Since the agreement at COP28 in Dubai last week, where nearly 200 nations agreed to to transition the worlds energy systems to be carbon neutral by 2050 (including China!) there’s been a small surge in “green” stocks, e.g. as shown in CRBN’s ETF. Full disclosure, I am a climate scientist and I’m not intending to open a debate here on what people think about climate change, I know there are polarised views.
Nonetheless, this is an international agreement to transition “away from fossil fuels in energy systems in a just, orderly and equitable manner, accelerating action in this critical decade, so as to achieve net zero by 2050 in keeping with the science”. In the history of the annual COP meetings this language is a big deal. As an amateur investor, I would be really interested in thoughts about investment apporaches in the coming months, especially on the global stage. Or is it best to just stick with ETFs.
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I do think that carbon capture has some appeal as a long-term investment strategy, though I’m very skeptical of the trade in “voluntary carbon credits” at this point, since the creation of those credits seems so sketchy. I do think that a real cap and trade system for emissions, globally, is the clearest way to get a solution for reducing greenhouse gases (as well as other kinds of air pollution, and maybe even water pollution), since that would build the incentives that allow capitalism and entrepreneurs to really dig in on solutions, but the half-measure credits systems in place now, with some exceptions in Europe, don’t seem to offer investors much to be confident about.
I think the polarization you mention is probably a big part of the issue — the reality is that stuff like oil & gas can’t drop dramatically in use over the next 10-20 years, maybe 30, unless the world accepts a lot of other tradeoffs, big stuff like power generation and global shipping are just too slow to change even if there is urgency to make that change happen. That makes people dig in their heels on either “all solar” or “all natural gas” or whatever, in the absence of a better consensus, which makes the investment outlook unclear for everyone… and, to some degree, makes people want to avoid even talking about them for fear of starting an argument.
I do wish we had a grown-up strategy that prioritized the eradication of coal plants globally and a ramp up of nuclear power, and maybe we will — there is a resurgent interest in nukes now, particularly small nukes, and that’s a small enough sector that the investment ideas might become meaningful.
I’m mostly sitting it out on those “big theme” ideas personally, because I don’t feel like i have a great handle on it — but I think nuclear power and natural gas, including LNG, probably should be the easy plays for the next ten years if we really want to try to reduce the use of coal for power generation. The renewable energy companies have had more of a challenge because of the shifting nature of subsidies and, more importantly, the higher interest rates that make huge projects like offshore wind farms less obviously profitable. It’s going to be an interesting time, and I’m trying to keep an open mind, but I don’t see a lot of things I want to buy right now in the energy space, wherever they are on the spectrum of cleanliness/emissions.
Would love to hear more ideas in this area, personally.
Thanks, that’s a very helpful and objective perspective. I feel as challenged about managing investments (which is why I am here) as I suspect much of the world feels about trying to comprehend the realities of climate change. I think the common danger is oversimplification (over-simplifying things in the investment domain has given me lots of bruises!).
So for what its worth I’d add a few comments about where I (perhaps naively) see the investment potentials from the perspective of a non-USA person working in climate science.
Mostly I think the financial implications are still maturing, and so investment explicitly on climate is risky, but I do hold ETFs that to try capture some of the potential.
The COP28 commitment to triple the installed base of renewables by 2030 was one of the strongest and most supported outcomes of any COP. Yes, its a non-binding agreement, but had close 200 nations fully on board; even partially reaching this target will have substantial implications on infrastructure, the grid system (transmission and control), and energy storage to manage the growth of a distributed generating capacity. Even China is on board and is installing renewables faster than any other nation (despite also rolling out new coal generation).
Transport (EVs and more) is undergoing a revolution, and that’s only going to accelerate faster than most expect. There’s still too many standards and lack of clarity bu the pace of rollout (esp in EU) is amazing.
The increase and acceleration in weather extremes is already significantly impacting the insurance and reinsurance industry in terms of their financial risk exposure, premiums, and what is insurable. Extreme events are additionally a significant societal disruption with commensurate impact on attitudes and risk management. Aside from the insurance industry this also raises vulnerabilities in production and supply chain issues.
Nuclear is highly attractive, but also hugely expensive and very slow to roll out at scale (compounded by regulatory constraints). Renewables (generation) is already cheaper than fossil and costs are falling year on year. The challenge in renewables is energy storage and balancing a distributed generation, which to me is an investment niche that’s still maturing but full of potential. While nuclear will continue, personally I only see nuclear as a niche solution at best in the near to medium term (2-3 decades).
Investments around energy efficiency and energy storage is a massive basket of development potential once things mature further … risky at present … we are hugely inefficient in our energy consumption and there is substantial effort looking a mitigating energy losses. Battery banks make a good buffer to generation variations but is unlikely to meet the bulk of baseload needs, but there are rapid developments in other storage options.
Carbon capture and storage is still a pipe dream in my view and nowhere close to investable other than as a speculative play. The technology exists mostly as a proof of concept, but for the most part is a hope and a wish, not a scalable reality. No one has demonstrated the capacity or economic viability to scale this anywhere close to the magnitude of the challenge. It will become part of the solution mix but at the moment tech developments are way overhyped as feel-good headline material.
I share your skepticism on the carbon market. Cap and trade is something appealing, but still mired in politics.
I could go on and on (it is my field!), but I am not competent to really talk about the many financial aspects , but I thought I’d throw out the above and note I am #$@%-scared of the future … I don’t think its generally perceived the magnitude of risk exposure we’re facing as a connected and inter-dependent global society.
One last comment is that the popular portrayal of polarization on the issue is a bit of a false equivalence; the majority of the global population accept this as a major threat, and the divisions at COP28 by the ~200 nations were never about *if*, but about when, and how to protect national interests in the face of a global threat necessitating a global response.