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How is climate change impacting your investment?

Do you think climate change is real? You don’t need to answer yes or no because as an investor, climate change is already impacting you.

john HeadshotsTRY sq John Berry 3 minute read

OPINION: Do you think climate change is real? You don’t need to answer yes or no because as an investor, climate change is already impacting you.

Central banks are looking at ways to stress-test climate change scenarios. Governments are changing regulations to prepare for a warmer planet. Consumers have changed behaviour and worry about emissions, carbon offsets and sustainability.

Covid-19 is a tragedy right here and now that is changing the way businesses operate, consumers spend and global economic systems work.

Governments and business leaders see climate change as a social and economic tragedy on the same scale – likely much larger – but hitting us over a longer time horizon.

So, as an investor, it doesn’t matter what you personally think about climate change. Governments and business leaders see climate change as a multi-decade issue and they have started preparing. This affects current and future investment returns.

Sunrise vs sunset industries

Government regulations, subsidies and policy directions incentivise change. Banks want to lend more to renewable energy projects. Venture capitalists want to invest in lower-emission technologies. Corporates are busy setting ambitious long-term zero-carbon targets.

The US coal industry has already felt this change. Despite his bold rhetoric, US coal production has fallen under President Trump. “Peak coal” in the US was 2008, and output last year was back to the same level as 1978.

Coal is challenged by lower cost and lower emission alternatives like natural gas and renewables. This is an unstoppable trend, in fact, Forbes expects that by 2025 more than 85 per cent of US coal plants will be uneconomic compared to renewables.

Markets are shifting

This impacts asset values, just ask BHP. It owns the Mt Arthur coal mine in Australia, regarded as a high-quality site with large reserves and low-cost production. It is reported that there is no buyer willing to pay a price near what BHP had expected. The market is shifting.

Oil companies get this, and know they need to be greener. BP, Repsol, Shell and Total have pledged to cut emissions to net-zero (although they have given themselves a long time-line to achieve this). BP’s new chief executive, Bernard Looney, made it clear that “we are heading to net-zero. There is no turning back.”

BP’s chairman, Helge Lund, backed up the management team saying “net-zero is not only the right thing for BP, but it is also the right thing for our shareholders and for society more broadly”.

So it doesn’t matter what you personally think about climate change when even big oil is preparing for a lower carbon and warmer world. Your portfolio will need to adapt to recognise this.

So far this year shares of global oil and gas exploration and production companies are down around 40 per cent. Shares in coal companies are down by 25 per cent.

Contrast this with clean energy shares which are up strongly over the same period. Some examples include SolarEdge up 85 per cent this year, First Solar up 21 per cent and Vestas (wind turbines) up 42 per cent.

Oil companies such as ExxonMobil, Chevron and Shell are reporting massive losses.

The global pandemic has crushed demand for their product, but don’t think this is just a temporary blip. Over the decades ahead the growth outlook for fossil fuels is tepid.

In the 1990s, BP branded itself “Beyond Petroleum” but it failed to significantly shift its business. BP’s new chief executive is having another go at that realignment – if you’re invested in BP you’d better hope they follow through this time. Climate change is impacting your investments, whether you think it’s real or not.

John Berry is chief executive at Pathfinder Asset Management, and KiwiSaver provider CareSaver. His views in this article are general only and are not recommendations for any particular person in relation to any share or financial product.

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