Key themes for 2022 and beyond

Executive Summary: Thematic investing is a core part of our investment process at Heptagon. Since 2011, we have published over 50 dedicated pieces of thematic work, and this constitutes our tenth annual review of the key long-term secular trends that we expect to grow in importance over time. The themes we have investigated – many of which are discussed in more detail later in this commentary – not only have the power to capture the imagination, stimulate and cause debate, but also drive a core part of our investment process. Investors can access a range of leading businesses exposed to these trends via the Heptagon Future Trends Equity Fund, which will celebrate its sixth anniversary as a UCITS Fund in January 2022.

Over the past year we have published five new detailed thematic pieces. Four of these comprised brand new topics – telemedicine, micromobility, the pet economy and the metaverse – while the fifth provided an update on the crucial topic of food innovation, given the major structural challenge the world faces in terms of needing to feed its growing population.

Beyond our core thematic work, our quest to better understand the future (and then invest in it) remains ongoing. Lockdown at the start of the year and subsequent travel bans restricted many of our plans, but we were still able to meet with over 80 companies virtually as well as a small handful in the real world.
Your author was also lucky enough to attend two real world conferences (on the pet economy and medtech innovation), albeit both in the UK. In addition, your
author had the opportunity to visit the UK’s first electric charging station as well as the world’s only Amazon salon (for a much-needed haircut). He also ate everything from bugs to meatless burgers. Much of our activity is captured in the Future Trends Blog.

All the themes we uncover share two common factors: their exponential growth potential and an inherent element of disruption. Think of these as a challenge laid in the face of existing business models; things can be done better and more efficiently. We present below a summary of how and where we see
the world changing most rapidly. Please note, this review is non-exhaustive; think of it rather as a series of interlinked high-level perspectives. We continue to believe that as diverse future trends overlap and intersect, they become mutually reinforcing. Few areas of the world will remain untouched. Please read on.

ALTERNATIVE ENERGY

First discussed: “Winds of change” (March 2018); “Everybody loves the sunshine” (January 2020)

2021 blog posts: #5, “Listen to the teenagers”(4 February); #7, “What’s new in the world of wind” (22 February); #31, “Take off for greener travel” (12 August)

Key statistic: 90% of all new energy projects developed in 2021 and 2022 will be green (source: International Energy Agency)

“We are growing solutions to decarbonise the world… the best is yet to come”

Henrik Andersen, Chief Executive of Vestas

Code red for humanity – the scenario where the world’s temperature might increase by 1.5 degrees over the next 20 years without any dramatic cuts to pollution – was a call to arms. It is one, however, that is already being heeded and addressed. Consider that just a year ago, only 25 countries had defined dates when they anticipated becoming net zero carbon producers. Currently, this figure exceeds 120 nations. Combined, these geographies produce over 85% of the world’s carbon emissions (per the International Energy Agency). That’s progress.

Of most note, President Biden of the United States announced earlier this year that the US aims to reduce its 2030 economy-wide greenhouse gas emissions by at least 50% relative to 2005 levels. America hopes to be generating 100% carbon-free electricity by 2035. This move represents a welcome shift in policy, particularly given the historic antipathy towards the topic expressed by President Biden’s predecessor.

Meanwhile, the European Union – already a leader in addressing climate challenges – stated in July that it aimed to make the continent climate-neutral by 2050. By this time, all diesel and petrol cars will also have been banned.

It’s possible to see policy in action already. Around 30% of global electricity produced currently comes from renewable sources. In the US, more electricity was generated from renewable power than coal during 2020, the second consecutive year this has been the case (per Bloomberg New Energy Foundation, or BNEF). Further, in the first half of 2021, renewable energy installations in America hit a new all-time high, with a 17% increase in capacity added year-on-year (per Future Crunch). A similar picture is also visible in Germany, the world’s fourth largest economy. Here, renewable energy production exceeded that of coal, natural gas and oil combined for the first time last year, with wind alone producing more than coal (data also from Future Crunch). Finally, consider that the UK is already halfway to reaching its 2050 goal of carbon neutrality, with an 11% drop in greenhouse gas emissions recorded over the last year (per Yale University).

The main reason for such progress is simply that costs continue to fall. Over 60% of the wind, solar and other renewables that came on stream last year were cheaper than fossil-fuel equivalents (per IRENA). In the last decade, the levelized cost of energy (or like-for-like cost) of onshore wind has, for example, fallen by 63% (per BNEF). Costs will likely fall further still, given scale gains and technology improvements.

The future will be SWB: in other words, integrated energy solutions combining solar, wind and battery storage. If the decline in onshore wind costs is impressive, then consider that lithium-ion battery costs have dropped from over $1000/kWh in 2010 to $137/kWh by last year and should fall by the $100/kWh mark by 2023 (per BNEF). Today, solar and wind make up just 9% of the world’s energy mix, but by 2050, the figure could be as high as 50% (BNEF).

Current shortages of some conventional fuels may focus the minds of policymakers further. Little wonder then that over $500bn has already been committed to decarbonisation projects during the last year, with venture capital investments in this area growing at five times the rate of the overall industry (per PwC).

Of course, there is still more to be done. Some estimates (for example, from BNEF) suggest that more than $120tr of cumulative investment will be required by 2050 to reach the currently stated renewable targets of all countries. At COP26, the UN recently reiterated its goal for global net zero emissions by 2050. While this is clearly a huge sum, the figure comprises both supply-side initiatives (clean power generation, energy storage, transmission and distribution) as well as demand-side projects (energy efficiency, transport electrification, emissions reductions technologies etc). This also constitutes a logical segue into our next topic, the car of the future. For the record, cities (and their transport networks) are responsible for around 60% of total carbon emissions (per the World Economic Forum). Improve the car and you can reduce carbon.

THE CAR OF THE FUTURE

First discussed: “The long road to autopia” (April 2015);

2021 blog posts: #4, “The autonomous car is just around the corner” (27 January); #16, “City of abandoned scooters” (22 April); #21, “TOWIE (or, The Only Way is Electric)” (25 May); #29, “Quiz time” (22 July)

Key statistic: With battery costs continuing to fall, electrical vehicles and vans will reach pricing parity against conventional fossil fuel-powered vehicles between 2024 and 2027 (source: UBS and Bloomberg New Energy Foundation)

“The long-awaited inflecton point for the electric vehicle has arrived”

Kevin Clark, Chief Executive of Aptiv

If the future of energy is SWB, then the future car will be CASE: connected, autonomous, shared and electric. To keep things in perspective though, electrification is the most salient and visible of these four (mutually supporting) drivers. Per our observations about alternative energy, electric vehicles constitute the single most important technology to curb and reverse carbon emissions in the transport sector. It’s therefore impressive to consider the rate of acceleration (no pun intended) in electric vehicle sales. Over 3m such vehicles sold in 2020 compares to a figure of just 17,000 two decades prior. Further, for every doubling of battery production, costs fall by an estimated 25% (per MIT).

Norway perhaps represents a sign of things to come. It became the first country in the world to record more sales of cars powered by electric engines than by petrol, diesel and hybrid engines over the course of a year. In 2020, BEVs (battery electric vehicles) made up 54% of passenger car sales, up from 42% the year prior. The country is on course to ban new petrol and diesel cars by 2025. However, to put Norway’s progress in context, fewer than 10% of all cars sold globally so far this year have been electric (all data per Future Crunch).

The good news is that BEV penetration estimates (i.e. their share of the total auto market) have increased by over tenfold in the last five years, with current industry consensus assuming around 15% penetration by 2025 and 30% by 2030. 18 of the top-20 auto manufacturers have announced firm commitments to produce electric vehicles, and some 400 new consumer models of this nature are set to launch in the coming five years (all data per Aptiv). Take GM as one example. It has stated that it intends to invest $27bn in this area between now and 2025, launching 30 new models. As an indicator of current progress, over 20% of all new cars produced over the summer were electric (per Energy Monitor).

New models (at cheaper prices) are a necessary but not sufficient condition for electric vehicles to become an entrenched reality. There remains the perennial chicken and egg problem relating to appropriately scaled and dense charging infrastructure. Europe alone will need over 6m public charging points by 2030 in order to meet its stated emissions targets. Today, it has fewer than 250,000 (per the European Automobile Manufacturers’ Association). The recent lengthy queues that many of us have witnessed at petrol stations in the UK in particular serve only to reinforce the case for electric vehicles, in our view.

In the increasingly electric world for the automobile, there is a separate structural shift underway. No longer is the steering wheel the most advanced instrument within the vehicle; rather, it is the smartphone (or something very similar to it). Vehicles are becoming increasingly software defined; controlled by AI, connected to other vehicles, the cloud and the surrounding environment by low latency 5G networks. Even today, the current car has over 100 controllers, 200m lines of code and more than 1,000 functions dependent on multiple controllers (per Aptiv).

The connected car is likely to be the biggest ‘thing’ in the Internet of Things – a datacentre on wheels. Against this background, it should be of no surprise that the autonomous vehicle software market is set for significant expansion, from $30bn currently to $80bn by 2030 (per McKinsey) even if fully self-driving cars may still be some time away. GM’s Chief Executive says to not expect them before the end of the decade.

THE POWER OF DATA

First discussed: “The data deluge” (March 2011)

2021 blog posts: #12, “At the nexus of innovation” (25 March); #20, “A deep dive into deep tech” (18 May); #24, “It’s like the mob taking over New York” (18 June); #39, “Has quantum computing come of age?” (13 October)

Key statistic: There are roughly 5 connected devices for every person on the planet today. By 2030, this figure will rise to 41 per person, equivalent to a total of 350bn devices (source: IDC)

“Data is being created, moved, analysed and stored at an unprecedented and accelerating rate… [it’s] a digital tsunami”

Charles Meyer, Chief Executive of Equinix

All industries generate data. In some ways, it would be possible to contend that the internet powered us through the pandemic. Data consumption grew 30% year-on-year in 2020 (per the World Economic Forum), but this is just the tip of the iceberg. Our initial 2011 thesis outlined in The data deluge essay contended that the amount of data produced and consumed would continue to grow exponentially. A decade on, there is no sign of this slowing down. Over 2bn connected devices will come online in the next 12 months (per Microsoft), but by 2050, 1tn devices could be connected to the internet (per IDC).

Just under 60% of the planet is currently online, implying that there is another 40% still to convert. Further, while almost everyone we know has a computer in their pocket with access to a global information network (i.e. a smartphone), we’re only scratching the surface of what we can do with them. A forecast doubling (at least) of broadband speeds and WiFi connectivity over the next two years (per Cisco) implies even more data will be created. Maybe if you live in Silicon Valley, then topics such as cloud and software-as-a-service seem old hat, but do not forget that fewer than 25% of corporate workloads globally have been moved into the cloud. This is what ‘digital transformation’ really means. Ask IBM (the source of the above statistic) where the world is in terms of artificial intelligence adoption and practical implementation, and the figure is markedly lower, at less than 5% of that which is possible.

Whereas cloud speaks to storage and artificial intelligence speaks to analysis, data have no value unless they are secured appropriately. The cost of failing to do so is significant. Losses from cybercrime totalled more than 1% of global GDP in 2020, with the World Economic Forum estimating that this is equivalent to $2.9m every minute. It is perhaps no surprise then that the value of the total cybersecurity market has expanded 30-fold since 2005, with the industry being worth $124bn in 2019.

By the end of next year, this figure could be almost 40% higher (at $170bn, per Darktrace, a leading player in the field), although there are good reasons to believe this estimate to be conservative, especially as the number of connected devices only grows.

ONLINE (AND CASHLESS) SOCIETY

First discussed: “Just the tip of the iceberg” (February 2014); “Cash dethroned” (May 2013)

2021 blog posts: #3, “Shop online and help save the planet” (20 January); #6, “The future, according to Dan” (11 February); #11, “Visit Ealing and see the future of retail” (16 March); #15, “Greener spending” (14 April); #32 “Everyone’s hair is on fire” (19 August)

Key statistic: Over $1 in every $5 was spent online last year versus 1-in-7 a year prior (source: Mastercard)

“Customers have embraced all forms of digital payment. [This is] indicative of permanent shifts in consumer behaviour”

Dan Schulman, Chief Executive of PayPal

Where best to see data at work than in the hands of Millennials? More than half of the US population comprises the Millennial or younger (i.e. born from 1981 onwards), and these population cohorts are undoubtedly the most hyper-connected. Watch consumer behaviour here to understand the future of both commerce and payment, for the two are inextricably connected.

The emerging paradigm has the consumer at the centre. Customers want not just sustainability but also efficiency; think deliveries within no more than an hour (or one day at the absolute extreme) made by autonomous vehicles (perhaps even drones) with products arriving from warehouses powered by green energy. We’re not quite there yet, but there is growing evidence suggesting that this vision will become an increasing reality.

What we already know is that whereas in 2019, $1 in every $7 was spent online around the world, by the end of last year, this figure had grown to $1 in every $5. In the new digital-first era, consumers will logically seek to buy through the digital channel. Some 66% of US consumers say that they have increased their spend via their mobile phones relative to a year prior, while 55% say the same about merchant websites. When asked about favoured payment mechanisms (versus 2019 levels), contactless, mobile wallet and QR code rank most highly (all data per Mastercard). No surprise then the number of cashless transactions is forecast to grow almost threefold globally between now and 2030 (per PwC). Or, as Michael Miebach, Mastercard’s Chief Executive, recently put it, “the race to digital is clearly on.”

If the future for retail is online, then this has clear implications. Consensus forecasts assume at least 10 percentage points of online retail growth at the expense of physical for most developed markets over the next five years. Supply chains need to adapt. Warehouses purposed for online retail activities require around three times as much space as those supplying physical stores. This is a function of a broader product range (the ‘long tail’), products shipping in packets rather than pallets and higher quantities of returned goods.

For context, whereas a typical Walmart store may carry 150,000-200,000 SKUs (stock-keeping units), a newbuild Walmart warehouse could contain over 10 times this amount, or up to 3m units. Another important consideration is that post-pandemic, almost all retailers have sought to build larger inventory levels in order to pre-empt potential shocks to the system. Over the last five years, the typical warehouse size (as measured by square footage) has increased by around 50%. However, this is not enough.

The acceleration of e-commerce/ digital-first trends means that demand continues to outpace supply. Prologis (the source for all the above data) estimates that in the US, this imbalance is equivalent to 140 million square feet over the next five years. Given that over 45% of small and medium businesses currently do not have an online presence (per PayPal), even this estimate – and that for online retail growth – may prove conservative.

HEALTHCARE AND FOOD SOLUTIONS

First discussed: “Reinventing healthcare” (November 2012); “Healthcare transformed” (April 2013); “You are what you eat; health, wellness and innovation” (October 2014)

2021 blog posts: #2, “Hot topics in healthcare” (15 January); #8, “Doctor’s orders” (26 February); #9, “Food for thought” (5 March); #14, “Fake steak and test tube
tomatoes” (8 April); #25, “Eat bugs!” (23 June); #34,. “The future is meatless” (9 September); #38, “The marvels of medtech” (6 October); #40, “The other big food challenge” (22 October)

Key statistic: Nearly 700m people are undernourished, but at the same time, 2bn adults are either overweight or obese (source: World Economic Forum)

“We are just touching the tip of the iceberg [in terms of treating diabetes]”

Karsten Munk Knudsen, Chief Finance Officer of Novo Nordisk

“[…even if the removal of sugar from food products is] a ball that’s only gaining in momentum”

Edmund Scanlon, Chief Executive of Kerry Group

Data has an impact in every domain. Consider that within the healthcare space, medical knowledge is doubling every 73 days currently, compared to every 3.5 years a decade ago (per ASCO). This quantum leap has been enabled by a combination of better processing power, algorithms and machine learning outcomes. Thought of another way, advances in technology are driving advances in medicine. DNA sequencing costs have, for example, fallen by a factor of 30 since their commercial launch in 2003, now costing less than $500 per sequence (according to Harvard University). Meanwhile, the development of next-generation cancer treatments have resulted in the largest-ever year-on-year drop in cancer-related mortality in 2020 (per the American Cancer Society).

While such progress is undoubtedly encouraging, there is still much to be done. More than 90% of new drugs fail clinical trials (per Goldman Sachs), which matters, particularly if speed is of the essence – say, in the case of the recent pandemic. A more supportive regulatory environment could certainly be helpful, but perhaps better pre-planning – or the use of more data, more efficiently – might lead to better outcomes.

Furthermore, medicine (as well as better lifestyle choices) can help resolve one of the major disconnects facing the world currently. It is a shocking statistic that at the same time as nearly 700m people globally are under-nourished, over 2bn adults are overweight or obese. Unhealthy diets have become a leading cause of mortality, killing more people globally than drugs, alcohol and tobacco combined. In the US alone, obesity-related costs to the healthcare system totalled $480bn in 2020 (data per the World Economic Forum and the Centre for Disease Control respectively).

The problem is compounded by the fact that we currently waste 1.3bn tonnes of food annually, which is equivalent to around a third of all food that is produced for human consumption. This represents a loss of $1tr per annum, a figure which is estimated to hit $1.5tr by 2030. Further, food waste is often overlooked as a driver of climate change, with wastage being responsible for around 8% of global greenhouse gas emissions (all data per the United Nations Food & Agriculture Office). It is also worth bearing in mind that up to 40% of this wastage occurs before the food even reaches markets, driven primarily by either improper use of commodity inputs or lack of storage (per Boston Consulting Group).

The good news, however, is that there are solutions at hand. Think of them as being (at least) threefold. Begin with treatment. Only half of those with obesity currently seek treatment and only half of this cohort actually receive the right treatment. This data comes from Novo Nordisk, one of the leading drug manufacturers in the field. The company’s latest medication (branded as ‘Wegovy’) can help patients lose an average of 15% of their body weight, almost double the rate demonstrated by other prescription treatments. Expect this drug to be increasingly rolled out globally in 2022.

Next, taxation should be used increasingly as a strategy. Consider that the introduction of a soda tax in California led to over a 10% reduction in sales of sugar-sweetened beverages in the state (per Goldman Sachs). Many other states and indeed countries around the world have implemented similar policies, although there remains room for major improvement.

Finally, innovation matters. 85% of consumers want to know what their food product contains, while over 60% say they now pay more attention to the nutritional benefits of products when making purchase decisions (per Kerry Group). Correspondingly, agtech start-ups raised more than $26bn in 2020, up 15% year-on-year (per AgFunder). To take just two examples, the expansion of the alt-meat category – which we discuss in more detail later in this report – could win a share equivalent to 10% of the global meat industry by 2030. This prize could be worth up to $140bn (per Barclays). Meanwhile, innovations in vertical farming combined with product delivery by drones – the benefits of technology overlapping – mean that some forecast a scenario where this approach could cover up to 80% of food demand in urban areas by 2030 (on estimates by Credit Suisse).

BEYOND FOOD WASTAGE: PLASTIC AND THE CIRCULAR ECONOMY

First discussed: “Winning the war on waste” (September 2018)

2021 blog posts: #10, “The best idea we have heard for some time…” (11 March); #19, “The toxic boomerang” (12 May); #22, “The future’s multi-coloured (and made of many materials)” (3 June); #28, “The magic of mushrooms” (15 July)

Key statistic: The equivalent of a truckload of plastic enters the oceans every minute. As a result, there are 5tn pieces of plastic in our oceans, enough to circle the world over 400 times (source: World Economic Forum)

“It is the worst of times, but it is the best of times – because we still have a chance”

Sylvia Earle, marine biologist

It’s not just food we waste. Humans produce 1.3bn tonnes of garbage annually. This is equivalent in size to over 3,500 Empire State Buildings. Viewed from another perspective, the figure is even more shocking – since the end of the Second World War, less than 10% of all plastic produced by humans has been recycled (per the World Bank). Things are also getting worse rather than better. 2020 saw a 30% increase in plastic waste relative to the prior year, exacerbated by the pandemic; think of the rise in single-use products. Some 1.6bn face masks are estimated to have entered oceans last year. On average, each will take 450 years to degrade (per Statista).

Plastic pollution is currently costing the world around $2.5tn annually (per Jefferies). Put simply, humankind is polluting water faster than nature can recycle and purify it. This is only storing up future problems, both environmental and health-related. Governments, businesses and consumers all have a clear role to play in changing these dynamics.

Fortunately, over 70% of Americans agree that it’s important to take “radical action” on this crucial challenge (per IPSOS). As our above-mentioned Blog pieces also describe, innovation in many different domains is already underway.

Change is coming to all industries. To rephrase one of Charles Darwin’s most famous dictums, those businesses able to manage change most responsively will be the ones best placed to survive the future.

Alex Gunx, Fund Manager