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Are the winds of change turning Investors green?

Scratching beneath the surface of society’s climate change awareness, a green revolution is taking place, one that will reshape industries and present new opportunities for investors.

| 6 min read

It’s expected that the 2020’s will herald the dawn of the fourth industrial revolution. But unlike the previous three, there will be something markedly different about this one - it will not be powered by fossil fuels.

Global warming and climate change aren’t new. We have been hearing about it since as early as the 70’s when President Carter put solar panels on the roof of the White House. Whilst people might debate the validity of global warming, one thing that is happening is that society’s opinion is changing. Social media has provided a voice for people’s concerns and has raised awareness. Whether it be Greta Thunberg’s global climate protests or McDonald’s switching to paper straws, these concerns have become embedded into our society over the past few years.

Governments and companies take notice

If you were to go back to the 2000 US election, Al Gore ran a presidential campaign that put climate change centre stage. Unfortunately, he lost. But fast forward to 2015 and 196 nations signed up to the Paris Climate Accord - a legally binding treaty to limit global warming to well below 2°C. It was a monumental first step and paved the way for the green movement to truly begin.
Since then, over 110 countries, including the UK, Japan, Europe, have pledged to become carbon neutral by 2050, whilst China has pledged to do it by 2060. That means over 50% of global GDP and 50% of carbon emissions are now intrinsically linked to this target.

Companies have also taken note of this change and not only did blue-chip names endorse the Paris Agreement, they’ve also begun to adapt their business and adopt new practices. They’ve increased their levels of transparency - disclosing how much carbon they emit - and have been making similar commitments to slashing emissions.

2020 - the reset

In 2019, 13% of the UK’s total energy supply was generated by renewable energy (IEA, 2020). In the US it was 8% and in China in 2018 it was 9%. For decarbonisation to happen, it simultaneously means investing into new innovative technologies whilst writing off carbon-linked assets. In a capitalist world, this hit to short term profits proved to be too big of an obstacle for a lot of companies and governments.

However, 2020 saw a paradigm shift. The world was already on the path towards a greener future but as countries locked down and experienced some of the most severe and sudden economic hits ever experienced due to the coronavirus, companies and governments realised that this was the time to reset expectations and strategies.

Instead of climate change being an outside consideration, it’s now being fully integrated into recovery plans. Governments see this as a unique opportunity to transform their economies and position them for the future. Nowhere is this more apparent than the US. After four years of policies that supported fossil fuels, the newly elected President will now make climate change action a key part of his policies, setting the precedent for the western world.

Joe Biden wants to build a clean energy economy, one that can address the environmental issues that the world currently faces and, as a signal of how seriously he believes this, his first act as president was to re-join the Paris Climate Agreement, after Trump had taken them out in 2017. The next step will be implementing his “Build Back Better” recovery plan and it’s $2trn investment into clean energy initiatives, such as renewable energy, zero-emission vehicles in public transport and improving buildings’ energy efficiency. It follows in the footsteps of the EU’s Green Deal, which aims to reduce carbon dioxide to 55% below 1990 levels through similar initiatives, and China’s push for new green investment, which according to JP Morgan is estimated to exceed £13trn over the next 30 years - approximately 5 times the size of the UK economy.

This acceleration of the transition to a lower-carbon economy has resulted in negative consequences for some industries, however. Car manufacturers are facing regulation that phases out combustion engines, whilst energy companies must contend with a decrease in their demand assumptions.

BP announced it is to write down the value of its assets by $17.5bn as the acceleration had caused it to lower its long-term pricing forecasts. The company recognises the change taking place, though, and laid out a new strategy where it gradually moves away from oil and gas and becomes a leading renewable energy producer by 2030 - it’s hoping to develop 50GW of renewable energy.

Investing in the future

The first and most prominent area is the transition of energy production from fossil fuels to renewable energy. As technology has advanced, the cost of producing electricity by solar and wind has fallen dramatically to the point where both are now cheaper than conventional fossil fuels. Companies have been created to allow direct investment into both, offering an attractive recurring revenue stream that provides a real return to investors.
But given how low the levels of renewable energy penetration currently are, and the emphasis of governments for this transition, it’s likely that the demand for these capabilities intensifies. Companies that offer leading, innovative technologies should be able to capitalise on this structural tailwind. Almost like how Levi’s capitalised on the gold rush by selling jeans to the gold miners.

The revolution isn’t limited to energy production, though. Electric vehicles are displacing combustion engines as governments use taxes, regulations and subsidies to incentivise citizens to adopt them. In turn, we’re seeing an exponential increase in demand for battery technology and the materials such as Lithium that go into making it.

The green revolution is only just beginning. As countries try to establish themselves as the new 'Green’ leaders, the societal change, combined with the backing from authorities, will see a flood of money entering this area. Understanding how to take advantage of these opportunities will be a crucial theme for investors over the next few decades.

Gregory is part of the Charles Stanley Professionals Network; designed to connect and educate the next generation of investors. Read more articles from our network contributors and find out how you can be part of the network.

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Are the winds of change turning Investors green?

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