Green Capex Opportunities - enabler

Until recently, the standard approach to sustainable investing resulted in investors excluding high carbon companies and sectors and/or overweighting ‘green’ companies and sectors that have limited exposure to ESG risk. However, this does not tackle real world emissions, which we try to address with our investment philosophy and process[1].

There is significant opportunity here to invest in those high carbon companies that have potential to be able to decarbonise. There is an even bigger investment opportunity that stems from providing the kit that helps such companies decarbonise; this is the Green Capex Opportunity. This is precisely where a capex boom, which is borderline mandated by governments in Europe, is most likely to take place. We find no better example of this opportunity than Danieli.

As noted by BlackRock[2], a standard ESG approach may exclude a steel business on the basis that it is typically a high carbon sector. However, Danieli has a clear strategy to achieve zero carbon steel and has developed technologies to support this pathway by relying on a solid balance sheet with high R&D to innovate such technologies. Its electric arc equipment has a lower carbon intensity than 70% of the world’s basic oxygen steel production process.

MSCI rate Danieli BB due to concerns around employee engagement and corporate governance, but predominantly as a result of Danieli’s supposed modest opportunities in clean technology and apparent limited strategies to leverage the growing demand for cleantech products. This is a classic example of where MSCI ESG ratings underrate companies based on backward-looking sustainability credentials whereas our sustainability investment process captures those enabling companies that have the potential to tackle real world emissions.

[1] More information about our sustainability philosophy and process can be found on our website here
[2] Philipp Hildebrand, Mark Wiedman (2022). Managing the net-zero transition. BlackRock.

The information in this case study has been prepared and issued by River and Mercantile Asset Management LLP (trading as “River and Mercantile” and “River and Mercantile Asset Management”) registered in England and Wales under Company No. OC317647, with its registered office at 30 Coleman Street, London EC2R 5AL.

River and Mercantile Asset Management LLP is authorised and regulated by the Financial Conduct Authority (Firm Reference Number 453087) and is registered with the US Securities and Exchange Commission as an Investment Adviser under the Investment Advisers Act of 1940.

This case study is directed at professional clients. The information in this article should not be relied on or form the basis of any investment decision.

Please note that individual securities named in this case study may be held by the Portfolio Manager or persons closely associated with them and/or other members of the Investment Team personally for their own accounts. The interests of clients are protected by operation of a conflicts of interest policy and associated systems and controls which prevent personal dealing in situations which would lead to any detriment to a client.