A Masterclass in Sustainable Investing

ESG Integration in VanEck’s Natural Resource Funds

The need to understand and formally integrate ESG into our investment process became clear in recent years as a strategy that focuses on global natural resources. The key to ESG integration is to treat it no differently than how you think about the rest of your investment thesis around a company.

There are operating statistics and financial metrics, and then there are E (environmental), S (social) and G (governance) metrics. In the equity business, you always must think about governance. When investing in natural resources, the environmental side and the social license to practice are important to consider as well.

ESG is an integral part of the investment process for VanEck’s natural resource strategies. When engaging with investee companies, we make it clear that we analyze these factors in detail, especially with respect to the targets that they are setting.

Digging Into the Data to Make ESG Integration Meaningful

As ESG has become mainstream, there has been an increased need to measure companies’ ESG performances. While some companies use third-party ESG scoring providers, we prefer to rely on hard data metrics to evaluate a company’s ESG performance for VanEck’s natural resource strategies. We look at the numbers and incorporate them into discussions we have with management.

When engaging with companies, we discuss their ESG targets, the metrics they use to measure performance, their progress toward meeting these goals, and the dialogue regarding the company’s operational and financial performance.

Opportunities to Invest in the Resource Transition

The resource transition presents a lot of investment potential, specifically in the growing universe of names that are becoming investible.

Traditional Energy

The traditional resource space has the potential to make an outsized change when it comes to sustainability. Oil and gas companies are some of the top emitters of global greenhouse gases, therefore, reducing their emissions has a large impact on global sustainability. They also have the greatest skillsets to address their emissions through project management and technological capabilities. The VanEck natural resource teams are interested in what can be gained in the future from making these companies more sustainable, rather than only looking at their current operations and impact.

Resource Transition Sector and Disruptors

Many resource transition companies are improving environmental sustainability, including solar companies and wind companies. Disruptive technology companies are also looking to change things dramatically, such as direct air carbon capture or green hydrogen.

Shifting Business Models

Most companies in the world are incrementally improving the environmental sustainability of their operations - for instance, by emitting fewer greenhouse gases or consuming less energy. Other companies are taking the transition a step further by fundamentally changing their behavior to improve the sustainability of their operations.

More Progress Needed to Meet Global Goals

Technological advances related to sustainability are progressing, but not nearly at a fast-enough speed to address future sustainability needs. The uptake of EVs, solar panels and wind farms around the world is great and is much faster than overall energy consumption growth, but it's not anywhere close to reaching the global goal of net zero by 2050.

Much larger investments must happen between now and 2050 to reach climate targets. Reports issued by the International Renewable Energy Agency (IRENA) outline the investment and capital expenditures needed in the resource transition. A few years ago, IRENA estimated that $110 trillion was needed to be spent in energy transition technologies to reach net zero by 2050. Recently, IRENA increased this estimate to $131 trillion – the equivalent of five or six U.S. economies over the next 30 years, or a German economy every year over the next 30 years.

These projections are much larger than what is being spent. In 2021, approximately $850 billion was spent. In 2022, $1.1 trillion was spent, largely on just three technologies: solar, wind, and transportation (which was accounted for mostly by electric vehicles). While this represents progress, it is not nearly strong enough.

Global Investment in Resource Transition

Source: BloombergNEF. Energy Transition Investment Trends 2023. Data as of 2023.

Power generation and transport only account for 40% of global greenhouse gas emissions. The sectors that account for the other 60% of emissions need to be addressed and funded through investments. Specifically, the resource transition sectors that are lacking investment are those that are difficult to decarbonize, including steel, cement, chemical and paper and agriculture. Agriculture is one of the largest producers of emissions – accounting for roughly 20-30%, which is comparable to power generation. Beyond emissions, agriculture has a significant impact on other areas of environmental sustainability, including land use, water use, pollution and biodiversity.

Aside from reducing emissions, we need to think about the investment opportunities associated with climate change mitigation and adaptation as they become a larger part of the discourse and push for global sustainability. While we are a long way away from that, it is on the horizon.

Additional highlights from the masterclass, which can be accessed here, include:

• 14:09: Specific areas that are often overlooked in the sustainability discourse
• 20:20: How to evaluate ESG risks in current or prospective investee companies
• 41:44: How the global push for net zero greenhouse gas emissions is impacting companies in the natural resources sector
• 1:00:15: How to think about sustainability in the context of managing a strategy that also invests in fossil fuels

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