Monday 23 January 2023

Points experts

CPR Invest - Hydrogen, a year of joining forces for the decarbonated energy of tomorrow

€840 million under management and outperformance to boot: this new fund has already met with great success.

In November 2021, CPR AM launched an unprecedented strategy on the market with CPR Invest – Hydrogen. This international equity impact fund supports the development of hydrogen, a competitive and decarbonated energy. In so doing, it addresses United Nations’ Sustainable Development Goal n°7. On the fund’s first anniversary, let’s take this opportunity for an assessment with its manager, Alexandre Cornu.

H 24: In less than one year the fund already has more than €800 million in AuM. How would you explain that?

Alexandre Cornu: There are three reasons for this great success:
- We were pioneers in this extremely promising theme, which addresses climate change concerns by developing decarbonated energy, which, little by little, will replace fossil fuels. Oil, coal and natural gas still account for 80% of the global energy mix. What’s more, in developing hydrogen applications, we are, in a certain way, addressing the current energy crisis.

- Our investment philosophy is fully consistent – to take a long view of the industry and to develop a new energy sector. To produce “green” (i.e., clean) hydrogen, we first need a source of energy that itself is fully decarbonated. We therefore had to stretch the investment universe not just to renewable energy sources but also to all suppliers of the equipment needed for producing hydrogen, as well as to hydrogen users. In so doing, we have taken on exposure to the entire industrial spectrum.

- We have outperformed our benchmark, the MSCI ACWI (All Country World Index) by 3.80%, i.e., -5.56% YTD [A € units on a net basis from 31 December 2021 to 13 December 2022] vs -9.36%.

H24: Why this thematic for a long-term strategy?

Alexandre Cornu: Almost $11,000 billion in investments will be made by 2050! It currently costs $6 to produce one kilo of green hydrogen, vs. $2 for “grey” hydrogen. The challenge is to deploy all production infrastructure to lower the green hydrogen production cost three-fold, driven by the goal of developing a competitive and decarbonated energy source. Once that happens, hydrogen will be much easier to use. The hydrogen industry is expected to ultimately generate cumulative revenues of $2500 billion and 30 million new jobs, and to reduce carbon emissions by 15%.

By working with experts from the academic and industrial worlds, CPR AM has built up a conviction that has now become a reality. And now governments worldwide have given us a 10-year head start. The Biden administration, for example, has signed the Inflation Reduction Act, whose objective is to reduce US carbon emissions by 40% by 2030. The IRA includes a very important hydrogen component, with an outright subsidy in the form of tax credit of $3 per kilo of green hydrogen produced. This now makes green hydrogen competitive in the US! In Europe this summer there were two sets of dozens of projects, with public-private financial backing of about €30 billion to develop green hydrogen technologies, infrastructures and uses. On top of that, the Hydrogen Bank is capitalised at €3 billion.

I have mentioned only the US and Europe, but, in fact, there are about 50 “hydrogen plans” worldwide! This is a global industrial outpouring unlike anything we’ve seen in more than a century. It means that everything that was still in the planning stage is now being converted into orders with manufacturers, being built out, and being deployed into real-world uses.

This is only the beginning of this long and beautiful story.

H24: What makes your management approach different?

Alexandre Cornu: Most so-called “hydrogen” funds are passive. Their design is fixed and often concentrated on a limited number of stocks. A large portion of these funds is exposed to equipment makers, makers of electrolysers and fuel cells, and companies with immature technologies and business models, which make them highly volatile.

In fact, we are just beginning to develop uses of hydrogen. This is a slow process but with one great inertia, meaning that, once we get going we’re not going to stop! Based on our long-term view, we decided from the start to take on exposure to all stakeholders. This rather broad universe ultimately gives our portfolio a rather defensive profile.

Our process is well laid out. Taken altogether, CPR AM’s thematic management team covers almost 3500 stocks. During our preliminary work, we identified an investment universe of a little more than 300 stocks. We used filters to ensure that target companies are investible (i.e., with minimum liquidity and sufficient market cap) and that their values are aligned with our impact ambitions. We excluded from our universe those companies that are subject to controversies or that score poorly in our four ESG dimensions (CO2 emissions, water management, healthcare/safety, and management of local communities and human rights).
That left us with 200 stocks in which we can invest and from which we have built up a portfolio of 60 to 80 stocks that is managed actively by reconciling purely bottom-up considerations with top-down ones, i.e., the current equity market environment.

Article written by H24 Finance – December 2022

Alexandre Cornu, Thematic Equity Portfolio Manager CPR AM