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Asset Management | ESG Edge

The Train is leaving the station – Don't get left behind!

October 2020

The Earth sweltered to a record hot September. Boosted by climate change caused by humans, global temperatures averaged at 60.75 degrees (15.97 Celsius) last month, 0.97 degree Celsius above the 20th century average, edging out 2015 and 2016 for the hottest September in 141 years of recordkeeping, according to the National Oceanic and Atmospheric Administration (NOAA). With climate change now becoming visible in daily lives and impacting every part of the world, the need for climate risk mitigation is surfacing, and investors must prepare for this before it is too late.

Investors must decide which strategies and technologies are most likely to create value in a world that must fight climate change. They need to allocate capital ahead of the big regulatory shifts that are now underway. Investors should not only avoid severe capital erosion in industries that are seen as contributing to adverse climate change but also correspondingly benefit from being early investing in new generation industries which will define the new era of climate change mitigation. Not doing so would leave them at a tremendous disadvantage. ESG funds, by the virtue of their investment objective, may be one of the optimal ways of making this capital allocation.

The upcoming US election is seen as a major turning point for green investing and climate action. Democrat presidential nominee, Joe Biden, has pledged to spend USD 2 trillion to combat climate change with an aim of eliminating carbon emissions from the power grid by 2035 and accelerating the uptake of electric vehicles. If this is implemented, companies working in the low carbon energy industry, such as solar and wind power, and firms in the electric vehicle supply chain stand to benefit immensely. According to the Wall Street Journal, "Tax incentives for renewable energy projects such as wind and solar are due to phase out in 2020. Mr. Biden has pledged to extend them and support the acceleration of other projects such as energy efficient buildings." Therefore, it is no surprise that renewable energy stocks and ETFs have been soaring in the US markets and elsewhere in the world, while traditional energy stocks continue to languish.

The world's transition to cleaner sources of energy is gaining speed as the coronavirus pandemic accelerates a shift in investment away from fossil fuels, according to the International Energy Agency (IEA). IEA adds that capital spending on energy this year is set to plunge by 18%, as global energy demand is expected to fall by 5% in 2020, a pullback not seen since World War II. Correspondingly, spending on renewable energy is showing strong resiliency underscoring the fast occurring shift.

By far the most glaring illustration of the big multi decadal shift comes from the fact that US Power utility NextEra Energy's market capitalization is now starting to exceed that of oil giant Exxon Mobil Corp, as the most valuable US listed energy company. The world is changing at a fast pace. Investors not wanting to be left behind may look at being early investors in ESG funds.

Authored by: Abhay Laijawala, MD and Fund Manager, Avendus Capital Public Markets Alternate Strategies LLP

Good Reads

NextEra Now More Valuable Than Exxon as Clean Power Eclipses Oil
Bloomberg, October 2020
NextEra ended Wednesday with market value of $145 billion, topping Exxon's $142 billion. The oil major's U.S. rival, Chevron Corp., also surpassed it in value for the first time. The shift reflects a global energy transition that’s embracing clean energy and rejecting fossil fuels.

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Solar the new 'king of electricity' as renewables make up bigger slice of supply: IEA
Economic Times, October 2020
Solar output is expected to lead a surge in renewable power supply in the next decade, the International Energy Agency said, with renewables seen accounting for 80 per cent of growth in global electricity generation under current conditions. In its annual World Energy Outlook on Tuesday, the IEA said in its central scenario - which reflects policy intentions and targets already announced - renewables are expected to overtake coal as the primary means of producing electricity by 2025.

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