Dispelling the Myths of Sustainable Investment

 In Market and Investment Insights

Hamish Chamberlayne, Portfolio Manager within Janus Henderson’s Global Sustainable and Responsible Investment Team, discusses what he believes are the major myths about sustainable investment. He explains why he thinks environmental and social megatrends will accelerate the transition to a low-carbon economy and discusses some of the investment areas that stand to be disrupted.

Key Takeaways

  • Population growth, aging populations, resource constraints and climate change are the key megatrends that will pressure the sustainability of the global economy
  • Market forces will drive the transition to low carbon, as the price of renewable energy, such as wind and solar, continues to fall
  • Significant disruption will likely happen across many sectors: electrification is already disrupting transport markets and the battery mega factories are coming
  • The team believes that carbon is the “big short” and significant asset divesting is happening in the market
  • The future sustainability of the global economy requires change across multiple sectors; the team says sustainability makes good business and investment sense

So I think there is this perception that sustainable investing is first and foremost about morals and second about investment. I have grown quite used to being put into that separate box that people tick if their client comes in and says first and foremost they have a moral objective. But I think that is wrong, I would like to challenge that this morning. I think sustainability makes good investment sense. Allow me to tell you why.

Let’s start with four main environmental and social trends. We call these the four megatrends. They are placing the global economy under enormous pressure. We think they transcend economic cycles. Very quickly, the global populations expect to grow by another 2 billion people over the next 30 years. Much of this will be driven by aging. And at the same time, while this is placing enormous constraints on our natural resources, and at the same time we have got to deal with climate change. So we have got to decarbonize our societies. We’ve got to relinquish a very, very productive source of energy, something which our modern economies are founded on. This seems absolutely impossible. How are we going to do this? How are we going to do this and maintain sufficient productivity to look after a growing and aging population? Because we really are still very reliant on carbon.

Now, can anyone guess where this is? I got it wrong the first time that I saw it. It is actually one of the most technologically advanced civilizations in the world. It is California, would you believe it? California. Bakersfield, California. Isn’t it a sobering thought that for all our technological progress, all our technological advances, we are still extracting energy in the same way that we were 150 years ago when John D. Rockefeller discovered oil in Pennsylvania.

Now we know the environmental arguments for reducing our use of fossil fuels. We know the moral arguments of doing so. But is there an investment argument to take carbon out of our portfolios? Many of you will say no. It is integral to our societies and we are going to be using carbon for many years to come, so we should still invest in it. However, I would like to challenge that assumption. I think any economist worth their salt will tell you that the price is set by the marginal demand and the marginal supply. I think that is a really important point and I will come onto it later.

Now, any talk about sustainability wouldn’t be complete without wind farms. So I am not going to disappoint. Where do we think this is? This is Texas, yes, Texas, the Lone Star State. One of the largest oil-producing states in the United States. But it is actually also the largest wind-producing state in the United States by a factor of three, and four out of the world’s 11-largest wind farms are actually in Texas. Something incredible has been happening over the last five years. There have been enormous cost declines in clean technologies, the price of wind and solar, utility scale wind and solar has declined by as much as 80%. So much so, that they are now the cheapest forms of electricity in the United States on an unsubsidized basis. So here we are in Texas, and this is a quote from a Texan Republican landowner, I love this quote, “I never thought wind would pay more than oil. That noise they make, thrum, thrum, thrum, is kind of like a cash register.”

So we think that wind and solar have now become so cheap that the U.S. will actually exceed its decarbonization targets that were set under the Obama administration. Yes, that is right, exceed. So market forces, the key point here is that we think market forces are going to be driving the transition to the low-carbon economy. We think economics really will trump politics.

Now, this is just the power sector, but we think there is going to be lots of disruption coming in other sectors as well, in transportation and oil markets. Now I hear you say that electric cars, they are too expensive, they don’t work. Electric trucks, it is going to be decades before we have electric trucks. They are half of all demand. Well, I would like to introduce you to the Tesla Electric Semi, a heavy-goods truck, an electric heavy-goods truck, which was released a couple of months ago. This has a range of more than 500 miles on a single charge. It can lead to savings of over $200,000 in fuel costs. Lots and lots of orders are already coming in for this truck. And perhaps even more importantly, I think this is probably one of the most important product releases of 2017, is this, the Baojun E100, a Chinese electric car, which costs just $5,000. That is amazing, $5,000 for an electric car. When you look around the world and look at all the emerging markets, what do you think they are going to buy? Are they going to buy a car from Volkswagen or Toyota? Or are they going to buy a $5,000 Chinese electric car? Now I am not making the argument that there are going to be millions of these on the road tomorrow, but the point is we are now producing products that we didn’t even think were possible two years ago. The world is changing incredibly fast.

So what’s making all this possible? Well, there are huge investment increases in battery manufacturing capacity. This is the Tesla Gigafactory in Nevada. It is already producing, but when it is complete, it will be producing enough batteries to support the production of millions of electric cars per year. This is actually the largest factory in the world, the largest building of any kind in the world. Two laps of it would be a five-kilometer run. When it is going to be finished, it is going to be covered in solar panels, it is going to be a zero-carbon factory that also recycles about 90% of its water. Don’t think too hard about that.

Now if you think this is big, let’s go to China. In China, there are more than 100 battery manufacturers. We expect Chinese battery manufacturing capacity to increase to over 300 gigawatt hours by 2020. Make no mistake, China has very large ambitions here, very large ambitions in clean tech. China is already the world’s largest market for electric vehicles. Last year it accounted for more than 50% of global electric car sales.

So what’s the point? Well, all of this is going to be taking away the marginal demand growth for oil. And the point is that oil is actually a very expensive source of energy. This is the oil cost curve. As you can see, the price of electricity is significantly below the price of gasoline. The average U.S. driver would save more than $2,000 a year by switching to an electric vehicle. And even more importantly, even more significantly, the price of utility-scale solar and wind is cheaper than Middle Eastern oil. Nine percent of the oil market is burnt in power stations. So we think there is going to be structural deflation in energy markets over the next 10 years, over the next few decades. So essentially, the growth in marginal demand is going to be eroded by the growth in these new technologies. Let me ask you a question. Can you put yourselves in the shoes of Saudi Arabia? What would you do if you were Saudi Arabia with 70 years of oil reserves at current rates of production? Is it any coincidence that the Saudi Aramco IPO is coming this year?

So I think, we think that carbon is the big short. Look at Norway divesting oil from its portfolios. So the price of oil is going up at the moment, yes it is, but is this your chance? Is this your chance to take oil and carbon out of your portfolios? I think it is. I think, well, I certainly think that this is a chance and perhaps we should ask ourselves, “Do you want to be the last off what I see as a sinking ship?”

Now, sustainable investing is not just about taking fossil fuels out of your portfolio and investing in wind farms. Let’s go back to the four megatrends: population growth, aging populations, resource constraints, climate change. If we want a sustainable world, there are many areas that we need to address. Whether it’s in transportation, smart cities, sustainable infrastructure, water, energy efficiency, insurance and risk management, health, as you can see a wide variety. We see lots of opportunities. What is the common denominating factor amongst all these businesses? It is the fact that they are realizing that sustainability makes good business sense, that they’re incorporating sustainability into their strategies. It is the reason for their growth. I think that is the really key point. That after all the technological advances over the last 10 years, there is an increasingly close alignment between sustainability and key investment trends.

So to conclude, sustainability is not just about morals, it is not just about taking carbon out of your portfolios, it is not just about wind farms, it’s much, much bigger than that. Sustainability is good business sense and it necessarily follows that it’s good investment sense.

Thank you very much.

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