Thematic Commentary – 31 October

Circular Economy Enablers

Currys, a well-known electronics retailer based in the UK, has quietly developed a substantial repair and refurbishment business, generating GBP £676 million in sales in its last financial year. This division, part of the company’s “Long Live Your Tech” sustainability strategy, focuses on tackling e-waste by repairing, refurbishing, and recycling electronic devices. The retailer offers a range of care and repair plans and even vouchers for trading in used electronic goods. It has also partnered with eBay to resell used and refurbished electronics and is considering taking on product warranties from manufacturers.

It boasts an impressive in-house repair operation that handled over 800,000 repairs last year.

By spotting a business opportunity through monetising post-sale opportunities, Currys has not only embraced circularity but demonstrated that the pursuit of sustainability can also be a profitable endeavour.¹

Educational Tech and Digital Learning

Internet history underscores the importance of verticals. Market leaders with a robust brand, specialised expertise, scale, and ample resources can stimulate growth and seize new opportunities through agility and adaptability. With almost one year having passed since the launch of ChatGPT, the most successful EdTech companies have combined their products with advancements in AI to create new opportunities to better serve students. Chegg recently unveiled its enhanced user interface and unified asking experience to an initial user group. This update enables Chegg to deliver answers from its extensive database of over 150,000 subject matter experts, bolstered by generative AI technology. The company is prioritising usage, quality, accuracy, and speed and is set to launch its own large language learning models, leveraging Chegg’s unique data. Over the next few months, Chegg will introduce multi-turn chat for a more conversational experience and AI-enhanced learning tools, including practise tests, assessments, study guides, and flashcards. Additionally, they plan to facilitate student connections and content sharing.²

Environmental Impact

Many European nations still subsidise gas, coal, and oil heating but could these funds be allocated in a way that achieves the same positive outcomes whilst minimising environmental impact. According to a new report by the European Environmental Bureau, shifting just half of the funds currently allocated to fossil fuel heating subsidies in Europe to incentivise heat pumps could accelerate the transition to renewable home heating methods by 2040. The report found that heat pumps are more cost-effective than fossil fuel boilers in most EU countries but can have prohibitive upfront costs for many households. The analysis estimates that transitioning all European households to heat pumps would cost €21.3 billion over 15 years, falling to €14 billion with the introduction of a €100 per tonne carbon tax. Heat pumps have emerged as a key component of Europe’s climate policy, with high efficiency and widespread adoption in countries like Norway, Sweden, and Finland. However, some countries such as the UK have slowed down their phase-out of fossil fuel heating due to concerns about the cost of living.³

Global Sustainable Infrastructure

Infrastructure investment is now being disrupted by technological, environmental and social change.

Conventional infrastructure risk categorisation systems are increasingly becoming obsolete, in a world where climate events (e.g. floods, hurricanes) threaten even historically ‘safe’ assets. Sectors like oil and gas now face energy transition risk and fully autonomous electric freight trucks pose a significant threat to traditional railways. Today, infrastructure investors must rethink what constitutes ‘safe’. Nowhere is this more evident than in historically ‘risky’ renewable infrastructure assets. 2023 milestones mark this change. Brookfield’s investment in UK-based Banks Renewables, backed by incentives from the $USD 369 billion Inflation Reduction Act, is expected to triple wind gigawatt capacity in the UK by 3x within 5 years. Acciona and Orsted’s collaboration on floating wind platforms, aiming to reduce cost and environmental impact through incorporation of new biomaterials, could signify a breakthrough in wind platform commercialisation. Meanwhile, EDP Renováveis is doubling its solar capacity in Asia Pacific in 2 years, with plans to triple this by 2026. This focus on environmental infrastructure should be a signal not just of where investment opportunities are, but also areas to steer clear of in the path to a more sustainable future.^{4 5 6}

Sustainable Future of Food

The food industry has weathered some significant challenges recently. However, company earnings call analysis reveals that there is light at the end of the tunnel as recovery signs begin to emerge. Input price volatility is easing, with companies like Lamb Weston and Novozymes mitigating costs through pricing strategies and expecting future gross margin expansion. Costa Group reports a welcome decrease in shipping costs, signalling potential cost relief ahead. Supply chain disruptions are also abating. John Deere’s investment in AI and robotics indicates a positive outlook, despite past labour and supply challenges. Similarly, International Flavors & Fragrances and O-I Glass note volume rebounds as supply chain conditions improve. Consumer behaviour has evolved due to economic strains, affecting plant-based and animal-derived product sectors alike. However, the normalisation of consumer spending and focus on health suggests a stable outlook for plant-based foods. Credit and financing landscapes are tough, with companies like McCormick and Balchem feeling the pressure of rising interest expenses. Yet, they are proactively managing debt, reflecting their resilience. Most companies in the Sustainable Future of Food theme are profitable and we believe the food industry is poised for a rebound.⁷

USA Environmental Impact

References to the Inflation Reduction Act [“IRA”] continue their ubiquity in earnings calls for American companies that are supported by the $369 billion spending package.

Here are some highlights from October earnings calls:

“Additionally, the IRA, tax credits, and other local incentives aimed at promoting energy-efficient upgrades will encourage consumers to replace versus repair, as well as the boost the sales of higher-efficiency products.” – Heating, ventilation and air conditioning manufacturer Lennox International, Q3 2023 Earnings Call (26 October).

“The infrastructure spending and fixed asset investment related to the IRA programs along with the reshoring of manufacturing, should provide momentum for additional construction spending through 2024, effectively extending the construction cycle.” – Steel products producer Steel Dynamics, Q3 2023 Earnings Call (19 October).

“The $250 billion IRA is expected to support these projects and additional energy transition and manufacturing projects in the future, which presents a significant opportunity for CMC.” – Steel and metal manufacturer Commercial Metals Co, Q4 2023 Earnings Call (October 2023).⁸

Cybersecurity and Data Privacy

The cybersecurity market, projected to reach over $USD 650 billion by 2030, is being propelled by AI’s adeptness in detecting and averting cyber threats. This revolution in cybersecurity is underscored by recent reports from industry leaders like Palo Alto Networks and Cloudflare in their latest earnings calls.

Palo Alto Networks has achieved a 97% decrease in false positives and a 60% enhancement in threat interception, crediting AI for these advances.

Their CEO stated, “In the last 5 years, our Total Addressable Market (TAM) in cybersecurity has grown by approximately 14%, surpassing the IT market’s growth. With AI now a core tool, we’re capitalising on this by intensifying our technology investments.” Cloudflare reported an increase in the use of their R2 product, particularly among AI startups, signifying their growing preference for Cloudflare’s cost-efficient GPU usage for model training. These insights underline the pivotal role AI is playing in the evolution of cybersecurity offerings. We foresee that such technological advancements will allow cybersecurity firms to lower costs, make their products more affordable for the mass market, and consequently expand their TAM even beyond current scope, as many cybersecurity solutions are presently out of reach for this wider audience.^{9 10}

Digital Payment Economy

Italian luxury sports car manufacturer Ferrari will now accept cryptocurrency payments for its vehicles in the United States and plans to expand the initiative to Europe. This decision was made in response to requests from customers, both traditional and crypto-savvy investors. The move is significant as most large corporations have been hesitant to embrace cryptocurrencies due to their volatility and regulatory concerns. Ferrari’s Chief Marketing and Commercial Officer, Enrico Galliera, emphasized that the company remains committed to carbon neutrality by 2030, addressing environmental concerns associated with cryptocurrencies. BitPay, a prominent cryptocurrency payment processor, will facilitate the transactions initially in bitcoin, ether and stablecoin USDC. The company has a strong order portfolio and intends to use cryptocurrency acceptance to expand its total addressable market.¹¹