This is the text of a speech we prepared for the conference “Post-Carbon Finance: Fostering Low-Carbon Investment,” to be hosted by Ecologic Institute and the Consulate General of Germany in New York on June 15.
It is an auspicious time to be talking about climate finance. The US administration may be removing itself from the Paris accord, but as Cornerstone Capital wrote following the election of President Trump, we believe that the capital markets have the ability and responsibility to power the progress needed to solve the critical issues of our time, including climate change.
The US departure from the Paris Accord, together with the potential movement away from globalization in numerous countries, changes the medium-term climate investment catalysts, though will have less near-term effect. Earlier this year, we outlined three macro trends – regulatory, behavioral, and technological – whose intersection will drive climate change investing both in the near and medium term. Tonight, I want to talk through these trends, where their overlap creates the strongest catalysts, and how recent events create new climate investment risks and opportunities.
Regulatory: US sidestepping resistance, EMs linking to growth
Key US states and cities have driven policies addressing climate change, from renewable energy portfolio standards to feed-in tariffs (payments to ordinary energy users for the renewable electricity they generate), for decades. We see their role in climate action expanding further because of the current administration’s stance. The US government does not have a national energy policy, and, with the staying of the Clean Power Plan, it is not likely to adopt a plan soon. States and cities are now front and center, if they ever left, and leading states and cities have already increased climate response policies. California’s senate passed a bill mandating 100% clean energy by 2045 while Pittsburgh (not Paris) now aims to source 100% clean energy by 2035.
While states and cities will push climate change regulations in the US, national governments in emerging major emitting countries are taking a significant role. The clear co-benefits of climate action make the discussions for China and India different from even five years ago, as both countries have transitioned to incorporating climate action into other national policy goals. China sees the reduction in air pollution as well-aligned with the rollout of renewable energy, while India sees the necessary provision of electricity to all its citizens as linked to distributed energy sources, such as solar. This alignment between renewable energy, political stability, and economic growth provides significant hope for rapid progress.
Behavioral: Accelerating focus across sectors and consumer segments
We see behavioral trends becoming a more powerful force than regulatory trends. We consider behavioral trends in the broadest sense, from consumer trends to how companies are positioning themselves for changing markets. On the consumer side, we see a deeper focus on supply chain impacts. From food to beauty products to clothes, consumers are examining supply chains in a way we have not seen before. Some companies expressed their concern at the US’s shift on the Paris accord because they consider responding to climate change to be a market imperative (as well as a branding opportunity). Corporations are also acting to inspire their employees, who are increasingly demanding their organizations engage in climate action.
Technological: Relentlessly advancing
Technological advances to address climate change continue to meet and raise expectations. The question if solar and wind could reach grid parity has been answered, when it was a real concern less than nine years ago. The battery sector has also seen significant declines in price, with electric vehicle battery prices dropping by 80% from 2010 to 2016. If the decrease can continue, battery prices are poised to achieve grid parity in the coming years. This technology, which can support the decarbonization of transport and the mass storage of electricity, would be a significant boon to renewable energy.
Intersection of trends creates powerful investable opportunity
The intersection of regulatory, behavioral, and technology trends builds near- and medium-term momentum, which creates an investable opportunity that is more powerful than the sum of the individual trends. For instance, the intersection of trends has contributed to the increasing capacity of renewable energy, with solar capacity increasing from virtually zero at the turn of the millennium to 305GW in 2016. Over the same time, US regulation provided subsidies to consumers buying solar panels in the form of federal tax credits, minimizing the financial risks to buying solar panels while consumers became more interested in renewable energy sources for the climate benefits. China has also flooded the world marketplace with solar panels, rising from less than 1% of global production prior to 2000 to more than 60% in 2013. This supply growth, combined with technological advancement, has pushed solar prices to decrease 78% from 2000 to 2013, contributing to the relatively quick expansion of solar energy capacity.
These factors should cushion any near-term risks to climate investing from recent political events. In the near term, a slip in progress in one trend can be buoyed by the momentum created by other, overlapping trend. We believe that behavioral and technology trends can drive the investable thesis for renewable energy in the near term. In 2015, Kansas repealed its goal of 20% renewable energy by 2020, six years after adopting the goal. A year later, in 2016, Kansas achieved 30% of its electricity from wind power, speaking to the near-term momentum provided by the intersection of trends.
Looking to the medium term
The US departure from the Paris accord does, in my view, create medium-term implications. Regulation brings forward consumer and company action, which might take longer to manifest otherwise, and focuses technological development. Any further decrease of US regulation could weaken these trends, though there is the possibility that the retreat of leadership at the federal level will result in increasing state level regulation. California and China are already pledging to expand trade with an emphasis on renewable technologies. The potential for state action brings the possibility of companies looking to California as a leader in regulation instead of the federal government.
However, states will have difficulty filling the federal government’s role in international cooperation on climate change, which poses a risk for medium-term climate change investing. Consistent and transparent action across countries creates trust, enabling investors and companies to quickly adapt to new approaches and introduce technologies to new markets. A less trusting global marketplace hinders climate change mitigation and raises barriers to market access for investors.
We believe there are opportunities for creative investments to capitalize on and accelerate the behavioral and technological trends, which are aided by state action but not reliant on federal regulation. Given this change to medium-term regulatory momentum away from the US federal government, the areas of technological progress, behavioral trends, and the overlap of these two are becoming the more powerful catalysts.
On the behavioral side, we see companies that manage supply chain issues and integrate technological advances as well positioned to capture the increasing consumer concern around supply chain management. Specifically, an area that warrants more attention is the emissions reductions created for downstream companies by upstream companies. Coca Cola, for instance, says two-thirds of the carbon footprint of its products is caused by suppliers and is aiming to cut its carbon footprint by 25% between 2010 and 2020. While carbon emission trading schemes captures this value more explicitly, businesses that help other businesses within their supply chain be more efficient (i.e. sustainable) are well positioned.
Technologically, we are most interested in climate investing opportunities that align with broader technological trends, such as internet of things, and that respond to consumer demand for innovative energy products. While big data is mentioned in every conference on any topic, we do know that the availability of vast amounts of data, along with improvements in analytics, are likely to uncover critical insights that we would not be able to decipher through mere observation. We see the ability to gather and analyze big data as a necessary step for innovation in energy efficiency.
The public market support for large-scale energy innovation companies such as Tesla is a substantial vote of confidence for addressing climate change. Nearly 400,000 people have pre-ordered Tesla’s Model 3 car, highlighting the market demand for clean energy products. At the same time, we are looking for solutions to the sourcing of renewable energy raw materials so that the technology we use to address climate change doesn’t exacerbate environmental damage and income inequality issues in emerging markets. Technology companies that can source responsibly will be able to capture the demand for technology and benefit from the growing consumer concern around supply chain management.
The intersection of behavioral and technological trends opens creative opportunities for investors. For instance, we see a future for an ethical fish farming system that addresses the world’s protein requirements in a manner consistent with consumer supply chain concerns. Companies are starting to innovate in fish farming: a Danish company is building a high-efficiency salmon farm in the Gobi Desert in northwestern China, where there is no more rainfall than 50 to 100 millimeters a year, to address protein demand and consumer interest in sustainable protein supply chains. Companies that minimize energy use in this type of innovation are poised to satisfy consumer demand while benefiting from technological advances in efficiency.
We remain confident that technological and behavioral trends can continue to grow and catalyze climate investment, even as the US decreases its role in national and international regulation. However, there are several reasons we could be proven wrong in the future. Technology development or consumer technological demand for clean energy solutions could be more reliant on regulated subsidies than we understand, or changes in globalization could undermine the existing clean technology supply chains. We will continue to watch these trends and update our view on climate investing opportunities and risks.
In conclusion, I am buoyed by the progress over the last five years and hope that winning begets winning. As most people in the room can attest, shifting to an economy that decouples emissions and economic growth has had stops and starts before. Investors should remain focused on the bigger picture, utilize the growing global behavioral and technological trends, and nurture the capital markets to solve climate change.
Sebastian Vanderzeil is a Director and Global Thematic Analyst with Cornerstone Capital Group. Previously, Sebastian was an economic consultant with global technical services group AECOM, where he advised on the development and finance of major infrastructure across Asia and Australia. Sebastian also worked with the Queensland State Government on water and climate issues prior to establishing Australia’s first government-owned carbon broker, Ecofund Queensland.
Emma Currier is a Research Associate at Cornerstone Capital Group. Emma graduated with a Bachelors of Arts degree in Economics from Brown University in May 2016. While at school, she worked with the Socially Responsible Investing Fund and as a teaching assistant for the Public Health and Economics departments. She spent her sophomore summer researching differences between American and Indian educational styles in Arunachal Pradesh, India, and completed a summer investment bank analyst position with Citi in the Media & Telecom group in 2015.