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Climate change: Investment opportunities and risks

Climate change: Investment opportunities and risks

Climate change: opportunities and risks for investors

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, an ex-Stanford physicist, who QuantumScape was co-founded 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. He claimed that the cells being developed in this controlled environment could revolutionize the rapidly-growing electric car market, with performance far better than current batteries.

“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 to get a piece of the global clean-tech boom, proved to be a very open 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.

Climate-related questions that investors have to answer are complex and dizzyingly numerous. How fast will new energy systems become available and which technologies will be the most successful? What big companies are most at risk from financial risks from extreme weather events and the energy transition? How can investors ensure that their portfolios ride the economic waves of the climate crisis without being left at sea?

QuantumScape was among several high-profile clean tech companies that went public in the past few years through a special purpose acquisition corporation (Spac), which has far fewer disclosure requirements than a traditional initial public offering.

Spacs are becoming more popularThis has made it easier for retail investors to purchase stock in clean-tech companies at an early stage of 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.

Some people believe that the sharp correction in share prices and subsequent overheating of these companies is a sign of concern for the entire 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 he believes that investing in the electric vehicle industry is a good idea. “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 includedXpeng Motors is an electric-car manufacturerIn Guangzhou, I spoke to the eponymous chief executive He Xiaopeng regarding the rapid development of his sector.

The Chinese government has sought to encourage green tech for years through lavish subsidies. However, these subsidies have been cut in recent years.

Some analysts saw this as a sign of wavering commitment by Xi Jinping’s government to its vaunted green agenda. He Xiaopeng argued that the rapid technological advancements meant that leading companies in this sector could compete with much less 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.

Xpeng was a Chinese company that is producing higher-end electric vehicles to compete against Tesla. It went public in a New York flotation a few weeks after my visit. It was valued at $20bn — a market capitalisation that has since doubled.

It is one among several listed Chinese clean tech groups that have proved popular with foreign equity investors. 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. Foreign retail investors looking to take a piece of their profits face some obvious risks.

As in the west, China’s energy transition strategy Faces resistance From conservative voices concerned about the long-term impact on 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. Even though companies like Xpeng or Nio have floated to New York, they are still not easily accessible to western retail investors. However, the Chinese government is increasingly scrutinizing foreign listings.

A miner finds 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 I was in Australia, I visited the Melbourne headquarters. 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 said that the company is setting new standards by promising to create a new standard. 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 percent of shareholders protested against the company’s climate plan last month after proxy advisor Glass Lewis. They are highly recommendedIt was rejected by the Paris accord, as it was not clear if it was aligned with it.

Yet when BHP has taken serious action to “decarbonise” its business, the stock market response has been less than wholly encouraging. The company announced in August that it would be “decarbonising” its business. It was a selling item 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. BHP has continued to retreat from fossil fuels and announced last month that it was announcing a major divestment Australia’s coal assets

Companies in the resources sector are on a similar slippery slope. Shell and BP, both London-listed oil companies, have been subject to shareholder revolts over their climate plans. Rio Tinto, a mining company in October, was also subject to shareholder rebellions. Responded to investor pressureby increasing 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 seatsIts board will drive climate action faster.

Weather threat

Investors can’t simply ignore companies involved in fossil fuel production and protect themselves from climate-related disruptions. 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.

Munich Re, a global reinsurance company, was my destination in Germany. They were the first to seriously analyze climate change threats half a century back. 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. He now leads a team consisting of analysts spread around the globe. They use voluminous data as well as high-tech modelling software in order to plan a course for this huge insurer in an age when climate change is rampant.

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. The insurance industry was hit with $215 billion in payouts due to natural disasters in 2017 and 2018. The threat grew with 30 major storms in North Atlantic last year, a record.

However, there are no high-profile bankruptcies of insurance companies. Munich Re has been solidly profitable and its share price has steadily climbed through the superstorms, now at 38% more than at the beginning 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. He said that climate change concerns were likely to increase demand for property insurance over the next decades.

He stated that pricing is the real danger. 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

A time of disruption

During my travels, I saw large listed companies struggling with 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 declining 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.

While the climate crisis is a time of disruption for many businesses, others are seeing unprecedented opportunities in the powerful environmental changes that are occurring.

In the far north of Greenland I saw how the gradual disappearance Arctic ice threatened the centuries-old traditions that Inughuit dogsled hunter Inughuit. 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.

Bluejay chief executive Rod McIllree explained to me that historically, the Arctic sea ice season had left ships only a limited window of time to reach the titanium site. This made mining economically uneconomical. This is just one of many new Arctic projects that show the region’s growing economic potential as a 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 thing that is certain, given the increasing impact of the climate crisis upon the planet as well as the global economy, it will be a major issue for investors for many 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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