The United States has seen devastating wildfires ravage the Pacific Northwest, flooding in NYC and Detroit, droughts in the Southwest, as well as another record-breaking Hurricane IDA recently. It is unmistakably clear some degree of climate change is responsible for the growing frequency of natural disasters, not to mention their increased power in terms of the damage and destruction they leave in their wake.
The International Monetary Fund’s latest World Economic Outlook states that the losses from unmitigated climate change on global "gross domestic product" (GDP) will average 15 per cent by 2100 (with a range of three per cent to 30 per cent).
Likewise, the Network for Greening the Financial System (established by eight central banks following the signing of the Paris Agreement) indicates a reduction of 1.5 per cent to 23 per cent in global GDP.
Yet, at a time of record-high government debt levels, the ability of public fiscal policy to adequately respond to climate change impacts will be constrained. All of this is to say that private capital will play an enormous role in the world’s attempt to solve the problem.
The good news is that scientists still say there is time to avoid the worst-case projections, meaning that investors can stand to benefit from the long-term global shift to a non-fossil fuel, low-carbon economy.
One of our biggest investment opportunities going forward will come in the form of renewable energy (and infrastructure spending to mitigate the potential problems created by extreme weather events).
This is not a new idea for investors, but the scope of investment required for the world to meet its climate goals is massive. Total spending will have to reach an annual average of US$2 trillion by 2030 (for reference, spending in 2018 was US$900 billion), according to the International Energy Agency (IEA). This shift is already happening, as market forces have taken over.
The building of new fossil fuel power generation stations - except in the dirty energy states whose politicians are bribed by lobby money - slowly being phased out, especially coal. Companies and utility providers specializing in solar, hydro, wind and geothermal technology will stand to benefit as a result (nuclear, though able to produce clean energy, appears to lack the political appetite now).
Solar power is in line to be the big winner: IMF research gives it the largest jobs multiplier, making it a logical first choice for politicians looking for bipartisan support regarding infrastructure spending.
The biggest concern surrounding renewables is the lack of “baseload” ability — for example, peak energy demands are not always when the sun is shining the most. For that reason, technologies supporting "energy storage" capacity also must grow.
Importantly, the cost of renewable energy technology has come down dramatically and is now in-line, or cheaper, than dirty energy alternatives. And that is before factoring in the externality costs (pollution, carbon dioxide) of fossil fuels.
Economic analysis as far back as 2015 reveals renewables spending to be US$4.7 trillion in aggregate, or 6.3 per cent of GDP. The transition to renewables would accelerate even faster if fossil fuels weren’t currently benefiting from such massive direct and indirect subsidies from lobbly-money co-dependent governments.
Nonetheless, the world has moved past the tipping point when renewable energy sources are cheaper than dirty energy plants. Investors will want to have exposure to this secular bull market industry.
Besides clean energy, the next opportunity comes in the form of electric vehicles.
Tesla’s story is well known among investors and is the biggest “pure-play” company on this theme, but all auto manufacturers are moving in this direction. Globally, the IEA estimates there are only eight million electric vehicles on the road but predicts that number will be 120 million by 2030 (potentially as high as 250 million depending on the scenario).
These are just two of the largest opportunities that come to mind when thinking about investing around the climate change theme.
Other opportunities worth mentioning include specific rare earth metals (both the commodities directly and through mining companies), since demand will grow alongside the need for battery technology.
Plus, environmental consulting and engineering and construction services companies, will benefit from the changing infrastructure needs to a low-carbon economy; as well as carbon capture and storage technologies.
Finally, a potential investment idea that is often overlooked is geothermal energy. This is not the first source that typically comes to mind when thinking of “green” alternatives, but it solves two key problems.
First, it addresses the issue of peak production versus peak demand. Power generation can be scaled to match any demand curve since the flow of heat from underground can be increased or decreased with relative ease.
Second, and perhaps more importantly from a political perspective, the expertise and resources that oil and gas companies have in drilling and maintaining oil wells can be put to use in the construction of these power plants (which require creating a network of reservoirs to cycle the heat above ground).
Geothermal plant construction is a natural solution for transitioning the workers who feel threatened by a move away from fossil fuels, making it an easier political decision for governments.
Renewable technology successes are tied to economic geography
It should be mentioned that betting on any one technology or solution may not be a prudent investment decision as it is too early to call a winner in many cases. Furthermore, given the early-stage nature for some technologies, investors with the ability and risk tolerance may consider looking at private companies - even though there is no shortage of public company options either.
Bottom line: As governments attempt to make up for lost time as the climate approaches the critical 2-C warming threshold that scientists have warned about, these trends will continue to grow.
As such, private capital will need to play a critical role in this global energy transformation, as informed electorates demand more and more action on climate change.
The economic recovery from the COVID-19 pandemic is an important opportunity for governments to accelerate investments, through green infrastructure spending and the like, wherever there is political appetite for stimulus.
Much like the industrial revolution, the coming decades will open several opportunities for investors to take advantage of shifts in global priorities and technological breakthroughs.
David Rosenberg, Founder, Rosenberg Research & Associates