Market Review

The MSCI World Index (AUD) returned +2.5% in December, with declining stock prices (in local currencies) being positively offset by a strongly depreciating Australian Dollar.

Stock prices drifted lower in the month, driven in part by the Federal Reserve’s outlook for fewer rate cuts in the year ahead. The Fed did cut interest rates by 0.25% in December, but its revised guidance indicated fewer rate cuts in 2025 than previously expected. Stocks reacted by selling off, with the S&P 500 falling – its third negative month of the calendar year.

Concerns over potential trade tariffs by US President-elect Donald Trump continue to weigh on equities with China exposure in particular. Political upheaval in France and Germany also soured the mood for the region.

The European Central Bank cut interest rates by 25bps to 3%, with weak growth forecasts paving the way for more easing in the future. Meanwhile in the UK, persistent inflation led the Bank of England to hold rates at 4.75% at their last meeting.

Elsewhere, Japanese stocks performed strongly on the back of dealmaking news flow and expectations that the current investor-friendly trend in Japanese corporates would continue. Asia Pacific equities, however, lagged significantly.

In the global market, Consumer Discretionary and Communication Services were the strongest sectors while Materials and Real Estate were the weakest, followed by Energy.

Fund Review

The fund returned +0.6% over the month.

Trane Technologies (Resource Efficiency) was the largest detractor. The company is a world leader in air conditioning systems and services.  After a very strong run in 2024, expectations for the stock are very high, with its valuation at the highest level for over ten years.  This led us to reduce our weighting at the beginning of the month ahead of a subsequent sell-off.

Novo Nordisk (Healthcare) also performed poorly.  The shares were hit hard when the company released clinical trial data for CagriSema, their next generation weight loss drug. Headline average weight loss on the therapy was 22.7%, missing hopes for 25%, but we think the market reaction misunderstood the detail of the data. Novo remains in a tight duopoly for the life-changing GLP-1 class of medicines and has strong growth ahead of it.

From a thematic perspective, Water Management was the weakest performing – primarily driven by the position in Xylem, while Education was positive due to the holding in Grand Canyon.

Outlook

Although President Donald Trump does stand quite explicitly against much of the transition to a more sustainable economy, we observe that historically, the strong deregulatory agenda put forward by Republican administrations has tended to support the mid-cap stocks that our strategy is most exposed to.

We believe this is one of several good reasons to be optimistic regarding what’s to come, despite the last few years being difficult for WHEB and impact-led strategies in general.

Sentiment for impact investing is very low which can be seen in the portfolio valuation relative to local markets, such as Price to Earnings or Price to Book Value ratios. Markets usually turn when the last marginal seller has left.

The urgency for climate action has never been greater and the means have never been more economically attractive. 2024 had a series of extreme weather events (e.g., hurricanes Helene and Milton in Florida, storm floods in Valencia), while clean power costs (e.g., solar and onshore wind) are now well below fossil-fuel based alternatives. Electric vehicles also often beat their corresponding internal combustion engines option on a total cost of ownership analysis. This will enable an increasing number of environmental markets to grow independently of the political environment.

We are confident that most of the more strongly underperforming stocks in our portfolio have been hit by short-term issues the market is focusing on while the fundamental, longer-term investment case is as sound as ever.

We therefore remain excited about the future and convinced that the opportunity has never been greater.

Can’t take the heat? Take out the carbon

By Chloe Tang

If you’ve ever baked a pizza, ironed a shirt, or dried your socks on a radiator, you’re more familiar with industrial heat than you think. Scale that up a few hundred times, and you’re in the world of factories and production lines, where heat powers everything from drying cereal to sterilising surgical equipment or making cement.

Yet, these essential processes come with a hidden cost: they are major contributors to CO₂ emissions and thus to climate change.

Industrial Processes are essential, but come at a cost

Globally, industrial processes account for 30% (Figure 1) of total energy consumption and emit around 9 gigatonnes of CO₂ annually (Figure 4), roughly one-quarter of global CO₂ emissions.

Figure 1: Share of total global energy consumption by sector (1990-2022)¹

In Europe, heating alone represents 66% of industrial energy consumption, with nearly 80% (Figure 2) of that heat still generated from non-renewable sources.

Figure 2: Industrial energy consumption in the EU by application and source²

The issue boils down to the extreme temperatures required. Depending on the process, industries demand heat ranging from 100°C to >1,500°C. The higher the temperature, the harder it is to produce the required heat without burning fossil fuels. And that’s where the problem lies.

Industries that rely on high temperatures have operated the same way for decades. Switching to cleaner heat processes would require overhauling infrastructure and technology – an expensive and logistically challenging task.

The good news. Up to 60% of industrial heat demand could be electrified today with existing technologies. With continued innovation, this figure could reach 90% by 2035.⁴ And the bad. As of 2020, only 3% of Europe’s industrial process heat had been electrified.

But, as the saying goes, “Where there’s a will, there’s a way.” And the will is certainly there. For example, in 2024 the EU revised its Industrial Emissions Directive (IED 2.0), implementing stricter rules on industrial emissions. The revised directive sets an overall emissions reduction target of 40% by 2050.³

Solutions in Progress

Renewable energy solutions are steadily entering the industrial heat sector, especially for low- to medium-temperature applications (up to 600°C) in industries such as food and beverage, manufacturing, and paper and pulp.⁴

Figure 3: Industrial processes require a wide range of temperatures⁵

Technologies like electric boilers and heat pumps are becoming more mature and cost-competitive, enabling factories to transition without major disruption.

UK-based Spirax Group⁶, one of our portfolio companies, is at the forefront of industrial heat electrification.

Its TargetZero initiative focuses on electrifying industrial steam production methods with electric boilers and retrofit e-boilers, enabling cleaner energy transitions without major system changes. Paired with green electricity, this approach reduces Scope 1 and 2 emissions.

Alongside this, their PoweringZero initiative was launched for precise, energy-efficient heating up to 700°C, offering products like electric process heaters, heat trace or high-temperature heat pumps that recycle waste heat.

Tackling High-Temperature Processes

Cement, iron and steelmaking industries alone contribute over 50% (Figure 4) of global industrial carbon emissions annually. Their reliance on extreme temperatures (>1,000°C) makes decarbonisation particularly challenging, but there are examples of innovation.

Figure 4: Direct CO₂ emissions by type of industry⁷

In iron and steelmaking, electric arc furnaces provide a cleaner alternative by using electricity to melt scrap iron or steel. While they achieve the >1000°C temperatures needed their energy demands are substantial, and if powered by non-renewable electricity carbon emissions will remain high.

Cement production presents an even tougher problem. Rotary kilns, used for calcination (a chemical reaction requiring extreme heat), are traditionally powered by burning fossil fuels. Electric kilns are feasible and show potential, but the technology is still too early for commercial use.

Collaboration in the chemicals industry was a notable 2024 success story. Linde, another WHEB portfolio company, partnered with chemical manufacturers BASF and SABIC to launch the first large-scale demonstration plant for electrically heated steam cracker furnaces. These are used in breaking down petrochemical compounds to smaller molecules like ethylene or hydrogen, which need to reach temperatures of up to 900°C. This breakthrough has the potential to reduce CO₂ emissions by up to 90% compared to conventional methods.⁸

While challenges remain, such advancements highlight significant progress and offer promising solutions for decarbonising energy-intensive industries.

Turning Challenges into Opportunities

Industrial electrification faces both technological and economic challenges, with economic hurdles being a major barrier to adoption. The high upfront costs and downtime required to switch infrastructure can be discouraging for companies. In the long run, however, ongoing energy expenses have a much greater impact on total ownership costs. Unfortunately, in many regions, electricity costs more per unit of energy than fossil-based heat sources, despite being more efficient to use. This anomaly means that electricity-based heating can only be competitive where it is highly efficient – reducing the total amount of energy being used and offsetting the higher unit cost of electricity.⁹

It is for this reason that heat pumps are particularly attractive for low-to-medium temperature industries. Their ability to harness waste heat makes them highly efficient, lowering energy consumption and costs over time, even with higher electricity prices. When paired with thermal storage, companies can participate in demand response programs, further reducing energy expenses by shifting operations to low-demand periods.

For higher-temperature industries it’s not so simple, due to their substantial energy needs. Nevertheless, the uncertainty surrounding future carbon pricing and fossil fuel costs adds a compelling incentive for companies to transition sooner rather than later, to avoid potential financial and regulatory disadvantages.

Addressing these financial uncertainties will be critical to fostering wider adoption of electrification in industry.

Recent initiatives, such as the Regulatory Assistance Project’s 10-point plan,¹⁰ propose strategies to accelerate progress. These include setting clear electrification targets, aligning high taxes and levies on electrification with fossil fuels, increasing funding for electrification projects, enhancing grid planning, and supporting research into industrial competitiveness under electrification.

Aligning economic policies with technological advancements can help industries overcome these barriers, making industrial electrification a practical and sustainable path forward.

Decarbonising industrial heat is one of the most significant challenges in achieving a net-zero future, but it is not insurmountable. With up to 90% of heat demand potentially electrifiable by 2035, the path forward is clear. Through targeted policies, technological innovation, and investment in electrification, industries will be enabled to transition to cleaner, more sustainable processes.

¹ International Energy Agency (2022) IEA Energy and Carbon Tracker 2022 (Figure 1)
² De Boer, R., Marina, A., Zühlsdorf, B., Arpagaus C., Bantle, M., Wik, V., Elmegaard, B., Corberán, J., and Benson, J. (2020) Strengthening Industrial Heat Pump Innovation, Decarbonizing Industrial Heat (Figure 2)
³ https://environment.ec.europa.eu/news/revised-industrial-emissions-directive-comes-effect-2024-08-02_en
⁴https://www.mckinsey.com/industries/industrials-and-electronics/our-insights/tackling-heat-electrification-to-decarbonize-industry
⁵ Spirax Group (2024) 2024 Capital Markets Day (Figure 3)
⁶ https://www.spiraxgroup.com/en
⁷ International Energy Agency (2023), Direct CO2 emissions from industry in the Net Zero Scenario, 2000-2030 (Figure 4)
⁸ https://www.linde-engineering.com/products-and-services/success-stories/2024/it-is-electrifying-steam-crackers-go-electric
⁹ https://www.chemistryworld.com/news/electrification-of-process-heat-stands-to-slash-industrys-emissions/4020003.article
¹⁰ Rosenow, J., Oxenaar, S., Pusceddu, E. (2024) Regulatory Assistance Project. Some like it hot: Moving industrial electrification from potential to practice