What the "climate emergency" means for investors

A big scary UN report on climate change is on all the front pages this morning.

I'm not going to go through the report. For a start, I haven't read it. More importantly, this isn't a science newsletter. You can get all that from plenty of other sources.

What I am interested in is the politics of all this, and what it might mean in the longer term for investors.

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Long story short, it's yet another reason to think that the era of secular disinflation is at an end...

Tackling climate change from one of the UK's rainiest cities

Climate change is an emotive issue. So I'll start this by saying that I'm not interested in telling you how to think about climate change itself. I'm interested in discussing the political implications, and what they then imply for the investment side of things.

Why? Because politics is important. There was a brief period in the 1990s and early 2000s when investors could basically ignore it a lot of the time (the "end of history" era), but those days are long gone.

It's very clear that tackling carbon dioxide emissions and making individual countries and the world in general a greener place is a massive project and one that governments are keen to embrace.

The language used is if anything, even more urgent than it has been in the past. It's an "emergency". We're in a "Code Red" situation. Just take a glance at any of the front pages this morning.

Here's UN Secretary General Antonio Guterres: "This report must sound a death knell for coal and fossil fuels, before they destroy our planet."

Developed countries (the OECD ones), he says, should "phase out existing coal by 2030, with others following suit by 2040. Countries should also end all new fossil fuel exploration and production, and shift fossil fuel subsidies into renewable energy. By 2020, solar and wind capacity should quadruple."

It's quite the wish list, but you get the picture. Whether you think these ambitions are realistic or not isn't really the point. It's a crusade that every politician – and every corporate executive – can get behind, even if the rhetoric and the action don't always match up.

The big focus between now and the end of the year will be on the climate change summit – COP26 – being held in November in Glasgow.

(A side-note: I'm very fond of Glasgow. But if the aim is to create a sense of urgency about tackling climate change, holding the summit in Glasgow in any month, let alone November, is not the option I'd have gone for.)

Given that the UK is hosting the summit – and given the internecine squabbling between the Scottish and Westminster governments – we can expect the government to try to whip out some "eco-lier than thou" trump cards on and before the big day.

This will be very expensive

But what does this all mean for investors?

There are lots of implications. But two stand out above all others.

Firstly, this is going to cost lots of money. Thinking about the UK alone – which is already not doing too badly in terms of the big things like coal usage – we still need to get everyone driving electric cars, and I'm also wondering how we'll heat our homes if gas boilers end up being outlawed.

That's before you even start on the big countries that still use coal, like China. China has said that its emissions will peak by 2030 but the fact that it's still planning new coal-fired power plants suggests that might just be an aspiration rather than a reality.

China is unlikely to respond well to external pressure. That said, if China can find a way to make "green" politics work in its favour, I'm sure it'll come round.

Anyway, the point is, this is going to involve a lot of spending. And a lot of that money will be funnelled via governments. So that either means higher taxes or bigger deficits or both (likely both).

Secondly, this is going to be inflationary. This is a logical follow-on from the fact that more money will be spent. But it's also a logical result of moving away from reliable, efficient and proven energy infrastructure towards infrastructure whose track record is rather less lengthy, and which in many cases simply isn't as efficient.

Now again, this isn't about your politics. You can make an argument that our existing infrastructure doesn't price in all the "externalities" and so we have an artificial view of how cheap fossil fuels are.

But the point is, this is going to be more expensive for everyone. As Eoin Treacy of FullerTreacyMoney puts it, "favouring alternative valuation metrics, beyond profit and efficiency, ultimately results in rising inflationary pressures."

What about your actual portfolio? I think there are two specific areas you can look at. One is to look at the green technologies that might come out on top. That's tricky but you can certainly look at various raw materials that might benefit.

The other to look at is fossil fuels themselves. You might not like them but if the transition is being pushed through without an obvious alternative, then we're likely to see a period where supply can't keep up with demand.

Big oil majors will not necessarily be unhappy about the idea of merely milking the reserves they've got and abandoning expensive and risky exploration and production.

In the current issue of MoneyWeek, out now, my colleague Cris looks at the Big Oil stocks and the volumes of cash they throw off, and concludes that many of them look "extremely cheap". If you're not already a subscriber, get your first six issues free here.