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Whether readers agree with climate change or not, it is clear that fossil fuels will be steadily replaced by renewable electricity as the world’s dominant energy. Already, a third of the world’s 2,000 largest public companies have set net-zero targets. And 91% of global governments are committed. Whether readers share the same sentiment as UN Secretary General António Guterres – that current net-zero rules contain “loopholes wide enough to drive a diesel truck through” – the point is this: Decarbonization will be enormously capital intensive.
This will be comparable to the post-WWII reconstruction boom, as infrastructure, transportation networks, and technologies require vast amounts of fixed capital investment. And, not to forget, electricity supplied to the grid must be clean. McKinsey estimates an annual average of 7.5% of global GDP must be spent on physical assets to achieve net-zero by 2050.
Of course, the coming carbon transition is not a one-way bet and was always destined to be clunky. The world’s energy system remains dominated by fossil fuels. Renewable energy systems will take decades to build up. But it is possible that the world gets some wins here. Solar energy provides the best evidence, which became nearly 90% cheaper over the last decade. Should other green technologies follow the same pattern or provide innovative breakthroughs, higher growth and productivity will follow. India is a case in point, where the low cost of solar energy has allowed the country to meet a key target of its net-zero program a decade early.
Decarbonization trends will be measured not just over years, but over decades. Given the size and scale of this SuperTrend, investors will need to stay focused on actionable investment allocations. In the period directly ahead, traditional energy companies will remain income plays (as companies hand cash back to shareholders rather than pursing capital expenditures). These companies themselves are also strategically buying renewable assets, diversifying their asset mix from fossil fuels into renewables. These trends should be monitored closely.
The carbon market is also heavily policy-driven. Businesses and households will allocate capital where the returns are the greatest. Government policies that impose carbon pricing tilt the scales in favour of green investment. Once these programs are in place and politicized, they are difficult for policymakers to remove.
Tyler Mordy, CFA, is CEO and CIO of Forstrong Global Asset Management Inc., engaged in top-down strategy, investment policy, and securities selection. The Forstrong Global Investment team contributed to this article. This article first appeared in Forstrong’s “2023 Super Trends Report: Metamorphosis” publication available on Forstrong’s Global Thinking blog. Used with permission. You can reach Tyler by phone at Forstrong Global, toll-free 1-888-419-6715, or by email at tmordy@forstrong.com. Follow Tyler on Twitter at @TylerMordy and @ForstrongGlobal.
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The foregoing is for general information purposes only and is the opinion of the writer. The author and clients of Forstrong Global Asset Management may have positions in securities mentioned. Performance statistics are calculated from documented actual investment strategies as set by Forstrong’s Investment Committee and applied to its portfolios mandates, and are intended to provide an approximation of composite results for separately managed accounts. Actual performance of individual separate accounts may vary with average gross “composite” performance statistics presented here due to client-specific portfolio differences with respect to size, inflow/outflow history, and inception dates, as well as intra-day market volatilities versus daily closing prices. Performance numbers are net of total ETF expense ratios and custody fees, but before withholding taxes, transaction costs and other investment management and advisor fees. Commissions and management fees may be associated with exchange-traded funds. Please read the prospectus before investing. Securities mentioned carry risk of loss, and no guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.
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