As the world responds to climate change, investment management evolves too
We are all becoming aware of the big changes that are necessary as we face the challenges of a warming planet. While much of the information in the media has focused on our roles as consumers, commuters, and voters, what about in our investing lives? For a long time, this role has been limited to what’s available for those wanting to invest in “green” opportunities. But what is becoming clear is that climate change will lead to wholesale changes in many sectors, economies and geopolitical calculations that all investors will need to pay attention to.
Perhaps the biggest change in perspective that should be of concern to investors is the scope of the task and the time frame in which change must happen. Just a few years ago, experts who talked about catastrophic climate events likely by the end of the century now say those changes have arrived, making significant action necessary now. The International Energy Agency (IEA) has estimated that to meet the goal of a net zero-carbon world by 2050, the share of fossil fuels in the global energy supply would have to fall from its current 80% to 20% by 2050 – just 28 years from now. The Agency has estimated that reaching the goal of net zero-carbon on a global scale would cost $115 trillion.1
Dynamics of transitions
Changes at the economic and societal level to support these climate goals are complex and involve a staggering number of stakeholders and variables.
Most well known of these is the tension between the developed and the developing economies about who should be making the biggest changes and who should finance the necessary action. While countries like China (the world’s largest emitter of greenhouse gases2) and India are big emitters, the lifestyles of people in the West mean we remain among the largest per capita emitters (see table). Developing countries argue that they have the right to continue to develop and to have emerging middle classes demanding access to the same quality of life as those in Western economies, making reaching global goals on emissions even more difficult.
An obvious question for investors will concern the fate of companies in fossil fuel industries in the short and long term. Evidence of change in the global oil industry is evident already. As recently as 2014, oil investments by the world’s energy companies totalled about $807 billion. Consulting firm Wood Mackenzie has projected it will be only $348 billion in 2021 (see graph).
The International Energy Agency (IEA) notes that, “Fast-evolving government plans to accelerate transitions towards a more sustainable future have created a high degree of uncertainty that is testing the oil industry.”3 Oil companies in the West have been facing growing pressure from environmentalists, investors, and politicians regarding climate change. Several global oil companies have lost legal cases or shareholder votes, forcing them to take a more aggressive approach to cutting emissions. These companies are unlikely to be able to achieve this goal without cutting production.4 Meanwhile, the Saudi national oil company spent much of last year threatening to topple Apple as the world’s most valuable company by stock market valuation. Clearly, these global oil giants aren’t going away anytime soon, but deeper knowledge than ever before – including climate science regulation and politics – will be needed to accurately assess their investment potential.
There will be new and rising industries in a de-carbonizing economy too. Obvious ones to consumers include wind turbine and solar panel production as well as electric car manufacturing. But it is not just the final products but the inputs into these products that will define the dynamics of the burgeoning green industries.
A massive amount of minerals, such as lithium, copper and cobalt, will be needed in the transition to green energy. The typical electric car requires six times as many minerals to build as does a combustion-engine car, and an onshore wind plant requires nine times as many resources to build than a gas-fired plant.5
Understanding the dynamics of these industries, however, is not simple. For instance, while Chile is the largest extractor of copper, Indonesia the largest extractor of nickel and Australia the largest extractor of lithium, China is the biggest processor of all three, necessitating complex supply chains and geopolitical concerns. While the United States has significant deposits of lithium, challenges posed by environmentalists and Indigenous communities make mine approval slow and difficult. Deep industry and economic knowledge will be required to assess the investment opportunities in these industries of the green economy.
The effects of climate change on how and where we should invest are quickly becoming part of the analysis that economists, market watchers, and investment managers undertake in their daily work. We can access all this thinking when managing your investments. If you’d like to know more, let’s discuss these issues at your next portfolio review.
1 The International Energy Agency. Net Zero by 2050. May 2021. Quoted in Angelo Katsoras. Geopolitical Briefing: The monumental challenge of trying to hit climate targets. June 21, 2021. nbc.ca.
2 Government of Canada. Global greenhouse gas emissions. April 2021. Canada.ca.
3 International Energy Agency. Oil 2021: Analysis and forecast to 2026. March 2021. https://www.iea.org/reports/oil-20214,5 Angelo Katsoras. Geopolitical Briefing: The monumental challenge of trying to hit climate targets. June 21, 2021. nbc.ca.
Top Ten Per Capita CO2 Emissions (2018)
Source: Union of Concerned Scientists, 2020 quoted in Angelo Katsoras. Geopolitical Briefing: The monumental challenge of trying to hit climate targets. June 21, 2021. nbc.ca.
Annual Global Spending on Oil Extraction (2012-2024 est.)
Source: Wood Mackenzie, quoted in Angelo Katsoras. Geopolitical Briefing: The monumental challenge of trying to hit climate targets. June 21, 2021. nbc.ca.