Companies and industries at the forefront of developing technology solutions to sustainability issues may offer compelling long-term investment opportunities.
Managing Director, Head of Investment StrategyRBC Europe Limited
This report looks at the importance of sustainability from an investment perspective. It highlights some of the technologies and innovations that could help curb the greatest threats to the sustainability of the global economy. In our view, companies at the forefront of developing technology solutions to sustainability issues may offer compelling long-term investment opportunities.
Our climate change article looked at several emerging technologies used in buildings to dramatically cut fossil fuel consumption. We highlighted geoexchange technology, which takes advantage of constant subterranean temperatures to heat and cool structures.
GreenTech also encompasses electric vehicles (EVs) and the ecosystem around them, including batteries, parts, and semiconductors. According to a Deloitte Insights report released in 2020, EVs accounted for 2.5 percent of new car sales globally in 2019. It expects EV sales to grow by an average of 29 percent per year over the next decade, with EVs constituting just over 30 percent of new car sales globally by 2030 thanks to a broader model offering, a reduction in battery costs, and greater access to affordable public and home charging infrastructure. Regional differences will emerge depending on governments’ commitments to investing in EV infrastructure and offering cash and tax incentives. Deloitte expects EV sales in 2030 to account for 48 percent of domestic new car sales in China, 42 percent in Europe, and a more modest 14 percent in the U.S.
Other GreenTech industries include wind farms and solar power, and the development of batteries to store the power generated by these intermittent sources of energy—the wind doesn’t always blow and the sun doesn’t always shine—while comparatively the demand for electricity is more constant. Wind energy accounted for some 8.8 percent of total electricity generation in the U.S. in 2020, according to the U.S. Energy Information Administration (EIA), while solar energy contributed a lesser 2.3 percent. Together they provided some 10 percent of all electricity generated in the U.S. The EIA predicts the share of all renewables (i.e., including hydro) in the U.S. electricity generation mix will double from the current 21 percent to 42 percent by 2050, with wind and solar driving much of that growth.
Hydrogen, another key aspect of GreenTech, could potentially help meet a non-negligible 14 percent of U.S. energy demand by 2050, according to the Fuel Cell & Hydrogen Energy Association. While much of the attention garnered by hydrogen has focused on transportation applications—cars, heavy trucks, locomotives, ships, even planes—a number of technological hurdles to realise that potential still need to be cleared. However, there are currently feasible applications in oil refining (as a substitute for natural gas) and steelmaking (as a substitute for coking coal) that are already attracting considerable investment by industry majors.
Cement manufacturing and steel production are the two largest industrial sources of GHG emissions. Engineered wood, another GreenTech product, is being used to replace both of these materials in the construction of larger buildings—one built in Norway rises 18 stories.
Some GreenTech solutions, such as recycling robots, also tackle waste management. These have become increasingly popular after China banned the import of plastic waste in 2018 following three decades of importing close to half of the world’s recyclable plastic waste. This ban has provided the impetus for innovations elsewhere in the world that can efficiently process this waste in place of China. For example, artificial intelligence robots are able to not only sort rubbish but also extract recyclable components from it, and assess their purity—valuable data to have in order to recycle these materials efficiently.
Agriculture has already benefitted from the growing adoption of soil-friendly techniques such as no-till farming and cover cropping. GPS technology has enabled more precise land management and reduced input usage (fertilizers, pesticides, and fuel). But the industry remains one of the largest sources of GHG emissions.
Technology solutions in this field can potentially address all four of the threats outlined above while tackling the challenge of feeding a growing world population. Since the 1950s, consumption of protein in China has grown by five times while the country’s population has doubled. AgriTech and FoodTech can be leveraged to produce protein foodstuffs in a sustainable manner.
Agricultural innovations, such as the development of vertical farming, a reengineered farming process using stacked production systems, may permit the same or greater production of some foodstuffs on drastically less land. Moreover, this type of farming can be employed in closer proximity to cities, reducing the need for transport. Technologies that enable cultivation with less water can also help to mitigate water scarcity, while hydroponics use little to no soil.
FoodTech has fostered the development of plant-based products, which directly reduce GHGs (cattle produce a significant amount of methane), as well as the creation of protein sources via processes that use much less water. The United States Geological Survey estimates that the production of a hamburger weighing a quarter-pound (113 grams) requires 460 gallons of water (some 1,750 litres). Alternative sources of protein can require only half as much.
Other aspects of FoodTech such as food traceability for just-in-time delivery can lower inventories, thus reducing waste and GHG emissions. The World Wildlife Fund estimates that one-third of food ends up as waste, and as it rots, it produces methane.
AgriTech can also foster social progress to the extent that more efficient farming practices can help raise farmers’ standards of living, particularly in developing countries, and in the process enable family planning and reduce the pressure to migrate.
According to the World Bank, in 2017 just over 1.7 billion people in the world were unbanked, i.e., no access to financial services. While that number most likely has come down, the issue is particularly acute in low-income countries. But richer nations are not spared entirely. According to the Federal Deposit Insurance Corporation, as of 2019, 7.1 million households remained unbanked in the U.S., representing a non-negligible 5.4 percent of the country’s households.
Source – Global Findex database
FinTech solutions, including blockchain and emerging digital payment systems, are among the new technologies that can improve access to banking and credit. One example is the M-Pesa text message-based payment system initially launched in Kenya in 2007. The service allows the user to send and withdraw funds via basic mobile phones. By its 10-year anniversary, the service was used by 30 million customers across 10 countries, with over 95 percent of households in Kenya having at least one M-Pesa account. According to the World Bank, M-Pesa has advanced the financial empowerment of women, helping them gain control over their income, and fostered start-up businesses.
Ageing societies, rising health care costs, and unequal access to health care are widespread problems. Where access to proper care is inadequate, it is often due to the lack of reliable diagnosis, and substandard equipment, medication, and/or doctors. By reducing costs and improving efficiencies, telemedicine and digital diagnostics can make some of these services more widely available.
The ability to remotely collect, read, and interpret data, and provide an expert diagnosis to a patient in an underserved community or rural area can go a long way to improving the living conditions for many, in both emerging and developed regions. In the latter, telemedicine practitioners are able to not only diagnose but also prescribe medication to patients due to the increased popularity of smartphones and wearables.
Remote surgery can improve access further to those living in remote areas. This involves using an internet-connected robotic system to perform increasingly complex surgical procedures. This technology can circumvent lengthy and costly transport by ambulance or helicopter, and in doing so may also speed up treatment.
Smart Cities can help reduce the detrimental impact of urbanisation on the environment and improve the quality of urban life. These are cities in which infrastructure, utilities, services, homes, and more are connected via the Internet of Things and 5G and use artificial intelligence technologies to optimise the flow of goods and people. This connectivity enables cities to optimise waste management and water consumption. It can also facilitate more efficient traffic flow to enhance public safety.
For example, many cities today already employ sensors on trash receptacles to alert authorities when capacity is reached, allowing the refuse collection fleet to be deployed more efficiently. And while artificial intelligence is already being used to manage traffic, with greater connectivity more progress is possible on this front.
Sensors in sewage systems can monitor water levels and alert managers to a potential leak, enabling them to redirect wastewater if necessary to prevent floods. Such technologies can prevent economic losses and help protect livelihoods.
Parking management solutions is another area that can bring added productivity. Some cities offer the option for people to reserve a parking spot at the same time as when they make an appointment/reservation, so they don’t have to waste time—and gas—looking for a parking space. If they see that no spot is available, they can adjust their plans accordingly to make more efficient use of their time.
Asia is leading the global race to create Smart Cities, with a number of high-tech hubs in China including Shenzhen, Shanghai, and Guangzhou, but the technologies are being increasingly adopted in the West. Singapore also ranks very highly on this front, thanks to integrating the Internet of Things into mobility and transport, health care, and public safety, combined with a highly digitised public administration.
Over the next several months, we will cover each of these SusTech themes in more detail. As technologies emerge that make the world more sustainable, companies at the forefront of developing technology solutions to sustainability issues may offer compelling long-term investment opportunities, in our opinion.
The companies and industries that revolve around innovations and new technologies can make for volatile investments. Implementing these themes can carry higher-than-average risk and should thus be viewed within the context of a well-diversified portfolio.
We believe that for investors who can withstand such a higher level of risk, the secular opportunities that emerge out of these themes should contribute to portfolio performance in the long term.
Non-U.S. Analyst Disclosure: Frédérique Carrier, an employee of RBC Wealth Management USA’s foreign affiliate RBC Europe Limited, contributed to the preparation of this publication. This individual is not registered with or qualified as a research analyst with the U.S. Financial Industry Regulatory Authority (“FINRA”) and, since they are not associated persons of RBC Wealth Management, they may not be subject to FINRA Rule 2241 governing communications with subject companies, the making of public appearances, and the trading of securities in accounts held by research analysts.
This publication has been issued by Royal Bank of Canada on behalf of certain RBC ® companies that form part of the international network of RBC Wealth Management. You should carefully read any risk warnings or regulatory disclosures in this publication or in any other literature accompanying this publication or transmitted to you by Royal Bank of Canada, its affiliates or subsidiaries.
The information contained in this report has been compiled by Royal Bank of Canada and/or its affiliates from sources believed to be reliable, but no representation or warranty, express or implied is made to its accuracy, completeness or correctness. All opinions and estimates contained in this report are judgments as of the date of this report, are subject to change without notice and are provided in good faith but without legal responsibility. This report is not an offer to sell or a solicitation of an offer to buy any securities. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Every province in Canada, state in the U.S. and most countries throughout the world have their own laws regulating the types of securities and other investment products which may be offered to their residents, as well as the process for doing so. As a result, any securities discussed in this report may not be eligible for sale in some jurisdictions. This report is not, and under no circumstances should be construed as, a solicitation to act as a securities broker or dealer in any jurisdiction by any person or company that is not legally permitted to carry on the business of a securities broker or dealer in that jurisdiction. Nothing in this report constitutes legal, accounting or tax advice or individually tailored investment advice.
This material is prepared for general circulation to clients, including clients who are affiliates of Royal Bank of Canada, and does not have regard to the particular circumstances or needs of any specific person who may read it. The investments or services contained in this report may not be suitable for you and it is recommended that you consult an independent investment advisor if you are in doubt about the suitability of such investments or services. To the full extent permitted by law neither Royal Bank of Canada nor any of its affiliates, nor any other person, accepts any liability whatsoever for any direct or consequential loss arising from any use of this report or the information contained herein. No matter contained in this document may be reproduced or copied by any means without the prior consent of Royal Bank of Canada.
Clients of United Kingdom companies may be entitled to compensation from the UK Financial Services Compensation Scheme if any of these entities cannot meet its obligations. This depends on the type of business and the circumstances of the claim. Most types of investment business are covered for up to a total of £85,000. The Channel Island subsidiaries are not covered by the UK Financial Services Compensation Scheme; the offices of Royal Bank of Canada (Channel Islands) Limited in Guernsey and Jersey are covered by the respective compensation schemes in these jurisdictions for deposit taking business only.
We want to talk about your financial future.