Global greening may cost dinosaur industries
Growing international accord on climate change signals tougher regulation which will harm competitiveness of polluting industries
Climate change may not have won over all its doubters, but it is gaining traction as a global policy initiative, a key risk factor and an emerging investment theme, according to analysts at Blackrock Investment Institute.
“Even if you are sceptical of global warming and its causes, we think it is prudent to appreciate the regulatory momentum behind it,” Blackrock analysts wrote in a report circulated last week. “Asset prices are not immune to regulatory efforts to mitigate climate change.”
The insurance industry was one of the first to grapple with environmental risk. After Hurricane Katrina ravaged New Orleans and the US Gulf in 2005, regulators forced insurers to increase their capital reserve levels to ensure resilience in the face of future catastrophes, while new capital has demanded improved data and risk modelling. That approach is now being extended beyond the sector.
After a World Economic Forum survey rated extreme weather, natural catastrophes and failure of climate change adaptation among the top 10 global risks this year, a new framework to reduce carbon emissions is expected to emerge from the United Nations Climate Change Conference in Paris next month.
“Policymakers are targeting fossil fuel producers and energy-intensive industries with tough and costly new rules. They are supporting technologies and companies that boost efficiency and/or harness renewable energy sources,” Blackrock analysts wrote.
Blackrock also says regulators are likely to intensify their oversight of offending industries after incidents like the Fukushima nuclear disaster and the Volkswagen emissions control cheating reverberated through the economy.
“This is likely to drive up the cost of doing business – much like it did for financial services companies after the global financial crisis,” the analysts wrote.
Even if policy commitment wavers, technology will continue to improve energy efficiency, particularly in clean power generation and storage. The International Energy Agency predicts that renewables like wind and solar will account for almost half the global increase in energy generation until 2040.
Blackrock says such disruption could strand carbon-heavy utilities, materials and energy companies with assets that need to be written down before the end of their expected life span. Some investors are already divesting carbon-intensive equities from their portfolios, while others hedge their exposure by investing in renewables and clean technology.
But Blackrock analysts also say the biggest polluters have the greatest capacity for improvement, pointing out that companies which have improved their emissions performance – regardless of their absolute emissions level – have outperformed the MSCI World index over the past few years. From that point of view, carbon-intensive companies which are efficient, adaptable and well-managed could remain good bets.
Meanwhile, analysts warned that investing in renewables carries its own risks. Like any high growth sector, competition can become fierce and bubbles may develop. “Patience and a stomach for volatility are key,” they wrote.
Although China remains one of the world’s worst polluters, it generates 29 per cent of the world’s renewable energy investment, offering plenty of clean energy investment options bolstered by strong policy support.
“Citizens are clamouring for cleaner air and water as part of a social pact with the ruling Communist party. This means Beijing is bent on cutting emissions,” the analysts wrote.