By Erik Sherman
Energy has long been an important aspect of Canadian pension portfolios, starting with fossil fuels and eventually moving into renewables like solar, wind, geothermal, and biomass. The transition between sources of energy is thriving today and will only be more so in a future where greater energy needs and concerns about climate change meet.
“You know, people think of power and energy as not that exciting,” said Jonathan Gray, President and COO of Blackstone, in an interview with Goldman Sachs. “Today, it actually is because two megatrends are happening at the same time. One, many companies and countries are trying to move from hydrocarbons, particularly coal, to renewables. So, that’s impacting where the supply of power’s coming in a very big way. And then on the demand side, after 20 years of flat power demand in most developed markets, because of electrification of cars, because of some reshoring, and particularly because of data centers, we’re seeing this huge surge of demand.”
That energy transfer is a key theme in the portfolios of more than half of Canadian investors, according to Schroders. It’s also broader than generation. Alternative energy that creates electricity lacks the natural characteristics of chemically encapsulated power like hydrocarbons.
Renewals need energy storage, whether for power homes, businesses, portable tools, computers, cell phones, or electric vehicles of all sorts — consumer autos, self-driving taxis, commercial trucks, and even heavy equipment for mining and construction. Contained power accompanies mobile equipment and devices; in fixed applications, something has to hold generated energy for later use.
That means batteries. Not the common types used in smoke detectors and flashlights, but ones incorporating new research, specialty materials, specialty assemblies, and software required to run the batteries safely and effectively.
With renewable power increasingly running cars, heavy equipment, and mobile devices, batteries offer important opportunities for investment. But it’s a complex investment topic, encompassing multiple segments: raw material mining, reclamation, and processing; components and assemblies; overall manufacturing; and specialty software and hardware to enable safe and efficient use.
Investment consultant Andrew Lokenauth claims 15 years’ experience across such financial institutions as JP Morgan, Goldman Sachs, and Citi, pointing to the scope of the various parts. The battery-component current market value sits at about $27.3 billion annually and is expected to hit $125.4 billion by 2027, which he called “pretty incredible.”
“Major institutional investors like BlackRock and Vanguard are going all in,” he said.
Electric vehicles are a leading topic of conversation. “[The auto companies] want to move to EVs,” says Sunil Kansal, head of consulting and valuation services at Shasat. “Some of them have set a very aggressive target. like 2030, moving completely there. To move to that, you need batteries, and you need lithium, nickel, cobalt, and such materials.”
A focus just on vehicles can also be misleading. “And here’s the thing: this growth isn’t just about EVs anymore,” says Lokenauth, speaking to a much broader market.
Raw material and mining involve more common metals like copper and aluminum, and also lithium, cobalt, and the so-called rare earth metals. “I see the growing interest of investors in companies that actually produce these important metals,” says Kansal.
Even though ultimately focused on clean energy, the need for mining can potentially have serious environmental concerns. “When they process the nickel, it releases the gases which are environmentally not good,” Kansal says. There is frequently Soil and water pollution with cobalt. “In many cases, they need to clean up the forestation” due to EU deforestation laws, he adds. “If the industry wants more of these metals, it means some of these locations need enhanced deforestation concerns.” Such issues can affect investors’ net-zero targets.
Some of the big names in batteries are Panasonic (a major battery partner of Tesla), CATL (large in China and expanding globally), LG Chem (partners with many companies), and Samsung SDI (most active in the high-end market), Lokenauth says.
In addition, there are smaller innovative firms that present interesting growth prospects, says Anthony DeOrsey, research manager at advisory firm Cleantech Group. Battery recycling is likely to become important in reclaiming expensive materials. “They’re training on manufacturing scrap,” DeOrsey says. “There’s going to be a little bit more year over year as manufacturing capacity increases.”
Some companies are looking to create more efficient refining processes for metals. Neither nickel nor cobalt ore are useful in their raw state. DeOrsey follows a company called Nth Cycle. “They have an extraction technology that can recover materials from spent batteries or from ore on site.” Forge Nano uses a technology called atomic layer deposition (ALP) to coat battery components and improve their performance and lifespans.
DeOrsey says that new technology will be necessary to create defensive positions through unique intellectual property to compete with companies in China. “You can’t just copy their playbook and expect to be cost-competitive,” he notes. “The race is going to intensify.”
There can also be advantages in investment techniques. Some institutions stick to debt and equity, with pension funds tending to the latter.
“In recent years, streaming rights have become popular,” Kansal says. Investors put money up front and get the right to buy output at discounted prices, somewhat similar to an option contract. “I think pension funds could enter in some of those options or streaming structures,” he says, noting that a pension would need to structure arrangements so that they never had to take delivery.
