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Amazon’s march to net zero

Date: 28 June 2021

Amazon’s march to net zero: Companies that will benefit investors from tech giant’s sustainability drive

Through public momentum and policy implementation, large corporations have faced significant pressure to improve their environmental impact as well as adapt their businesses to incorporate sustainable alternatives to the energy and materials currently used. One sector in particular that is driving this sustainable transition is the technology sector, notably where they source their energy.

We have witnessed an uptick in corporate Power Purchase Agreements (PPA) where companies are completing contracts with renewable energy providers to supply energy at an agreed price for decades at a time. This assures the company can buy energy at a specific price for 10-20 years with an upfront fee which enable the energy providers to complete new projects such as developing wind farms. One company which has been leading this drive is Amazon which also means there is an opportunity for other companies to thrive as the technology giant begins this transition.

Amazon is a global powerhouse because of its ecommerce business and booming cloud computing operation. It has naturally taken advantage of trends accelerated by the Covid-19 pandemic and as a result, its cloud business in particular is involved in almost every element of home life, from streaming to being able to work from home and even ensuring education providers were able to offer home learning.

As such, it is innovative and agile, but this can lead to accusations that it does not take sustainability seriously. However, Amazon is currently embarking on an ambitious strategy to go net zero by 2040 and drastically reduce its reliance on carbon.

As part of this, it has bought 100,000 electric vans and plans to expand its reliance on renewables considerably in order to reach this target. However, from an investment perspective, even Amazon still comes with its risks despite the company’s size, reputation and power. Investors must rely on the continued adoption of cloud-computing, e-commerce, regulation and competition to maintain Amazon’s growth.

Given Amazon’s abilities, there are a number of companies it relies on to provide this service. As a result, there are several businesses that will help Amazon in this march to net zero and will subsequently benefit as a result.

As Amazon pushes to make its operations more environmentally friendly, we have identified three companies that investors may wish to consider as we experience this drive by the technology giant.

DS Smith

Amazon is famed for its rush delivery concept with its Prime service giving you next day delivery. This can be an environmentally sensitive subject as it often means vans going out under capacity and packaging often being unsuitable or oversized.

We have all had deliveries that have come with packaging that is far greater than the size of the item we ordered, but this is becoming increasingly rare. A lot of work is going into packaging and there is a real drive for more environmentally friendly solutions.

DS Smith is a leading international packaging player who is working closely with Amazon to better work out the correct sizing and can offer sustainable and plastic-free solutions. Risks will remain about whether the step change in e-commerce will slow down once when employees return to work and also around rising paper prices, which are a raw material input. However, the research and development by Amazon will help DS Smith in its wider business and further assist them in their drive to become a more sustainable company.

EDPR

Data centres are very energy hungry and as such need a huge amount of supply to help power them. However, increasingly often these energy supplies are coming from renewable sources and we are currently undergoing an upheaval of the energy system, meaning those that can adapt quickly are likely to thrive.

Amazon has recognised the need to power its operations through renewables and as such are looking for PPAs, long-term deals with energy suppliers, to give them certainty of its energy supply through renewable sources over 20 years or more.

One company Amazon works with in this area is Portuguese energy company EDPR, which specialises in renewables and has a strong global presence. PPAs are going to be a key driver for the energy sector going forward as they give the likes of Amazon that certainty that it has renewable energy in place for a number of years, so we can only see that relationship, and ones with other giants, flourishing.

Investing in the renewable energy sector is not without risks as the entrance of further competition, including a number of big oil companies, could put pressure on profitability. The disciplined approach to project selection taken by EDPR, however, should help reduce these risks.

Schneider Electric

The green and data revolutions in technology has wide ranging consequences for industrial companies too. Energy management is becoming a crucial consideration for the likes of Amazon as it has thousands of data centres that need to be kept up and running at all times of the day. Cloud computing firms will not accept any loss in service.

This is where the likes of Schneider Electric can help. It is a French company but a global leader in energy management, selling the likes of circuit protection and electrical distribution infrastructure to Amazon. Given the importance of data centres, its products need to be both intelligent and robust, as well as providing more environmentally friendly backup power should things go wrong.

Schneider Electric is a global industrial business with plenty of diverse end markets that grow at varying rates during an economic cycle. China has led the recovery so far although risks remain if the baton of growth isn’t taken up in Europe and the USA. However, the growth in data centres has been remarkable and is only set to continue which is good news for industrial companies such as Schneider Electric and shows how vital it is to Amazon’s work.

If you would like to hear more on the growing dominance of Amazon and the likely beneficiaries of its sustainable efforts, you can hear more from our Analyst team in our recent webinar, part of The Future of Investing webinar series.

This is a marketing communication and is not independent investment research. Financial Instruments referred to are not subject to a prohibition on dealing ahead of the dissemination marketing communications. Any reference to any securities or instruments is not a personal recommendation and it should not be regarded as a solicitation or an offer to buy or sell any securities or instruments mentioned in it.

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Authors

Ben Barringer

Equity Research Analyst

Harrison Williams

Equity Research Analyst

Sanjay Patel

Global Industrials Equity Research Analyst