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?

By John Stepek

published 13 February 2020

in Features

The times they are a changin’

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.

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.

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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.