The Money Wave — Investing in the Energy Transition

It was on a summer day in 2013 that Mark Campanale and Jeremy Leggett from Carbon Tracker went into ‘The Old Lady of Threadneedle Street’, aka the Bank of England.

They were having tea with the then-deputy governor Andy Haldane.

Haldane had been also appointed chair of the Financial Policy Committee, tasked to search for possible future shocks to the financial system.

The 2008 crisis was still very fresh in everyone’s mind, a black swan event that hit the financial system after mispricing mortgages.

But Campanale and Leggett’s visit was to warn about a very different type of risk. They were trying to convince Haldane to look at the possibility of overvaluation in fossil fuel companies.

As Leggett said:

What we fear here, in essence, is that the energy industry is in the process of doing much the same thing that the banking industry did in the run-up to the financial crisis. They are overstating the value of their assets, and clocking up huge debts to bankroll a growing portion of their operation that is uneconomic.’

Or so it starts in The Winning of the Carbon War, a book by Leggett I started reading this week.

We heard a similar warning from economist Joseph Stiglitz more recently, this week in fact, during the Green Swan conference, a virtual event organised by the Bank of International Settlements, the IMF and the Bank of France.

As he warned, carbon prices aren’t even close to where they should be to reach climate goals.

Remember that the 2008 crisis originated in one part of the economy, in the real estate sector, and one part of the real estate sector, the subprime, and there was a problem of mispricing of the risks, mispricing of the mortgages in that small part of the global financial system.

But here we are talking about the risks associated with carbon, fossil fuels. The prices today are out of line with what they will be once reasonable carbon prices are put in place.

Those reasonable carbon prices are going to be much higher than current prices, and that means fossil fuel assets will come down, and potentially come down very dramatically, very quickly, and that in turn imposes enormous amounts of transition risks.

Those risks are systemic. They lie not only in the fossil fuel companies, but in the companies that lend to the fossil fuels, companies that own shares in the fossil fuels, companies that trade with the fossil fuel companies.

Wherever you stand on the climate change debate, it’s clear pressure is building on climate change risk, and fossil fuel companies.

Last week in a landmark ruling, a Dutch court ordered Royal Dutch Shell to cut emissions by 45% from their 2019 levels by 2030. It could open the gate for similar rulings for large emitters.

Also last week, ExxonMobil lost two board seats to Engine No 1, an activist hedge fund…and lost an extra seat this week. And Chevron shareholders voted — against their board — for a motion to cut emissions.

At the same time, the International Energy Agency (IEA) gave another blow to fossil fuels.

If governments are serious about the climate crisis, there can be no new investments in oil, gas and coal, from now — from this year,’ said Fatih Birol, IEA’s Executive Director, after presenting their road map on how to achieve net zero by 2050.

Recently too, US President Joe Biden signed an executive order to look at climate-related financial risks in the federal government and US financial system, and this included risks to savings and pension plans.

And, last one, promise!

A few weeks ago, the US Fed asked banks to look at climate change risk, not only from the angle of climate events like flooding and hurricanes, but also testing how their oil and gas loans may perform versus renewable energy loans.

It’s coming from all fronts, the public, the IEA, governments, shareholders…all this will likely translate into more action for change.

We are already seeing change. Businesses are looking at their carbon footprints, they are modifying their business and business models.

It’s adapt or die here, and in particular for high emitters, with new funding becoming more scarce, higher risk, and the likelihood that carbon prices will get more expensive.

Some of those fossil fuel assets that are still underground may never see the light of day, even if oil prices rise.

There are risks, but there’s also plenty of opportunity here — in particular when banks are paying a pittance.

Renewable power generated returns of 422.7% in the last 10 years while returns from fossil fuels were just 59%, according to a report from the IEA and the Centre for Climate Finance & Investment.

Now things are accelerating.

As I see it, investing in the energy transition is one of the big opportunities out there for investors. It likely won’t be a linear path, but this is a megatrend taking shape.

And it’s not too late to get in, this is only starting.


Selva Freigedo Signature

Selva Freigedo,
For The Rum Rebellion

Selva is also the Editor of New Energy Investor, a newsletter that looks for opportunities in the energy transition. For information on how to subscribe, click here.

Selva Freigedo is a research analyst for The Rum Rebellion.

Born in Argentina, her passion for economic analysis started at a young age. Her father was an economist for the Argentinean governments and the family used to discuss politics and economics at the dinner table.

Argentina is a country with an unusual economic history. Growing up there gave Selva first-hand experience on different economic phenomena such as hyperinflation, devaluation and debt default.

Selva has also lived in Brazil, Spain and the USA.

Back in 2000 she was living in the US as the dot com bubble popped…
And in 2008 she was in Spain as the property market exploded and then collapsed…

She has seen first-hand what happens when bubbles burst.

Selva joined Fat Tail Investment Research’s team in 2016, as an analyst. She now writes from her vantage point in Australia, where she settled in 2015.

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