With COP26 rapidly approaching there is renewed impetus for investors to throw the weight of their pensions and savings behind the battle against climate change. But this strategy is fraught with financial risk.
One of our favourite stocks in recent times has been the Danish wind farm developer Ørsted. Its share price between the beginning of 2018 and the same point in 2020 rose nearly four-fold, while that of BP almost halved.
It is a commonly held belief that investing in areas of demand growth brings automatic investment success. The Ørsted share price experience seemed to vindicate this, but 2021 has exposed the misconception. So far this year Ørsted has dropped around 35%; BP, meanwhile, has risen 35%.
We halved our holding a year ago and have been running down our position ever since, selling the last units in September – reluctantly.
While there is certainly huge investor demand for carbon-friendly energy companies, if excess competition enters the market it erodes profitability and ultimately weighs on share prices.
Keeping an eye on excess competition is key. It is great news that the oil majors are finally turning green – it is difficult to see us achieving the carbon reduction targets that will be discussed at COP26 without them being part of the solution. But their involvement steps up competition, particularly for licences.
The seabed in UK waters is owned by the Crown Estate, which auctions these licenses, raising money for the Treasury and the royal family.
Earlier this year BP and its German partner, Energie Baden-Wuerttemberg (EnBW), won the auction to develop two sites in the Irish Sea – BP’s first move into the sector. They were reported to be paying £154,000 per megawatt per year for the leases, substantially more than competitors bidding for leases on Dogger Bank in the North Sea, and so much that many experts are questioning how profitable the site might be.
The present gas crisis is pushing up electricity prices, presumably further increasing the price demanded for attractive wind sites, but not necessarily the price of electricity in the long term.
The principle of investing for change is a good one, but most of us who expect to rely on those investments to fund our retirements, must also make a profit. It highlights the complexity of this issue. And it gets more complex.
Are you investing in the right areas?
It is arguable that the British government has overpromoted wind energy. It currently has 10GW of offshore wind capacity and is targeting 40GW by 2030. The wind turbines being installed in the North Sea are amazing. Just one turn of their giant arms can power a UK household for two days. But those arms have to turn. If the wind doesn’t blow we are in trouble.
The gas crisis underlines the challenges of the transition to a low-carbon world. It will take years for us to build a significant battery infrastructure to store energy from wind and solar farms, and the recent conflagration in Tesla’s Australian battery storage project highlights a problem that will be familiar to some owners of Samsung phones – lithium-ion batteries can be a fire hazard.
Gas is a rather good battery. In just 30 minutes a gas-fired power station can be up and running, generating power.
Should we be looking to dial down gas production? Or should we instead be investing in carbon capture and storage to enable us to continue to exploit gas until we have the renewable energy infrastructure in place?
It’s an idea we have explored, but here we stumble over another challenge for investors seeking to reduce global warming – the paucity of listed opportunities with significant exposure to this technology. We hold Aker Carbon Capture within the “Low Carbon World” theme of the Mid Wynd Investment Trust. This company offers modular capture technology for gas- and coal-fired power plants, refineries and cement manufacturers (if the cement industry was a country, it would be the third largest emitter of CO2 in the world). There is not a lot else out there.
Are there better opportunities further afield?
The lack of attractive obvious ways to invest in the low-carbon energy challenge has forced us to look further afield – at companies helping reduce our use of energy. We hold two American railway companies – Norfolk Southern and Union Pacific – that are helping to take freight off gas guzzling trucks.
We have just introduced a new theme to the portfolio that has some overlap with “Low Carbon World” – “Building the Future”. Within this theme we include the French firm, Legrand, which is the world’s biggest manufacturer of switches and sockets. It is expanding its product range in sustainable development and energy saving electronics.
We also include Trane, the US refrigeration and air conditioner manufacturer. Trane has the target of reducing one gigaton of carbon emissions from its customers’ footprint by 2030 – the equivalent of the combined annual emissions of the UK, Italy and France. A quarter of the world’s total carbon emissions come from heating and cooling buildings and transporting refrigerated goods. With regulatory pressure to reduce the energy demands of this infrastructure, this should be a profitable space for those with the best technology.
Blowing cold?
What does this all show? We support the idea of investors using their wealth to change the world. COP26 will hopefully inspire more people to embrace that challenge. We’re simply warning not to be carried away by the obvious candidates for a green portfolio – companies that provide low-carbon energy. The price of investments has to be right too, or you can end up losing a lot of money.
There are no easy solutions, but investing in companies that reduce our need for that energy does open up avenues that are worth researching.
Alex Illingworth is co-manager of the Mid Wynd International investment trust and the Artemis Global Select fund. The views expressed above are his own and should not be taken as investment advice.