The climate change debate is not only happening in the political arena, the real struggle is being fought in the world of finance.
The Donald Trump administration has begun its year-long process to formally exit the Paris Agreement, which will turn the United States into the only country in the world that is not participating in it.
Despite backlash from the rest of the world, President Trump’s decision to withdraw from it, and the emphasis on green issues in the recent Canadian election, suggests that the issue of reducing greenhouse gases is primarily a political one. Yet the market suggests that the true battle over decarbonizing the atmosphere may be happening in the world of finance, as global investors, led by giant money management funds that invest for the long term, have significant decisions to make about the future of energy.
Canadian bank RBC, one of the underwriters for the launch of Saudi Aramco’s forthcoming IPO, expected to be the largest public offering in history when it finally goes ahead, clearly thinks oil still has a big future. Yet the struggle by domestic energy player Encana to raise funds for its own IPO–and the similar experience of a number of US shale drillers–point to a different perspective.
Making money off green
A recent report from Bloomberg says some big funds have decided they can make money by betting that companies doing nothing to fight climate change are going to get weaker.
Many green fund managers have adopted the “long-short” strategy traditionally used by hedge funds to select their investment mix. The idea is to go long on companies that have figured out ways to adapt to the market rigours of a changing climate and go short on those companies that have not yet climbed on board.
One of those investment funds going long on climate change investment is the Canada Pension Plan Investment Board. This week the fund announced it was investing $2.63 billion to buy Canada’s biggest producer of wind power, San Francisco-based Pattern Energy.
Yet as the New York Times reported early N0vember, countries around the world, including Brazil, Canada, Norway and Guyana are looking to expand hydrocarbon production, something the paper claims will drive down prices and make people want to burn more oil and gas.
A generational shift
Deciding where to invest is not just a choice between green energy and fossil fuels, but a choice about which fossil fuel companies will continue to prosper while others decline. Analysts assume that governments and consumers will ultimately take climate change seriously enough to reduce the total demand for oil and gas, yet some are skeptical people will be willing to make the necessary sacrifices.
Automaker Volkswagen recently announced it is launching a campaign to build hundreds of thousands of electric cars with the aim of using mass production and economies of scale to bring the price of a battery electric car below US$23,000. Toyota is planning its own line of all-electrics.
Ultimately, the issue may come down to changes in public opinion as a whole. The Economist magazine recently reported that rather than politicians changing people’s views on major issues, it is the changing perspectives of a new generation that really matter.
“Demographic shifts accounted for a bigger share of overall movement in public opinion than changes in beliefs within cohorts,” the magazine reported.