The global energy equation is in flux. With the impacts of climate change looming large, we’ve reached a tipping point, and a global mobilization is underway to meet the moment. With fossil fuels retreating as the favored long-term energy source, the electrification investment megatrend is speeding the energy transition forward across industries.

Renewable sources of energy, such as solar, hydro, and wind power, are key to the energy transition. Scaling and syncing these sources means significant upgrades to the electrical grid, and that on its own is a significant economic driver. To wit, the International Energy Association (IEA) predicts that global spending on electrical grids must double from $302B to $600B in order to accommodate the incoming wave of renewables.[1]

 

Gridlock on the horizon?

 

But as this trend charges forward, questions arise about the best approach to the grid. Existing power grids cannot accommodate this renewable makeover – nor are they well suited to handle the steep electricity demand that is forecast for the decades ahead. The IEA spells out the coming storm in its annual report, which sees an average 3.4% increase in overall electricity demand per year until 2026.[2]

In truth, the adoption of cleaner energy systems will only make a broad impact if our grids can handle the incoming power load from novel technologies such as artificial intelligence data centers and electric vehicle (EV) charging infrastructure. We dug into how future electricity demand is, while challenging, an enormous opportunity for renewables in a previous blog.

The media and broader public may feel blindsided by what seemingly is a snag in clean energy adoption, however Reynders, McVeigh’s commitment to taking a full-picture approach to any sustainability megatrend has led us to investments we believe are well positioned to benefit from this sea-change in power distribution.

 

A strong backbone begets strength

 

By taking a 360º view of electrification, our research team homes in on the players that are, and will be, instrumental to the success of the larger electrification trend. The build-out and improvement of infrastructure pivotal to this transition, such as in our power grids, emerges as both an immediate and long-term opportunity that our firm is tracking closely.

But what makes a backbone player? We define these companies as those that provide critical technologies for front-end solutions in any investment trend. Backbone players are foundational for any transition and can succeed through even the most complex business or economic shifts because their technology represents a core requirement that sits at the root of new innovations.

Electrification and power grid infrastructure will require innovative solutions to properly meet the challenges ahead posed by a greater reliance on electricity (and subsequent integration of renewable sources). This includes components found within these systems, such as the transmission lines and cables that facilitate the flow of electricity from power centers to homes, commercial buildings, data centers, EV charging points, and more. The firms that manufacture and innovate around these components will be called upon with increased urgency as electrical infrastructure punch lists pile up in the coming years. One such company, France-based Nexans (EPA : NEX), fits the bill of a backbone player primed to thrive in the coming environment.

France-based Nexans (EPA: NEX) is a leading original equipment manufacturer (OEM) of critical electrical hardware, such as wiring and cables both for generation and transmission. Electrical grids are Nexans’ bread and butter, and their inclusion in our investment strategy is bolstered by its specialization in renewable grid technologies, such as in connecting off-shore wind farms to land-based power grids.[3] Aptiv (NYSE : APTV) provides wiring solutions in electric and hybrid vehicles and are therefore essential to the upswing in these market segments; the industry’s growth is dependent on their role in the value chain.  Read more about Nexans and Aptiv in our latest discussion paper on electrification.

 

As the media landscape continues to sound the alarm on the obstacles to clean energy goals set by corporates and governments alike, let us guide you to the innovative companies that are not only in-line with our sustainable investment philosophy, but also poised to participate in secular growth trends that we expect to outpace global GDP in the decades to come. Speak with our team today to learn more about our investment philosophy.

 

DISCLOSURE: This material is propriety and represents the current, good-faith views of Reynders, McVeigh Capital Management, LLC (“RMCM”) at the time of publication. It is for informational purposes only and should not be transmitted or reproduced to any 3rd party without RMCM’s permission. While this material includes a selection of current RMCM recommendations, it is not a complete list of the companies that RMCM recommends to its advisory clients. References to specific companies are for illustrative purposes only and should not be relied upon as investment advice or as a solicitation to transact in a particular security or in a particular manner. There is no guarantee that any particular investment will be profitable and past performance not indicative of future results. All investments involve risk. Please consult your investment advisor before making any investment decisions.

 

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed, and RMCM disclaims any duty to update any of the information and data contained herein. Certain statements may be deemed forward-looking, but any such statements are not guarantees of any future performance, and actual results or developments may differ materially from those discussed.

 

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[1] https://www.iea.org/reports/electricity-2024/executive-summary

[2] Ibid.

[3] Reynders, McVeigh Capital Management, LLC, ed. “Nexans.” Boston, Massachusetts, June 20, 2023.