Climate Change Investor Newsletter #4
May 2021
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When the Big Money™ Arrives
The moment when the real big money enters a space — and by that I mean the largest publicly traded investment funds and sovereign wealth funds — is when new markets begin to get real traction. That happened in April in the decarbonization market when Blackrock and Temasek (the Singapore government’s investment arm) announced a fund called “Decarbonisation Partners.”
Larry Fink, Chairman and CEO of Blackrock, released a statement saying, “For decarbonization solutions and technologies to transform our economy, they need to be scaled. To do that, they need patient, well-managed capital to support their vital goals. This partnership will help define climate solutions as a standalone asset class that is both essential to our collective mission and a historic investment opportunity created by the net zero transition.” (emphasis mine)
What’s particularly notable about the partnership is that they plan to back early stage companies in renewable energy and emerging fuel sources, as well as battery storage companies and autonomous vehicle technologies — in other words, across pretty much the entire gamut of green tech.
The two investors said they plan to commit $600 million to the effort, and expect to raise additional funds from outside investors eventually growing the fund to $1 billion. That sounds like a lot, but honestly it’s peanuts to organizations like these. Blackrock manages nearly $9 trillion and Temasek runs over $200 billion. But for these two organizations to commit any money at all is basically waving a green “go” flag to the biggest capital allocators in the world, telling them this is a space where they can deliver alpha at scale.
The scale part is the important bit. In order to have any material effect on their gigantic portfolios, money needs to be deployed in large allocations — small startups and mom & pop companies aren’t able to effectively use these types of large sums. Companies need to be large enough to be able to use big investments (in the tens and hundreds of millions of dollars).
Until fairly recently, that wasn’t necessarily the case in green tech. But 2021 is turning out to be the tipping point where the biggest governments and capital allocators finally got on the same page. At the Earth Day Climate Summit on 22 April, US President Biden told business and political leaders, “Taking on climate change together is more than just the right thing to do, it’s also in everyone’s best interest to do it. Meeting this challenge is going to require mobilizing financing at an unprecedented scale…” (emphasis mine)
And the big funds aren’t the only ones talking about investing big money. Possibly in response to an unflattering report (which I mentioned in April) that said the biggest banks continue to pour money into the petroleum industry, JP Morgan announced that they will be putting $2.5 trillion into projects around climate change remediation and sustainability over the next 10 years, including $1 trillion toward clean tech and decarbonization. And Citi announced they would also be investing $1 trillion in “sustainable finance” by 2030.
The cryptocurrency industry, as large and hot as it is, still has not attracted money from these largest funds, because there are few companies in the space that can deploy a very large capital investment at scale. It’s almost certainly coming, and I have no doubt that some sovereign funds are poking around at crypto’s edges and expect they’ll eventually want a position in the asset class. But it’s not there yet.*
Green tech, on the other hand, has reached scale. And more to the point, the green tech train just pulled out of the station. That means other big investors will move into the space, which will cause a macro increase in the valuations of the publicly traded leaders and largest movers. If you’re reading this, we’re probably in agreement that this will amount to a new Industrial Revolution — one that has the potential to save the Earth and create vast new wealth nearly everywhere.
*Disclosure: I have also been an investor in the crypto space since 2014.
What I’m Reading About: Carbon Markets
Carbon markets are pretty fragmented right now, and there aren’t many easy ways that retail investors can buy carbon credits, even though just about everyone seems convinced that eventually the world will need a functional market for non-voluntary carbon offsets.
But a time will come when, through either legislation or old-fashioned (!) corporate responsibility, companies will expect to offset their carbon footprint and it will become just another cost of doing business. That will require functioning carbon markets with efficient price discovery across the world, the way other commodities function now. That will also necessitate unified or near-unified worldwide standards for what governments consider an “offset,” something that doesn’t presently exist.
Forestry (literally planting trees) is the leading form of carbon offset credit, but others include buying renewable energy certificates, energy efficiency certificates, direct offset payments from certain industries such as defense, waste management partnership offsets, and mining methane capture credits, to name only the most prominent.
All of these various carbon offsets have to be valued, issued by a market maker, paid for by the entity offsetting their carbon footprint, and eventually the offsets have to be “retired,” so they can not be re-sold or used a second time. That offset “life cycle” is not yet mature, but according to Ecosystem Marketplace, which tracks some of the disparate carbon markets, the number of offset retirements spiked in the first two months of 2021.
This probably represents the beginning of a maturation of the world carbon market. In order to retire the offset credits, the registry doing the “retiring” has to have confidence that the offset is genuine and has been “used up,” according to the standards of its issuance. Ecosystem Marketplace used data from six such registries, though it notes that “new registries are being added regularly.”
Carbon offsetting is actually gaining widespread acceptance as a cost of doing business. From 2011 to 2019, the number of S&P 500 companies publishing sustainability reports jumped from 20% to 90%, and the number of companies participating in the Carbon Disclosure Project also increased.
The European Union has created a carbon market through its Emissions Trading System (ETS), and I firmly believe that the United States will need to implement some sort of federal cap & trade scheme eventually. At the moment, nine US states already have cap & trade laws in place, and the Commodity Futures Trading Commission (CFTC) recommended in 2020 that Congress pass a law formally establishing a regulated market for trading carbon offsets & derivatives. Perhaps ironically, even large energy companies such as Exxon (XOM) are lobbying for a carbon tax, not least because it will hurt small energy companies that compete with them.
For now, though, the only ways that retail investors can get exposure to the market are through exchange traded funds (ETFs) such as KRBN, which is up 19% YTD.* The ETF is benchmarked to the IHS Markit Global Carbon Index, so it’s the closest thing to a pure play on the price of carbon. When Congress finally gets around to establishing a federal cap & trade law requiring US businesses to offset their emissions, then we will truly be off to the races in terms of investing in the carbon market.
*I do not have a position in KRBN or an opinion of it as an investment vehicle.
What I’m Reading About: Hydrogen May Be Closer Than You Think
The French company Alstom announced on 23 April that its “Coradia iLint” train, which is powered by Hydrogen, is ready to deploy. It’s already been in passenger service for a year and a half, but the company said it was now ready for wider use. The article, in PhotoVoltaic Magazine, also cited a PwC report that indicated the hydrogen market would nearly double in the next 20 years:
“According to the report, global demand for hydrogen will almost double from 71 to 137 million metric tons per year by 2040, compared with 2019. The growth will be primarily due to the decarbonization of various sectors such as transportation, aviation and industry. Demand is expected to reach 519 million metric tons by 2070.” (emphasis mine)
Chart of the Month
What I’m Watching: “Impact Investing 3.0”
As noted above, I’m also invested in the cryptocurrency space, so I am a subscriber to Real Vision, which prominently features cryptocurrencies. However, I noticed one of their recent videos was called “Impact Investing 3.0,” which intrigued me.* The two men interviewed were from an Australian impact investing firm called Beckon Capital.
The main thrust of the discussion was that impact investing has evolved — 1.0 was a trade off of profit for impact, a kind of neoliberal philanthropy. Impact 2.0 was profit and impact, essentially what is conventionally thought of as ESG (environmental, social, and governance) investment. Impact 3.0, they argued, was creating impact through profit — that is, deriving value through doing good.
While I think that some impact investing is just a form of marketing (everything is sales, right?), I also agree that this type of investment product will likely be in greater demand going forward from both institutional and individual investors. This will drive demand in the climate change space as well as in other industries.
*Membership may be required to view.
What I Bought in April
Tellurian (TELL). See my original thesis on TELL here. I added to the position on share price weakness. Developments like this article, showing that natural gas emissions can actually be buried, make me even more confident in the play.
Enphase (ENPH). As I said in the March newsletter, I have had my eye on ENPH for a while, so I picked up some shares on a dip. ENPH is a leader in the micro-inverter space, converting DC power to AC power. After they posted earnings and the stock slipped due to chip shortages, I added more.
Brookfield Renewable Partners (BEP). Also noted from the March newsletter, I picked up some BEP during a pullback in the price; it should continue to deliver solid dividend growth through the next couple of years.
Ørsted A/S (DNNGY). This is another wind play, a Danish company that recently received a large investment from Norway’s sovereign wealth fund (which gets most of its money from oil). They are also developing a green hydrogen project (i.e. hydrogen produced with electricity derived from wind) in the North Sea.
I am/we are Long
CWEN, SEDG, TELL, MP, TPGY, TTCF, ABXXF, SLV, GLD, BEP, FCX, AEM, ESMU, CCJ, DNN, ENPH, DNNGY.
Conclusion
People are finally waking up to the fact that climate change is a massive investing opportunity and repositioning capital to take advantage of it. Partly this is because smaller movers have created opportunity and scaled, but part of it is also that the Biden Administration has demonstrated a commitment to moving toward spending at least some of the money that will be required to remediate the effects of climate change. Fortunes will be made in the process of greening the planet.
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About
The Climate Change Investor is published by Marc Johnson, an investor with over 25 years of experience investing in public and private markets. An avid consumer of financial research and new technologies, he believes that remediating climate change is both a moral imperative and an incredible business opportunity.
Disclaimer
Marc Johnson and the Climate Change Investor Newsletter are not registered investment, legal, or tax advisors, nor are they broker/dealers. No content contained herein should be considered financial advice. All opinions are based on research by the publisher of the newsletter and are intended as educational and entertainment material only. Although best efforts are made to ensure the information is accurate and current, occasional unintended errors and misprints may occur. Conflicts may be hidden or obscured. Neither Marc Johnson nor the Climate Change Investor Newsletter have received outside compensation for mentions of any stock, company, or project herein unless otherwise noted. Do your own research. Consult a financial professional on all investment decisions. © 2021 Marc Johnson
