Global Thematics: Earthshots Take on Climate Change

While “Moonshots” attempt to address climate concerns with disruptive technology, more immediate solutions are needed, so what are “Earthshots”? And which ones should investors pay attention to? Head of Global Thematic and Public Policy Research Michael Zezas and Head of Thematic Research in Europe Ed Stanley discuss.

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Michael Zezas: Welcome to Thoughts on the Market. I'm Michael Zezas, Morgan Stanley's Head of Global Thematic and Public Policy Research.

Ed Stanley: And I'm Ed Stanley, Morgan Stanley's Head of Thematic Research in Europe.

Michael Zezas: And on this special episode of Thoughts on the Market, we'll discuss the potential of "Earthshots" as an investment theme in the face of intensifying climate concerns. It's Wednesday, December 14th, at 10 a.m. in New York.

Ed Stanley: And 3 p.m. in London.

Michael Zezas: While climate continues to be a key political and economic debate, it's clear we're moving into a new phase of climate urgency. There's a significant mismatch between the pace of climate technology adoption, and the planet's need for those solutions. Here at Morgan Stanley we've done work around "Moonshots", ambitious and radical solutions to seemingly insurmountable problems using disruptive technology. There are some big hurdles with moonshots, however. First, they require significant political support. Also, the process of gradual, iterative decarbonization technology adoption will occur more slowly than investors expect. Given this backdrop, there's a growing need for urgent solutions. Enter what we call "Earthshots".

Michael Zezas: Ed, can you maybe start by explaining what Earthshots are and what the framework for identifying these Earthshots is relative to Moonshots?

Ed Stanley: So a Moonshot is an early stage technology with high uncertainty, but also high potential to solve a very difficult problem. And for Moonshots, the key investments are in R&D and proof of concept. An Earthshot, on the other hand, is more of a middle stage technology with generally lower uncertainty, proven potential and Earthshots the key investment here is really around scaling the technology quickly and cheaply. And Earthshots are more radical alternatives to otherwise slow and steady status quo in the decarbonization world. And we think about them broadly in two sets. Some are nearer term decarbonization accelerants, and others are longer term warming mitigations and adaptations. And I guess we can get into a bit more detail on examples in a minute. But to your question on frameworks, it's exactly the same framework that we used in Moonshots, and that is academia, patenting, venture capital and then public markets. Academia around breaking new ground and how quickly that's happening. Patenting to protect that intellectual property. Then venture steps in to provide some proof of concept for that idea. And then public investment is typically needed to scale it. And you can track almost any invention over time using that sequence of events all the way back to the patent for the light bulb in 1880, all the way up to carbon capture today.

Michael Zezas: Ed, what types of specific problems are Earthshots trying to solve, and which ones should investors pay particular attention to, both near-term and longer term?

Ed Stanley: So if you look at the nearly 40 billion tonnes of carbon dioxide emissions that we put into the atmosphere every year and you split it by industry, our Earthshot technologies catered to over 80% of those emissions. Be it electrification, manufacturing, food emissions, there's a radical Earthshot technology for decarbonizing each of those. But if we break them down into two categories, we have environmental Earthshots and biological Earthshots. On the environmental side, we have carbon capture, smart grids, fusion energy. And on the biological, we have cell based meat, synthetic biology and disease re-engineering. If we go into a bit more detail on the environmental Earthshots, there's been a lot of noise in fusion in recent days. But I think carbon capture for now is where investors need to focus. And for those thinking how is carbon capture an Earthshot, we've been hearing about this technology for years now, well, the unit economics and tech maturity are only really now getting to that critical balance where it can scale. And the 21 facilities globally that are doing this only capture around 0.1% of global emissions. The largest project in Iceland annually captures around 3 seconds worth of global emissions. So we're still very early days and it's all about scale, scale, scale now. On the biological side, I think the $4 trillion TAM in synthetic biology, which is the harnessing of biology and molecules to create net carbon negative products, is truly fascinating. But the one that piqued my interest the most doing this research, and has actually seen comparatively negligible funding is disease re-engineering. And if the planet does continue to warm, despite our best efforts in decarbonizing and carbon capture, then another 720 million people by 2050 will be in zones that are susceptible to malaria, mainly in Europe and the U.S. And companies using gene editing are having great success. There's a 99.9% efficiency and efficacy of wiping out malaria in the zones that these trials have taken place. Perhaps less pressing immediately than carbon capture, but from a social perspective, with half a million people dying per year from malaria and that number set to grow if warming grows, I don't think it's a theme that investors can ignore for very much longer.

Michael Zezas: Got it. And Ed, it's often said that each decade has one investment theme that outpaces others. And while this decade's in its early innings, there's several contenders. There's the new commodity supercycle, there's digitalized assets and cybersecurity. Another theme in the running is Clean Transition Technologies. How does Earthshots fit into the investment megatrends for the next decade?

Ed Stanley: I mean, that's absolutely fair. Markets move in ebbs and flows of macro themes and micro themes being the winning investment each decade. We had gold in the seventies, oil in the 2000, and then interspersed with that Japanese equities and U.S. Tech in the eighties and nineties respectively. And we do appreciate it's rare when you look back in time for hard assets, which clean tech and Earthshot technologies typically are, for hard assets to win that secular theme crown, so to speak. But we're already seeing a changing of the guards in private markets away from long secular bets on technology, SAS, fintech towards hard assets and security infrastructure. So that is the shift in investing from bits to atoms, which is well underway. And that's happening because not since the Industrial Revolution really have we been so uniformly mobilized to transition to a new paradigm in such a short space of time. But opposing that, I guess we should ask where could we be wrong? Well, for climate tech to be the winning investment trade of the next ten years, the irony is that this trade no longer lies in the tech proving itself necessarily or reaching cost parity. I think we've done that in many cases, that is in the bag. The success or otherwise of this being the secular investment theme for the 2020s will lie much more in reducing permitting bottlenecks, for example, and skills bottlenecks around the installation of some of this Earthshot technology. And that, too, actually is where investors can find opportunities in vast reskilling that's needed. But on balance, yes, this, in my view anyway, is the secular trade of the next decade.

Michael Zezas: And you've argued that a challenging macro environment is precisely the time to dig into Moonshots. It seems that would even be truer of Earthshots, would you agree?

Ed Stanley: I think that's a reasonable assumption, yes. If you look at companies over time, over 30% of Fortune 500 companies were founded during recession years, and many more of those were founded coming out of recessions as well. And crudely, the reasons are twofold. One, product market fit and unit economics have to be ideal in a downturn when you have consumers feeling the pinch and business customers reining back on spending. But secondly, investors pull back on their duration and risk appetite, clearly, and capital becomes more concentrated, and the R&D bang for your buck you get in downturns, ironically, is better. But when you add on to that current stimulus packages like the IRA in the US, you have all of the component parts you need for innovation breakthrough. And I would actually stress even more simply, we need some of these breakthroughs, more physical world breakthroughs than digital ones. Because without these breakthroughs, we simply won't have enough lithium for the EV rollout, for example, we'll be 22% light. It's not just will this happen in a downturn, it has to happen in a downturn, irrespective of the macro. So, yes, now I think is an excellent time to be looking at Earthshots and not simply just at the peak of frothy markets.

Michael Zezas: Well, Ed, thanks for taking the time to talk.

Ed Stanley: It's great speaking with you, Mike.

Michael Zezas: As a reminder, if you enjoy Thoughts on the Market, please take a moment to rate and review us on the Apple Podcasts app. It helps more people find the show.