Megatrend Investing 2025 and beyond: ASX players to capitalise on the clean energy transition

Welcome to the second edition of Megatrend Investing 2025 and beyond, where I discuss themes for the future and explore which ASX players provide opportunity in each.

Investors often spend significant time analysing market movements in the context of the 24-hour news cycle and checking their portfolio exposures accordingly. It is easy to get bogged down in the day-to-day headlines, whether it be the US inauguration or the AI stock crunch. We tend to lose sight of the bigger picture. This is where investing megatrends come in.

Classifying a megatrend

Before we make investment decisions, it is crucial to set parameters over how we identify a megatrend as opposed to a passing fad that triggers market momentum.

Megatrend or thematic investing refers to making investment decisions based on gaining exposure to companies who may service perceived themes or global megatrends.

For the purpose of this series, we consider a megatrend as an emerging social, economic, political, environmental or technological change that is characterized by an extended duration (10+ years) with ubiquitous implications that have impact on the general population.

Transition to renewables

What is renewables investing?

The terms ‘renewable’ or ‘clean energy’ can be an ambiguous phrase for investors and are often used interchangeably – however there is a technical difference between the two.

Renewable energy refers to sources that naturally replenish themselves such as solar or wind power, whereas clean energy can be any source with minimal environmental impact like low emission nuclear power. To put it simply, all renewable energy is clean energy however not all clean energy is renewable.

For the purpose of this article, we will be using these terms interchangeably.

So why invest?

A Finder survey observed that almost half of Aussie investors take ethical or ESG considerations into account when investing. Investors have become cautious of companies exposed to coal, given uncertainty from Western governments’ efforts to reduce carbon dioxide emissions.

Additionally, studies have concluded that renewable energy is the cheaper and more efficient alternative to traditional fossil fuels. Intuitively this is due to the generation of electricity costing virtually nothing once a wind or solar farm is in place. This contrasts with coal and gas that requires perpetual extraction from the ground to provide power. Australia’s vast resources also place it in a unique position to capitalise on the global shift from fossil fuels to more sustainable alternatives. Chart 1 show analyst projections for falling wind and solar costs (below global coal and gas) within this decade, helping increase uptake.

A report from US think tank RMI, shows that comparatively, the cost of fossil fuels has stayed about the same over the last 140 years. Co-author, Sam Butler-Sloss states that fossil fuels are not getting cheaper due to the fact they are commodities, not technology. On the other hand, renewables are technology based therefore can take advantage of learning curves. The technology required to extract and refine these fuels undergo far fewer iterations than renewable tech, which are mass produced – a characteristic of technologies with fast learning rates. 

In recent coverage of Aurizon (ASX:AZJ), Morningstar’s Adrian Atkins shared his thoughts on climate change and its effect on fossil fuel-adjacent investing. Whilst emerging Asian nations continue to rely on their younger coal power stations, most coal power stations in the West are typically aging and approaching the end of their useful lives. This makes replacing them with renewable energy alternatives or nuclear power much more likely. 

Latest reports from the Department of Climate Change, Energy, Environment, and Water (DCCEEW) project that the electricity sector in Australia will be 82% renewables by 2040, due to the impact from the Capacity Investment Scheme (CIS) which accelerates investment in renewable energy generation.  

The Trump dilemma

During 2024 in the US clean energy stocks were penalised by high interest rates and anti-ESG backlash amidst political scrutiny. US sustainable funds recorded their second year of net outflows in 2024 whilst investors poured support into the wider market.

After the election of President Trump last November, there now appears to be a contrast between the Albanese government’s vision for Australia with Trump’s favourite ‘drill baby drill’ battle cry.

If elected, the Coalition government have proposed to slow the growth of large-scale renewable energy and burn more fossil fuels until a nuclear industry is developed in Australia. The solar and wind vs nuclear energy case has been a contentious topic in the upcoming election with differing perspectives on the cheaper alternative. The direction Australia takes will impact major uranium players on the ASX include Paladin Energy (ASX:PDN), Deep Yellow (ASX:DYL) and Silex Systems (ASX:SLX). Morningstar currently does not have these Uranium players under coverage.

Key risks to consider before investing

It is important to note that there are several risks when it comes to basing your investment decisions on perceived megatrends.

It is important to note that there are several risks when it comes to basing your investment decisions on perceived megatrends.

Identifying a megatrend

Having the ability to spot a megatrend before the wider market requires an informational or analytical edge. Furthermore, being correct in that assumption requires an extra element of luck.

The megatrend must be profitable

Simply identifying an overarching trend and investing does not guarantee returns. Attempting to time the market by jumping in early or just as the market frenzy begins can lead to greater losses if identified improperly. Anecdotally, I made a similar mistake diving into the lithium frenzy of 2022 as the growing electrification trend seemed promising. By the time I invested, the entire market had their hands full with lithium picks. This led to oversaturation as companies moved to take advantage of lithium prices, which have since suffered a long bear cycle. It is crucial to have sound reasoning behind why the company is a valuable addition to your portfolio and the long-term thesis must hold.

Selecting the right companies

When the market perceives momentum and the barriers to entry are reasonable, new entrants are backed by significant capital and rush to service the megatrend. This leaves the market flooded with investment options, many of which can be highly experimental. An example of this is the demise of the buy-now-pay-later hype that saw several companies expand into the space with hopes to exploit the megatrend.

Ultimately, only 1 or 2 of these may became successful whilst the majority struggled. Megatrends can quickly snowball into a ‘winner-takes-all’ situation where only a handful of companies attract significant returns and the majority fall into an abyss. Buy-now-pay-later operators offering credit with minimal fees were seen as a threat to traditional financial institutions, however banks were quick to adapt their own BNPL schemes and it’s had an immaterial impact on returns since.

Paradoxically, consumers hate optionality. An abundance of choice with minimal company differentiation makes it anyone’s game. There is not always a clear or rational way to predict which companies may benefit from a megatrend. Even if a company appears promising, it must be purchased with a reasonable margin of safety should the megatrend not eventuate. Furthermore, exhibiting sound fundamentals helps avoid it being a purely speculative pick.

Renewables risk

On the renewable energy front, it is irrational to make sweeping assumptions about a 180 transition away from fossil fuels – it is more likely going to be an incremental change. The replacement of fossil fuels with renewables in developed countries is too slow to offset the rapid demand from emerging countries.

Furthermore, the invasion of Ukraine solidified the role of oil and gas as critical to the globe’s current power generation requirements. Another notable point is that renewables will require more gas station power backup as Australia transitions to a decarbonised economy. These provide a reliable source of power during periods of peak demand and as an accompaniment to intermittent wind and solar.

ASX players primed to benefit

At the right price, the below companies provide the value proposition to capture the transition to renewables.

Origin Energy Limited ORG ★★

• Fair Value Estimate: $9.00
• Share Price: $11.03 (as at 29/01/25)
• Moat Rating: None
• Uncertainty Rating: High
• Price to Fair Value: 1.22 (Overvalued)

Origin Energy (“Origin”) controls approximately one-third of the Australian energy retailing market. The company offers exposure to relatively defensive energy retailing and highly volatile liquified natural gas exports.

Elevated prices for electricity and liquified natural gas suggest the company should be tracking well in fiscal 2025. However, Morningstar expects future growth to be driven by renewable energy and battery developments, as well as a 23% investment in UK-based renewable retailer, Octopus Energy.

Origin’s domestic retailing business has experienced strong growth in the past decades however this is unlikely to occur given all state-owned retailers are now privatised. Origin and AGL Energy collectively command 80% of the market with regulators unlikely to allow further consolidation among the majors. Regulations have largely compressed retail profitability in response to rapidly rising retail prices and anticompetitive behaviour.

Morningstar analyst, Adrian Atkins, believes in contrast to the retail market, the electricity generation market offers better growth opportunities. Substantial new renewable energy projects still need to be built to meet government targets and offset the closing of aged thermal power stations, with Origin planning to significantly expand its installed renewable capacity.

Meridian Energy Limited MEZ ★★★

• Fair Value Estimate: $5.10
• Share Price: $5.29 (as at 29/01/25)
• Moat Rating: Narrow
• Uncertainty Rating: Medium
• Price to Fair Value: 1.03 (Fair value)

Meridian Energy (“Meridian”) is a vertically integrated renewable electricity generator, accounting for a third of New Zealand's total electricity output. Almost 90% of its electricity is generated from low-cost hydro power plants with the remaining being wind.

The significant hydro capacity is a source of competitive advantage and high returns; however, it increases risk during dry conditions that results in substantially lower production. Margins are squeezed during dry conditions the company is forced to purchase power under costly swaption agreements or the wholesale market.

Morningstar expects capital expenditure to increase as wind farm and other decarbonisation projects are prioritised. We believe the company can maintain its dividend payout target of 80%-100% despite this increased investment in renewable energy and battery storage.

Meridian is able to generate solid returns on invested capital thanks to cost advantages from its low-cost hydroelectric power station. 80% of New Zealand’s power comes from renewable energy with thermal power slated to be close to complete replacement by 2035.

AGL Energy AGL ★★★

• Fair Value Estimate: $12.00
• Share Price: $11.65 (as at 29/01/25)
• Moat Rating: None
• Uncertainty Rating: High
• Price to Fair Value: 0.97 (Fair value)

AGL Limited (“AGL”) holds a market-leading position on investments in renewables or lower-greenhouse gas intensity. It generates close to 20% in the National Electricity Market mainly from coal-fired power stations as well owns a small portfolio of hydroelectric, gas, wind and solar generation assets. Given the scheduled closure of its coal power stations by the mid-2030s, it is aggressively developing new renewable generation and storage.

Relatively high wholesale electricity prices remain elevated to incentive investment in renewables. The firm’s strategy is heavily influenced by government energy policy such as energy targets. Profitability in the medium term is likely to be depressed as Victorian government subsidies support higher-cost coal power stations to keep them operating and allow time for renewable developments to complete.

AGL is well-placed in the medium term as one of the lowest-cost suppliers of electricity on the grid however maintainable excess returns are unlikely. An orderly transition to renewably energy likely requires coal power stations to remain in the grid for a few decades.

The current dividend payout ratio of 50-75% of underlying net profit after tax will likely flex depending on the capital expenditure outlook to help fund the large development pipeline.

Renewable ETFs?

2024 was a tough year for clean energy players battered by the high interest rate environment. The renewables space in Australia is still quite small therefore there are a limited number of ETF options on the ASX available to investors. Notable names include VanEck Global Clean Energy (ASX: CLNE), the first ever green energy ETF on the ASX and Betashares Climate Change Innovation (ASX: ERTH) that invests in companies tackling climate change.

VanEck Global Clean Energy CLNE

Launched in 2021 as the first renewable energy ETF on the ASX, CLNE aims to replicate the performance of the S&P Global Clean Energy Select Index. This index tracks the performance of the 30 largest companies in global clean energy related businesses from both developed and emerging markets. The total investment management fee is 0.65% per annum reflecting $6.50 in fees for every $1,000 invested. The fund’s sector composition is skewed towards utilities with industrials and technology trailing behind. Top holdings include European players Verbund AG who provides hydroelectricity and Neoen who are involved with all aspects of solar, wind and storage facilities across Europe. This ETF is not currently in Morningstar’s coverage universe.

Betashares Climate Change Innovation ERTH

ERTH aims to track the performance of the Solactive Climate Change and Environmental Opportunities Index who is comprised of 100 global companies from sectors that are expected to have a positive climate change and environmental impact. The investment management fee is 0.65% per annum however certain additional costs also apply. One key area of strength for BetaShares Climate Change Innovation ETF is its low Morningstar Portfolio Carbon Risk Score of 9.13 and very low fossil fuel exposure over the past 12 months, which earns it the Morningstar Low Carbon Designation. Top sector holdings include industrials and consumer cyclical followed by tech and basic materials. Electric vehicle manufacturers Tesla Inc TSLA and BYD Co Ltd hold the highest presence with a combined 11% portfolio weighing. This ETF is not currently in Morningstar’s coverage universe.

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