Monday thoughts: Climate change is already hitting your investments
OPINION: Do you think climate change is real? You dont need to answer yes or no because as an investor climate change is already impacting you. Central banks are looking at ways to stress-test climate change scenarios. Governments are changing regulations to prepare for a warmer planet. Consumers have changed behaviour and worry about emissions, carbon offsets and sustainability. READ MORE: * With new tech, the world can limit warming to 2C * KiwiSaver members won't be shortchanged by managers cutting fossil fuels * Chloe Swarbrick submitting new bill to force Government funds to sell fossil fuel assets Covid-19 is a tragedy right here and now that is changing the way businesses operate, consumers spend and global economic systems work. Governments and business leaders see climate change as a social and economic tragedy on the same scale likely much larger but hitting us over a longer time horizon. So, as an investor it doesnt matter what you personally think about climate change. Governments and business leaders see climate change as a multi-decade issue and they have started preparing. This affects current and future investment returns. Government regulations, subsidies and policy directions incentivise change. Banks want to lend more to renewable energy projects. Venture capitalists want to invest in lower-emission technologies. Corporates are busy setting ambitious long-term zero-carbon targets. The US coal industry has already felt this change. Despite his bold rhetoric, US coal production has fallen under President Trump. Peak coal in the US was 2008, and output last year was back to the same level as 1978. Coal is challenged by lower cost and lower emission alternatives like natural gas and renewables. This is an unstoppable trend, in fact Forbes expect by 2025 more than 85 per cent of US coal plants will be uneconomic compared to renewables. This impacts asset values, just ask BHP. It owns the Mt Arthur coal mine in Australia, regarded as a high-quality site with large reserves and low-cost production. It is reported that there is no buyer willing to pay a price near what BHP had expected. The market is shifting. Oil companies get this and know they need to be greener. BP, Repsol, Shell and Total have pledged to cut emissions to net zero (although have given themselves a long time-line to achieve this). BPs new chief executive, Bernard Looney, made it clear that we are heading to net zero. There is no turning back. BPs chairman, Helge Lund, backed up the management team saying net zero is not only the right thing for BP, it is the right thing for our shareholders and for society more broadly. So it doesnt matter what you personally think about climate change when even big oil is preparing for a lower carbon and warmer world. Your portfolio will need to adapt to recognise this. So far this year shares of global oil and gas exploration and production companies are down around 40 per cent. Shares in coal companies are down by 25 per cent. Contrast this with clean energy shares which are up strongly over the same period. Some examples include SolarEdge up 85 per cent this year, First Solar up 21 per cent and Vestas (wind turbines) up 42 per cent. Oil companies such as ExxonMobil, Chevron and Shell are reporting massive losses. The global pandemic has crushed demand for their product, but dont think this is just a temporary blip. Over the decades ahead the growth outlook for fossil fuels is tepid. In the 1990s, BP branded itself Beyond Petroleum but it failed to significantly shift its business. BPs new chief executive is having another go at that realignment if youre invested in BP youd better hope they follow through this time. Climate change is impacting your investments, whether you think its real or not. John Berry is chief executive at Pathfinder Asset Management, and KiwiSaver provider CareSaver. His views in this article are general only and are not recommendations for any particular person in relation to any share or financial product.