Climate Change Investments – the next New, New Thang!

Blain’s Morning Porridge – 16^th Nov 2022 – Climate Change Investments – the next New, New Thang!

“COP27 is an opportunity for “greenwashing, lying and cheating…”

This morning: COP27 is proving a Tower of Babel, but the world is waking up to the reality of climate change and the opportunities it will be bring for climate change mitigation and renewable energy investments. Just don’t let the current financial industrial complex be setting the route-map! We need disruptive climate change investment!  

Another judder moment last night.. Move along.. nothing to see here. A big hole in the ground and two dead Poles was not a wayward Russian missile strike – apparently.  The Russians deny it, the allies now say the big missile shaped dent was probably not the Russians but a Ukraine anti-aircraft weapon, but it’s a timely reminder Article 5 says an attack on any Nato member is an attack on all. It begs the question: Why would Russia want to lose two wars at the same time?

Meanwhile, Donald Trump has confirmed he will provide the comedy relief during the next US Presidential Election. Marvellous. The whole of ‘Merica will be delighted. Particularly the Democrats.

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Happy birthday and welcome to the 8 billionth human being on the planet who was (probably) born yesterday. I sincerely hope he/she grows up to enjoy a happy, fruitful and fulfilling future. They baby will face challenges – most obviously from climate change and how that impacts their life in terms of environmental, food and energy security. But I’m confident. I am convinced humanity will prove Malthus wrong – again.

Despite the current doom and gloom the 8 billionth human will live a life better than their grandparents. Lifespans around the globe continue to rise, medicine continues to advance, and better education and rising living standards are slowing population growth. We are only a few decades away from peak global population.

So, on that note, let’s find something to be positive about this morning: Climate Change and COP.

Global leaders have spoken in Egypt:

• “A highway to climate hell with our foot on the accelerator.”
• “..let’s earn the clean ticket to heaven.”
• “No action is dangerous…”
• “…you have created an economically impossible scenario.”
• “We have to move beyond the era of fossil fuel colonialism.”

And/Or

• “It is up to the G20 countries responsible for 80% of global emissions that we are beholden to for our survival. We are being held to ransom at the cost of profit and an unwillingness to act despite the ability to do so.”

Words are cheap.

Some nations are experts in saying one thing while doing another. COP 27 in Sharm El Sheikh is turning into a negotiating Tower of Babel. All the big-wigs have come and thrown in their tuppence-worth of headline statements about the emissions “Highway to Hell” (try saying that without the ACADACA chords thundering in your ear), spouting platitudes about cutting emissions, but the reality is its bogged down in impasse and national advantage. There is a laundry list of targets to achieve, but it’s become a game of political compromise, a talking-shop that avoids saying things like phase-out fossil fuels.

How do we save the planet?

Governments can’t agree. Bureaucrats just want to bureaucrate. Don’t ask the financial industry. Instead – look to entrepreneurs!

The hot air generated at climate conferences; from the multitude of bureaucratic “alliances”, “pledges” and unfulfilled ESG commitments, could raise global temperatures by a couple of degrees. The politicians play to what their electorates want to hear about saving the planet, but are acutely aware of the importance of maintaining growth and energy security. How do you square that triangle? The consequences of energy insecurity triggering runaway inflation and impacting growth was the critical lesson of 2022 following the Russian invasion of Ukraine.

There are some positives like the $20 bln public/private finance initiative to wean Indonesia off coal – the Just Energy Transition Partnership (JTEP). It’s a model to provide public and private finance for Indonesia’s transition from coal to renewables. Yet, it involves some of the largest global banks – the same ones signed up for Mark Carney’s “Glasgow Financial Alliance for New Zero” (GFANZ) – who are now being accused of rolling back on their previous promises about fossil fuel funding.

Climate change has become an optimisation game for the big banks – balancing the profits they would forego and the losses they would incur if they cease oil, gas and coal funding, versus their public images of clear, climate bragging polar-bear huggers.

I can’t help but wonder about the unintended consequences of well-meaning organisations like GFANZ and its side-kick, the Net-Zero Asset Owners Alliance, investment managers who aim to cut their emissions on portfolios to zero – that’s $150 trillion (yes, trillion) of assets. Across the financial universe, there is not a single asset gatherer not boasting about their achievements in decarbonisation… and its now wonder climate activists and smart concerned financiers are increasingly suspicious its bogged down in greenwashing, green-hushing and tick-box ESG bureaucracy.

I am part of the Financial Industry, and I fear for its effectiveness. Talking to a very clever, brilliant, well-connected senior portfolio manager at one of the biggest asset managers, she told me her firm is sending dozens of “managers” to environment, climate and green-bond conferences. But these guys are not the stock pickers, the PMs, or analysts who understand the fundamentals of green tech, climate change mitigation or returns from green businesses. Instead, they are the administrators setting policy and optimising the fund’s profile. Risk managers, compliance officers, and the accountants have taken over to optimse their firms position – and ultimately, that’s not a route to maximise our climate future outcomes via investments in green tech.

We need a new approach to financing climate change mitigation and renewable energy projects. And the model is probably very similar to the Tech boom of the last 30 years – smart financiers finding the smartest inventors, innovators and entrepreneurs with ideas to fund. I am tempted – again – to start a fund investing in climate mitigation projects.

I am excited Climate Change and Renewables will become the next New, New Thing in big investment opportunities. New New Things come around every time the Old Thing collapses. Tech, and especially disruptive Tech, is so yesterday – just ask Cathie Wood and Masayoshi Son.

Big tech has become increasingly mature, dull, boring and predictable – often predictably unprofitable as Tech firms discover their taxi-company and food delivery earnings don’t justify gravity defying multiples. I still have a couple of Big Tech names in the PA portfolio – but frankly I expect them to trend lower as their improbable P/E’s normalise.

I occasionally go back and read old Morning Porridges (partly to check if early onset dementia could be progressing, says my wife!) I came across a comment I made in 2016 – “Climate Change is more likely to be solved by technological breakthroughs and quantitative advances rather than politicians and bankers swanking it up at conferences where they boast how environmentally concerned and aware they are.”

I am now absolutely convinced Green Solutions, and Renewable Energy are becoming the next New New Thing! Tax breaks, subsidies, like those contained in the new US Inflation Reduction Act will catalyse a whole new raft of investment into energy and climate projects. We also see the largest investors in green climate mitigation and renewables are the fossil energy companies. The big tech firms are spending money on climate mitigation via reforestation, rewilding and carbon sequestration projects.

We are now past the first stage of Climate Change Financial Reality. The early stages of Green, ESG compliant investment in renewable energy have frankly been a bit of a joke. Make lots of noise about how green you are, slosh your marketing documents in Greenwash and nod in a concerned manner when asked about the realities of ESG: real carbon costs, income and opportunity inequality, and don’t interfere too much in bad corporate governance.

The result has been lots of investment in Wind and Solar Energy farms for years – not because they are necessarily the best investment solutions, but because they are easy from a construction and operation perspective. Low risk, apparently, giving funds lots to brag about in terms of how green their investment portfolio is.

But there is far more to alternative energy than just building yet more wind installations, or taking fields out of agriculture to place Photo-voltaic Solar Panels on. To be blunt, these are OK, but not great alternative renewable sources. They are basic – and have thrived because they are easy, simple and highly investible by investment firms that don’t know hydrogen from hydrography and understand diddley-squat about the disappointing operational and maintenance costs of windfarms.

There are a legion of other more promising renewable technologies to consider: Tide, Geothermal, Capacitance (storing energy), Hydro, Nuclear, Bio-waste, and many we are still years away from including easy nuclear (ie takes less than 30-yrs to plan and construct), and just maybe Nuclear Fusion. And we have to plan a transition path – which means gas for at least the next 30 years or face zerogrowth, high inflation, energy depletion unravelling society.

Hydrogen is going to be fascinating. Currently it exists in four forms..

• Brown Hydrogen from coal gasification – not popular at all. This is cheap as chips and very dirty in terms of CO2. It is generally frowned upon.
• Grey hydrogen from natural gas reforming. Again this is cheap to produce, but CO2 intensive.
• Both Brown and Grey Hydrogen can be converted to Blue Hydrogen is the CO2 produced from burning coal and gas is captured and sequestered. Blue Hydrogen is moderately expensive, mitigates the CO2 debt, and is considered ok by all but extreme greens.
• Green Hydrogen is produced by water electrolysis using renewable green power. It is very clear, hopelessly inefficient and expensive, but everyone loves it. It takes more energy to produce than it stores.

But eventually, someone clever and smart is going to find a way to make hydrogen work… That hydrogen shift-moment will occur when the cost of producing hydrogen falls – which requires renewable/clean energy costs to tumble, or a new unsuspected production method to be innovated. Perhaps both. It is just one example of how the world may change.

Hydrogen is just one route to green alternative energy. There are others we know about, and possibly many we’ve haven’t yet spotted. What it needs is the kind of buzz around renewables and climate mitigation we saw around Disruptive Tech…

I have an feeling it’s going to happen. Lots of things will need to occur around it, including how to ensure polluters pay, which means establishing a really functional Carbon Pricing market, and agreeing how to measure, verify, regulate, authorise and trade carbon credits effectively to stimulate carbon mitigation strategies from nature based, sequestration and simple replacement.

I am sure Climate Change and Renewables are going to be a massive investment opportunity – if we just start to focus on the reality, rather than the climate change circus of conferences and government palaver. This is going to be a topic I will get back to writing much, much more about…

Five Things To Upset Yourself With this Morning

WSJ – Trump Announced Third Consecutive Presidential Bid

BBerg – UK Inflation hits 41-year high on soaring energy prices

FT – The cracks in the US Treasury bond market

Torygraph – Goldman “paid out $12mm” over sexism claim

Guardian – UAE using role as COP28 host to lobby on its climate reputation

Out of time, and back to the day job…

Bill Blain

Strategist – Shard Capital