Looking ahead to 2023: Here comes the sun
Forstrong SuperTrend 6: Transitioning to net-zero
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 email@example.com. Follow Tyler on Twitter at @TylerMordy and @ForstrongGlobal.
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