Transition Opportunities - Investing in the transition and unlocking Green Alpha

23 March 2023

ESGGatekeepersGreen InvestingInflationInvestmentsMeeting of Mindssustainable

Facilitator: Ian Saunders. Experts: Thomas Hohne-Sparborth and Didier Rabattu


  1. Investment into the sustainable transition is driven by good economics and supported by new policy in the US, EU and UK, with the sustainable energy transition helping to drive the de-escalation of inflation
  2. China is the world’s largest investor in renewables and climate technology and the energy and renewable transition is comparable to the global impact of the information technology (IT) revolution of previous years
  3. In the same way IT was a productivity enabler, the new transition will increase the demand for technology to be both sustainable from an energy efficient and a cost saving perspective resulting in sustainability becoming a productivity multiplier
  4. Less mature investment potential can benefit from a multi-asset strategy through partnering with VC and governments for funding of early-stage development prior to upscaling and listing
  5. In essence the on-going LOIM research into the transitional process and the delivery requirements is the key to identifying the companies with the best capabilities and investment potential

Discussion Points:

LOIM has developed a system for identifying economic indicators, through their detailed research, highlighting investment opportunities arising from the global sustainable/efficiency transition primarily within the energy, electrification, construction and nature-based industries. This includes the design of future proof multi-asset strategies and roadmaps to capitalise on this evolving potential for their clients

Complexities of changing investment landscapes:

An overview of previous technological transitions demonstrates an initial slow and shallow curve, followed by a steep uptake driven by affordability and the economies of scale, moving from niche to mass markets until a cost parity is reached and the technology becomes competitive. 

Renewables have followed this pattern, with solar becoming the cheapest source of energy on the planet and electric vehicles projected to reach levels of mass market competitiveness with conventional vehicles within the next five years.

In addition to the economic case for a sustainable transition, energy security was also raised to guard against energy dependency from aggressive state actors. 

From a materials perspective timber as a building material was used as an example of how the current carbon market is driving the cost of timber construction down.

Capitalising on sustainable market:

The benefits of co-locating financial analysis and sustainability experts together will generate ideas for stock convictions - a system that has enabled LOIM to place the sustainable transition at the heart of their strategy.

LOIM analysts study potential transition markets from the bottom up identifying opportunities, future Capex flows and profit pools in such areas as electrification, renewables, enhanced sustainability and efficiency in building materials. This approach helps future proof investments by defining the size of these new markets, not just placing ESG values on activities and outcomes.

When asked about the beginning of the S curve and the initial investment required for new technology to release Green Alpha, it was stated that mature investment potential is being driven by government and private sector demand for better performing products such as batteries and building materials.

Energy transition is seen as a relatively mature transitional investment by LOIM with materials development more of an emerging option, chemical recycling and bioplastics were given as potential examples of these evolving material technologies that can be offered as private equity options due to their evolutionary timelines.

When asked how LOIM identify the right companies to invest into, the presenters recapped on the scale of the efficiency and sustainable transition, their in-house analysis and how the quantifying of the transitional requirements ultimately leads to their identification of relevant and best suited companies, able to undergo their in-house ESG and other vetting processes. 

There was a statement from the table highlighting the potential of the frontier and emerging markets from which both speakers highlighted the convictions that LOIM has made and how those convictions will be directed to the relevant global markets and regions.

Electrification was highlighted as very much a global conviction of LOIM where as others are more relevant to the European market. It was also stated that the gaps in productivity and potential between the established and emerging market countries is decreasing rapidly and will ultimately change the global status of some countries due to them gaining energy independence and their ability to export energy in the future.

In response to a question on battery capacity and whether it a limiting factor, examples were given of how technology is rapidly transitioning away from commodities that present economic or environmental challenges to new battery chemistry, and how in other instances, investment has to be made on the ground at the local (cultural) level to ensure continued efficiency and productivity.

Concerning LOIM perspective on hydrogen, the presenters explained that hydrogen is an indirect form of electrification as a carrier of electricity with a strong application in the future transport and steel production industries, as a significant energy with growing investment opportunities.

Nuclear was also discussed as a clean form of energy with an emphasis on small nuclear reactors rather than the larger power plants as a potential investment option.

New technology, in particular developments that enable water to be drawn from the atmosphere and its future investment potential sparked opinions from around the table on its geopolitical impact in water-scarce regions and the geopolitical impact of rare earth minerals.

Concerning power storage, the presenters spoke of more interconnectivity between grids and an evolving situation where extra power is redirected rather than always stored, although storage capacity will still be vital especially for managing peaks in usage.

Investability and Sustainability

Research and investment committees analyse each individual roadmap so that small investment universes (200 names per strategy) are created ensuring they are aligned to the transition and that the green alpha can be identified, following this the risk within the investment universe is analysed across all sectors.

This process is constant to ensure the development of high conviction portfolios with a legitimate investability/sustainability/investability balance within the central focus, the investment universe where back testing bias and understanding the dynamics of a company’s ability to transition or operate sustainably is also a constant activity.

By working in this way they are creating completely new asset classes such as carbon and nature-based solutions because it makes economic sense.

A representative from Lombard Odier UK raised how having such connected research and investment teams has led to the identification of new sources of green alpha. This led onto the potential for investment into food security and future food production techniques such as plant-based proteins and the non-economic practices of some current agricultural techniques and the impact on planetary boundaries.

Key Takeaways:

  • The presenters outlined that they are already strategically positioned with research-based knowledge for the evolution of the transition
  • They highlighted that in some instances the energy sector appears to be shrinking however it is the fossil fuel sector that is actually shrinking and the renewable sector is displacing the fossil fuels and growing the energy sector
  • It was stated that there is a discussion in the EU currently about decoupling fossil fuel energy from sustainable energy across the wider sector to outline the cost differential
  • There was a question from the table about including the social dimension as part of the transition from a cost perspective – the presenters highlighted that new financing systems for electric car leasing were already in place in some countries and that other sustainable products had new financial and business models attached to them that made them more consumer friendly and recyclable