Sustainable aviation fuel currently accounts for a negligible amount of air transport fuel and is subject to blending limits for commercial purposes. (UBS)

A major US airline announced the launch of a fund aiming to invest in sustainable aviation fuel. The fund is backed by several other corporations in both the aerospace and financial industries and will commence with about USD 100million in capital.

Sustainable aviation fuel currently accounts for a negligible amount of air transport fuel and is subject to blending limits for commercial purposes, but tax credits in the recently passed Inflation Reduction Act (IRA) are spurring renewed interest in its potential. IRA comes alongside several other regulatory initiatives, including the EU’s ReFuelEU plan, and California’s Low Carbon Fuel Standard. Improved project cost economics following these developments should help spur continued investment in the space.

Along the same lines, battery recycling is a niche market, but technological advancements are helping improve the efficiency of the second stage of life and are expanding the scope of what can be recycled. The US Department of Energy recently announced several loans for private US battery recyclers. One of these loans amounts to USD 2bn and will be used to expand a US based factory for battery recycling and production of cathode material and copper foil.

We expect battery recycling to become more commonplace in the years ahead, but in the interim companies are ramping up capacity and smoothing out technological challenges as they wait for more scrap material to enter the market as first generation Electric Vehicles retire.

While the shift toward electric vehicles is well underway, innovation in these “hard to abate” industries is unlikely to be achieved through electrification alone. Sustainable aviation fuel and battery recycling are two examples of small but growing industries, that we believe can aid in the transition to a cleaner transport future.

We have discussed the opportunity set in several related themes outlined below, but given the infancy of these markets, investors looking for direct or pureplay exposure should consider private market opportunities as well.

Investor takeaways

  • The revolution in transportation is underway, and we recommend investors gain diversified exposure across the supply chain. Our Smart mobility theme provides more information on the opportunity set inherent in the transport transition.
  • The Greentech goes global stock list also includes companies investing in SAF production, but this is not likely to generate significant revenue for these companies in the near term as supply ramps up. Private markets offer an opportunity to gain earlier stage exposure to purer play companies.
  • The Circular economy theme describes the opportunity set we believe exists in closing the loop, not just on batteries but more broadly. We believe companies can benefit from utilizing resources more efficiently, and the companies that enable this should benefit too. The circular economy is a broad term, and we see opportunity across sectors, but the earliest stage opportunities.

Main contributors: Amantia Muhedini, Stephanie Choi, and Michelle Laliberte

Read the full report Sustainable Investing Perspectives: EU “IRA”, future of transport, and higher utility prices 6 March 2023.

This content is a product of the UBS Chief Investment Office.

Watch the UBS Trending episode Planes, trains, and automobiles 10 March 2023.