Advertisement

Green investment: from "sensible re-pricing" to full-on mania

Change is afoot, says John Stepek. Everyone is waking up to the fact that we need to do more to protect the environment. That presents opportunities for investors – but how much is already priced in to the markets?

MoneyWeek has a bit of a hippy feel to it this issue. We’ve got veganism on the cover and houseboats in the property spread. We’re not the only ones. A week after Boris Johnson decided that new petrol and diesel cars will be banned in Britain from 2035, this week transport secretary Grant Shapps suggested it might even start in 2032. The dismayed reaction from car manufacturers tells you all you need to know about why investors need to pay attention to this stuff. 

Advertisement - Article continues below

Change is afoot. You might be on board with every “green” sentiment going, or you might think that a lot of it is trendy nonsense – it’s irrelevant. You should certainly approach trends with scepticism, but if you fail to acknowledge genuine shifts in behaviour, often driven by government regulation, then your portfolio could be left high and dry. 

For example, a report from the International Energy Agency (IEA) this week revealed that global energy-related emissions of carbon dioxide were unchanged in 2019, even though the economy continued to grow (by 2.9%). How did that happen? It’s mainly due to developed economies cutting back even as emerging emissions keep climbing. Despite the impression given by teen truant and climate crusader Greta Thunberg’s occasional spats with US president Donald Trump, America saw the biggest drop in absolute terms. Significant falls were also seen in the European Union (with the UK particularly strong on this front) and Japan. The main driver is that coal is being displaced by natural gas and renewables (wind in particular). And more than eight years on from Japan’s Fukushima disaster, nuclear generation is growing again. 

Advertisement - Article continues below
Advertisement
Advertisement - Article continues below

The question however as always is – how much of this stuff is priced in? I read a fascinating blog from Joachim Klements earlier this week in which he discussed work by researchers from the University of Augsburg and Queen’s University. They looked at more than 10,000 listed companies across the world, and put together a measure of their exposure to changes to regulations around carbon pricing and climate change. Since 2013, he notes, their research finds that companies with the lowest carbon risk exposure (ie, the “greenest” companies) have done better as a whole than the wider market. Now that’s what you’d expect – if climate change vulnerability is a new risk, markets should price that in. However, if it’s been going on for six years, then that’s more than enough time to go from “sensible re-pricing of future prospects” to “mania”. And if you look at recent share-price movements, I think we’re getting to the point where you could argue that a “green bubble” is underway. 

There’s electric car group Tesla, whose share price has more than trebled in just four months. But as Eoin Treacy of FullerTreacyMoney notes, it’s not alone. Renewable energy exchange-traded funds (ETF) – tracking everything from battery technology to solar power – have jumped, while hydrogen stocks (you’ll have to wait for the ETF, but I’m sure there’s one coming) have surged too. Now, bubbles can go on for a lot longer than anyone expects. Stuart’s vegan share tip suggestions may be worth a punt, but I’m not sure a houseboat will ever be a good investment.

Advertisement
Advertisement

Recommended

Great frauds in history: Alexander Fordyce and shorting the East India Company
People

Great frauds in history: Alexander Fordyce and shorting the East India Company

Alexander Fordyce's disastrous shorting of the East India Company led to him bankrupting the private bank in which he was a partner.
12 Aug 2020
Too embarrassed to ask: what is a dividend yield?
Too embarrassed to ask

Too embarrassed to ask: what is a dividend yield?

Learn what a dividend yield is and what it can tell investors about a company in MoneyWeek's latest "too embarrassed to ask” video.
11 Aug 2020
James Montier: valuations are way too high
Investment gurus

James Montier: valuations are way too high

The market is completely discounting the risk to the economy and operating as if there is nothing to worry about, pricing in a V-shaped recovery, says…
10 Aug 2020
Don’t dump your dividends
Income investing

Don’t dump your dividends

This crisis certainly does not prove that taking regular capital gains is safer than relying on natural income from dividends.
10 Aug 2020

Most Popular

Eagle Lightweight GT: the reincarnation of the E-type Jag
Toys and gadgets

Eagle Lightweight GT: the reincarnation of the E-type Jag

Jaguar’s classic E-type sports car has been reinvented for the modern age. The result – the Eagle Lightweight GT – is a thing of beauty.
7 Aug 2020
Should you take advantage of the UK’s new breed of domestic holidaymakers?
Buy to let

Should you take advantage of the UK’s new breed of domestic holidaymakers?

With Britons choosing to holiday in the UK this year, the owners of the country’s holiday cottages are cleaning up. Should you buy in, too? Merryn? So…
10 Aug 2020
The pound has been trending higher against the dollar – will it last?
Sponsored

The pound has been trending higher against the dollar – will it last?

Sterling has been rising against the dollar. Dominic Frisby sets his trend lines in the charts to see where the pound is heading next.
10 Aug 2020