By Bruno Bertocci, Head of the Global Sustainable Equities team and lead Portfolio Manager; Joe Elegante, Senior Portfolio Manager and Alix Foulonneau, Analyst
Energy is central to nearly every major challenge and opportunity the world faces today, including poverty eradication, adaptation to climate change, food security, health, sustainable cities and transport.
Energy demand continues to grow, particularly in emerging markets, due to increasing populations, ongoing urbanization and rising wealth.
annual growth demand for energy efficient products1
of population has access to energy 2
people still cooking with polluting fuel and stove combinations3
Sustainable energy sources like wind and solar receive a lot of press attention but in fact energy efficiency is central to tackling climate change and is often referred to as the best "alternative fuel".
Energy efficiency can be achieved through leaner, smarter industrial processes, energy savings tools as well as energy savvy consumer products.
We believe the driver for energy efficiency is innovation and the prospect of stricter regulation offers long-term opportunities for investors. We expect earnings growth rates for companies offering such products to remain in the high single-digits.
Finding the right investment opportunities
At UBS Asset Management, we find investment opportunities with innovative companies delivering solutions to the world’s most pressing sustainability challenges.
Spectris is one of them and is a leader (typically no.1 or 2) in niche markets in material analysis (34% of 2018 sales), test and measurement (33%), precision instruments (19%), and industrial controls (14%). It has a well-balanced international exposure with a third of sales originated from Asia and Emerging markets.
The business supports the improvement of productivity and efficiency in industrial processes. For example, its monitoring solutions reduce waste in food production lines and its data analytics identify efficiency opportunities for power companies.
Spectris has comfortable gross margins in a market with high barriers to entry but there is room for improvement in operating margins. We expect management to focus on reducing the cost base, simplifying the business and fully integrating past acquisitions to create value.
We first invested in Spectris in November 2017 and it remains one of our top 10 holdings.
- 34% of revenues originates from materials analysis
- 33% in test and measurement
- 19% in-line Instrumentation
- 14% in industrial controls
- A third of sales in Asia and emerging markets.
Investment opportunities from energy efficiency
- Energy is crucial for our society. It is in the products we consume every day and drives our economy
- Improved energy efficiency is an opportunity to limit the demand growth for energy
- A key business factor for an increasing number of companies and should see above-average sales and earnings growth in the decades to come
- Addressing an enormous challenge humankind faces enabling investors to support the UN Sustainable Development goals.
UN SDG Goal 7
Ensure availability and sustainable management of water and sanitation for all.
Goal 7 of the United Nations Sustainable Development Goals is aimed at ensuring access to affordable, reliable, sustainable and modern energy for all.
Goal 7.3 target: By 2030, double the global rate of improvement in energy efficiency
It is at the very core of sustainable development and one step closer due to recent progress in electrification, particularly in the least developed countries, and improvements in industrial energy efficiency.
However, national priorities and policy ambitions still need to be strengthened to put the world on track to meet the energy targets for 2030.
Enhancing instrumentation and controls – here's an example of how their instrumentation is used to drive improved energy efficiency.
Drax Power's use of Spectris Servomex analyzers to optimize boiler combustion efficiency has saved them millions of pounds in direct fuel savings and lower operational costs.
Drax Power is the UK’s largest power station and is Europe's biggest decarbonisation project. Seventy per cent of its electricity is generated from sustainable biomass.