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Climate change: opportunities and risks for investors

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The day before I met Tim Holme at his headquarters in San Jose last December, he had just become Silicon Valley’s latest start-up billionaire.

Shares in his next-generation battery company, QuantumScape, were surging in the wake of its recent public listing — one of many clean-tech stocks that had caught the imagination of investors across the US and beyond, amid a growing focus on the market implications of climate change.

Holme, a former Stanford physicist who co-founded QuantumScape in 2010, gave me a tour of the company’s experimental assembly lines, in a brightly lit room with moisture levels 2,000 times lower than the air outside. The cells being developed in this delicately managed environment, he claimed, could revolutionise the fast-growing electric car industry, offering performance far superior to batteries currently on the market.

“All of a sudden, you’re not talking about a nice high-end toy for rich people,” Holme told me. “You can really get into the mass market, which is what you need to tackle climate change.”

Stock market investors, eager for a share of the spoils from the global clean-tech bonanza, proved a receptive audience for this message. Within a few weeks, QuantumScape — still years away from commercial production — would hit a market capitalisation of $48bn, comfortably exceeding that of the century-old Ford Motor Company.

Holme was one of many entrepreneurs and business leaders I encountered during two years of research for a book exploring how the climate crisis — and the response to it — is reshaping the modern world. It’s a subject that has surged to the top of the agenda of the largest asset managers and is no less critical for individual investors.

The climate-related questions now facing anyone with an investment portfolio are dizzying in their variety and complexity. How quickly will new energy systems be rolled out and which technologies will come out ahead? Which big companies are most perilously exposed to financial risks from the energy transition and extreme weather events? How can investors ensure their portfolios surf the economic waves driven by the climate crisis and are not left at sea?

QuantumScape was one of several high-profile clean-tech companies to go public over the past couple of years through a special purpose acquisition company (Spac), a route that entails far looser disclosure requirements than a conventional initial public offering.

The growing use of Spacs has broadened the scope for retail investors to buy stock in clean-tech companies relatively early in their development. It’s also becoming increasingly controversial, as small investors in some companies have been left sitting on hefty losses from bets on high-profile Spac-linked businesses. If you bought QuantumScape stock at its feverish peak last December and held it, you’re now sitting on a loss of nearly 80 per cent.

To some, the overheating and subsequent sharp correction in the share prices of such companies are grounds to be wary of the whole clean-tech sector.

Power shift: Tim Holme, co-founder of QuantumScape, a battery maker © Simon Mundy/FT

‘Haters and doubters’

When I caught up with Holme this month, he said that amid the whiplash fluctuations in QuantumScape’s share price — which now leave the start-up valued at $10bn, a third lower than on the day it went public — it has made faster than expected technical progress towards rolling out a commercial product for Volkswagen, its major investor, by 2024.

“There will always be the haters and the doubters,” he says. But the wider case for investing in the electric car industry, he maintains, is unarguable. “Very soon,” Holme told me, “there will be a tipping point where a combustion car is no longer superior in any way to a battery vehicle.”

Equity investors looking to gain exposure to the clean-tech revolution can choose from a fast-growing set of public companies not just in the big western markets but notably in China, where renewable energy and electric transport are an increasingly important part of the country’s vast manufacturing sector.

I travelled through China just before its borders closed amid the coronavirus pandemic, visiting some of the country’s prominent new energy companies. These included electric-car maker Xpeng Motors in Guangzhou, where I spoke to its eponymous chief executive He Xiaopeng about the rapid evolution of his sector.

For years, the Chinese government had sought to foster green tech through lavish subsidies, which it has been slashing over the past couple of years.

Some analysts saw this as a sign of wavering commitment by Xi Jinping’s government to its vaunted green agenda. But He Xiaopeng insisted that rapid technological advances meant leading companies in this space could now compete with far more limited state support. As that support was scaled back, weaker companies dropped out of the market — a welcome development for the stronger ones, he said, who were gunning to make an impact not just on the huge domestic market, but globally.

A few months after my visit, Xpeng, which is building higher-end electric cars intended to compete with Tesla, went public in a high-profile New York flotation that valued it at $20bn — a market capitalisation that has since doubled.

It is one of several listed Chinese clean-tech groups that have proved popular among foreign equity investors, with others including fellow electric car start-ups Nio and Li Auto. Another is BYD, a group with a market valuation of $125bn that is China’s biggest electric-car maker as well as a major producer of batteries and solar panels, whose vast 40,000-worker campus I toured in Shenzhen.

All the Chinese clean-tech entrepreneurs I met — not least He Xiaopeng, who previously made billions in the Chinese internet industry — seemed convinced that the Xi administration’s long-term strategic focus on green growth put their sector in line for phenomenal growth. However, there are some conspicuous risks for foreign retail investors seeking a slice of their profits.

As in the west, China’s energy transition strategy faces resistance from conservative voices worried about the impact on long-term growth. Rising tensions with the west are a headwind for Chinese clean-tech companies — witness the US tariffs slapped on solar panel exports from the likes of BYD.

Even after the declining state subsidies thinned the crowd of Chinese companies in this space, they remain numerous and the competition between them intense — making a big bet on any single group a risky prospect. And while the New York flotations of companies such as Xpeng and Nio might make them easily accessible to western retail investors, such foreign listings are under scrutiny from an increasingly heavy-handed Chinese government.

A miner breaking new ground

When it comes to climate-related risks, no company in the world is exempt — and for some of the biggest businesses in the world, the climate crisis has created an environment of unprecedented disruption and uncertainty.

While in Australia I visited the Melbourne headquarters of BHP, the world’s biggest mineral resources company, with annual carbon emissions greater — when the use of its products is factored in — than those of the UK.

“When BHP moves, the whole sector moves,” Fiona Wild, the company’s sustainability head, told me. “It’s not just about sitting here thinking how to manage risks and minimise impacts for BHP. It’s about how to galvanise really significant change — and I honestly can’t think of a better place to do it than here.”

Wild added that the company is breaking new ground by promising to set reduction targets for its Scope 3 carbon emissions — meaning it would take responsibility for emissions from the use of its products and in its supply chain, as well as those from its own operations.

In recent months, however, the company — listed in Sydney and London — has come under heavy pressure from investors and external critics who argue that it is moving too slowly. Seventeen per cent of shareholders rebelled against its climate action plan last month, after proxy adviser Glass Lewis recommended them to reject it, saying it was unclear whether it aligned with the Paris accord.

Yet when BHP has taken serious action to “decarbonise” its business, the stock market response has been less than wholly encouraging. In August, the company announced that it was selling its oil and gas operations to Australia’s Woodside Petroleum for shares to be distributed to BHP shareholders.

BHP’s share price fell sharply, and is now down about a quarter from its level on the eve of the announcement, as analysts warned about an unhealthy reliance on the volatile market for iron ore, now overwhelmingly BHP’s biggest business. Even so, BHP has pressed ahead with its gradual retreat from fossil fuels, last month announcing a major divestment from coal assets in Australia.

Companies across the resources sector are walking a similarly treacherous tightrope. London-listed oil majors Shell and BP have both faced shareholder rebellions over their climate plans, while mining company Rio Tinto in October responded to investor pressure by sharply expanding its emission reduction goals. In the US, ExxonMobil — the world’s biggest non-state oil company — was hit by a remarkable shareholder intervention this year, when the little-known hedge fund Engine Number 1 succeeded in gaining three seats on its board to drive faster climate action.

The weather threat

But investors cannot shield themselves against climate-related disruption simply by shunning companies directly involved in fossil fuel production. In the financial sector, for example, the biggest groups are forced to reckon with the effects on their portfolios of the global energy transition — and of increasingly severe destructive weather events.

In Germany, I visited Munich Re, the global reinsurance giant that began analysing climate change threats seriously half a century ago. That part of the business is now led by Ernst Rauch, who started researching natural disaster risks for Munich Re in the late 1980s, using the company’s second-ever computer. Today, he leads a team of analysts scattered around the world, using voluminous data and high-tech modelling software to plot a path for this giant insurer in an age of climate turmoil.

Early in Rauch’s career, 16 insurance companies went bankrupt in the wake of 1992’s Hurricane Andrew, which caused $25bn of damage mainly in southern Florida. Today, Rauch told me, his team’s analysis leaves no room for doubt that the strongest storms are becoming increasingly destructive, along with disastrous forest fires in places such as California. In 2017 and 2018, the insurance industry suffered by far its two most expensive years in terms of payouts related to natural disasters, amounting to $215bn. Last year provided new proof of the worsening threat, with a record-breaking 30 major storms in the north Atlantic.

Yet high-profile insurance company bankruptcies are nowhere to be seen. Munich Re has remained solidly profitable, its share price steadily ticking up through the superstorms of recent years, now standing 38 per cent higher than at the start of 2017. While storms, fires and floods are all expected to grow in severity, another Andrew-style rush of insolvencies is now hugely unlikely, Rauch told me, citing insurers’ far stronger loss reserves and careful use of climate data. Indeed, he said, growing concerns about climate threats were likely to drive demand for property insurance for decades to come.

The real risk, he said, related to pricing. In much of the world — cities on storm-hit coastlines, for example — insurers will be forced to increase their premiums to levels that could become unacceptable to many. “The question here is affordability,” Rauch told me. “And that should be a concern for our industry, because it can undermine and erode our business model in the long run.”

Qaanaaq, the Greenland town close to the titanium mine being developed by Bluejay Mining © Simon Mundy/FT

An age of disruption

Throughout my travels, I found big listed companies grappling with an era of climate-driven upheaval. In Brazil, I met executives at JBS — the world’s biggest meat producer with $50bn in turnover — to hear about the blockchain-based verification system they hope will tackle growing investor unease about the company’s alleged links with illegal cattle ranchers, and the implications for its long-term prospects.

At the Dhahran headquarters of Saudi Aramco — by far the world’s biggest listed energy company since its 2019 flotation — chief technical officer Ahmad Al-Khowaiter told me how it was racing to future-proof its business by building new businesses in sectors such as hydrogen, even as he predicted its low-cost production would make it the “last man standing” in a slowly dwindling oil industry.

In Chile, I spoke to the chief winemaker at Santiago-listed wine giant Viña Concha y Toro, who explained the company’s fast-growing investment in research to help its vineyards adapt to rising temperatures and shifting rainfall patterns.

But while the climate crisis means an age of disruption for many companies, for others the powerful environmental changes in themselves are opening unprecedented opportunities.

In the far north-west of Greenland, I saw how the progressive disappearance of Arctic ice threatens the centuries-old traditions of Inughuit dogsled hunters. But a short distance south from their main settlement of Qaanaaq lies one of the world’s most lucrative titanium ore deposits, being developed by London-listed Bluejay Mining, a small-cap company backed by the likes of Prudential and M&G.

Historically, the long Arctic sea ice season left only a narrow window for ships to access the titanium site, making mining uneconomical, Bluejay chief executive Rod McIllree told me when we met at his Mayfair office. Now, this is one of several new projects across the Arctic that demonstrate the growing economic potential of that region as a direct result of global warming. “There are projects being contemplated now that would never have got off the drawing board 10 or 15 years ago,” McIllree told me. “I mean, it’s just accelerated out of the box.”

Investors looking to build a climate-smart portfolio, in short, will find opportunities — and grounds for concern — in every corner of every stock market. Those seeking growth would do well to consider increased exposure to a clean energy sector set for enormous long-term expansion — while remaining conscious of the huge swings in valuation that are bound to continue among companies jostling for leadership in the space and the uncertainty as to which will emerge on top.

Income-focused investors should not ignore the new set of serious financial risks that have emerged for the most dependable blue-chip companies — most obviously in the energy industry, but across every sector to some extent. The only sure thing, amid the growing impact of the climate crisis on both the planet and the global economy, is that this will be a critical issue for investors to grapple with for decades to come.

Simon Mundy’s book Race for Tomorrow is out now (William Collins, £20 / $28.99 / C$34.99)



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