming on several occasions. Yet, the reality of his policies paints a more nuanced picture.

One way to assess the potential impact is to look at historical data. During Trump’s first term, U.S. solar panel installations grew by 53%, and wind turbine installations surged by 83% compared to Obama’s second term. Moreover, Trump extended key subsidies such as the Investment Tax Credits (ITC) and Production Tax Credits (PTC), which directly supported solar and wind projects despite their scheduled phase-downs.

From a market perspective, the industry thrived under his administration. During Trump's first term, the iShares Global Clean Energy ETF (ICLN), a benchmark for renewable-focused companies, soared approximately 260%. For context, this dwarfs the 15% growth seen during Obama’s second term and contrasts sharply with the ~60% decline under Biden's presidency. Based purely on the numbers, Trump emerges as an unlikely yet undeniable advocate for the sector’s market success.

The second factor, often overlooked, is the strategic importance of renewable technologies within Trump’s nationalist and protectionist agenda. Producing these products domestically creates jobs, reduces reliance on imports, and enhances energy independence, key pillars of his economic narrative. Today, U.S. companies building these technologies benefit from targeted subsidies, and there is little reason to believe Trump would dismantle them. On the contrary, with 90% of related jobs based in Republican-led states, his administration may double down on policies that favor U.S. manufacturing. Potential increases in import tariffs under his leadership could further strengthen the competitiveness of American-made renewable solutions, creating a significant advantage for domestic manufacturers and companies to which we are well-exposed.

What about China?

China remains a cornerstone of the global energy transition. As the world’s largest consumer of clean technologies, it accounts for approximately 40% of global energy transition investments. Simultaneously, it dominates the manufacturing landscape, with around 65% of the world’s installed capacity for clean tech production.

However, scale alone doesn’t guarantee attractive investment opportunities. China’s role as a major producer of clean technologies exposes it to significant risks, particularly when production growth outpaces demand. The solar photovoltaic (PV) sector offers a striking example. China’s annual solar module production capacity currently stands at approximately 900 GW, while global demand in 2024 is expected to hit a record 592 GW—up 33% YoY. This overcapacity has squeezed profits across China’s upstream solar industry, with many companies producing at a loss to retain market share.

This illustrates a critical point: growth in an industry is not enough to justify investment. Companies must demonstrate strong pricing power, sustainable profitability, and the ability to grow earnings. In our portfolio, we focus on businesses that meet these criteria. Specifically, our Chinese exposure is concentrated in global technology leaders active in the lithium-ion battery and offshore wind sectors. These companies have high pricing power, are growing their market share, maintain minimal reliance on the U.S. market, and are consistent earnings growers.

While these firms faced headwinds in 2023 due to external macroeconomic pressures, they have begun to recover in 2024. Year-to-date, our China exposure has contributed 7.4% to our total portfolio returns. With much of the negativity surrounding China already priced into valuations, we see solid fundamentals supporting continued positive momentum into next year as the market begins to recognize its resilience and long-term potential.

Is there still growth?

The deployment of clean technologies continues to grow at a strong pace. By the end of 2024, global solar panel installations are expected to exceed the IEA’s main case outlook by 50%. Electric vehicle sales are projected to reach 16.6 million units (+20% YoY), with growth expected to accelerate further in 2025. Stationary energy storage installations are also set to surge to 69 GW (+76% YoY), driven largely by China’s co-location mandate requiring battery integration with new solar and wind projects.

While the underlying industries are growing, our focus remains on identifying companies that can effectively capitalize on this growth. Looking at our portfolio’s EPS growth expectations and valuation levels underline this approach. Consensus estimates project a 3Y CAGR of 30.2% for earnings, while valuation ratios of FY2024 P/S and P/E at 2x and 15.8x, respectively now align with the MSCI World. Essentially, investors in this portfolio are paying MSCI World valuations for companies with triple the expected earnings growth. We believe the risk-reward dynamic is particularly compelling, as investor disinterest in these strategies has been so profound that the greater risk now lies in missing the upside rather than suffering downside.

As confidence builds and attention shifts to profitable companies driving growth in high-potential industries underpinned by long-term structural trends, interest in this opportunity is set to grow further. The fundamentals are clear: strong earnings growth, attractive valuations, and exposure to sectors experiencing transformational expansion.

Catalysts

• Higher U.S. Tariffs. If the Trump administration raises tariffs on imported goods, U.S. companies with domestic manufacturing capacity stand to benefit significantly from improved competitiveness.

• Lower Interest Rates. Renewable energy projects are highly CAPEX-intensive. Lower rates would enhance project economics, driving increased deployment at both the utility and residential scale.

• Stricter EU CO2 Targets. Europe’s planned stricter emission performance standards for cars, if upheld, are expected to accelerate EV adoption. Automakers would need to significantly increase EV sales to comply, with some analysts forecasting up to 30% YoY growth in 2025.

Risks

• IRA Uncertainty. Questions around the potential repeal of sections of the U.S. Inflation Reduction Act (IRA) could heighten investor uncertainty, delaying project timelines and pushing some companies into a wait-and-see mode.

• Lack of Grid Investment. Insufficient investment in grid infrastructure risks slowing renewable energy deployment, exacerbating grid connection delays and congestion issues.

• EU Trade Protectionism. Rising EU-China trade tensions, particularly in the electric vehicle sector, could hinder the expansion of Chinese companies in the region, impacting their ability to gain market share and meet regional demands.