The existential urgency to decarbonize and reach net zero is rife with complexity. It’s nuanced and it begs for a pragmatic view of the path forward. Whether you are an active ESG (Environmental, Social & Governance) investor or one interested in how a transition may affect economic and investment choices, I’ve laid out some considerations that we’ll have to navigate.
Decarbonizing our economy will be spectacularly resource intensive. Many of the key commodities required to make the transition (Copper, Lithium, Nickel, Cobalt, etc.) are finite in supply and/or problematic in location. The irony is that large-scale deployment of windmills, solar farms, transmission lines and water management will take significant raw materials to implement.
Russia’s war in Ukraine has increased the pressure on raw materials in the short term. With much of Europe’s energy supply coming from Russia, their significant dependency will need to be re-sourced. In the short term, this economic duress will impact the investment in sustainable and carbon-oriented infrastructure. Europe has awakened to this vulnerability and has doubled down its efforts to build a sustainable economy, yet this will take time.
Electricity is foundational for decarbonization. Investments in infrastructure must ensure that electrical grids remain reliable. Electricity, the energy source for electric vehicles, will also be needed in order to generate hydrogen. Furthermore, when solar, wind and other technologies are not available, electricity will be required to fill in the gaps.
Electric vehicles (EVs) are projected to be 10% of the world’s vehicles by 2030 and have 42% of the market share by 2035. Yet current EV and battery production use copper, lithium, nickel and cobalt. Semi-conductors use silicon, cobalt and copper, all mined materials short in supply.
It will take the best period of energy and creativity we have ever had
The projected investment to reach the net zero goal by 2050 is between $240-275 trillion. There will be many new vehicle, battery, manufacturing and technology companies vying for leadership. There will be large energy companies working on the shift from fossil fuels to other energy sources (hydrogen, etc.) and energy storage. It is important that these companies are well-capitalized, because a lot of companies won’t make it.
A global, multi-pronged effort is needed to achieve net zero. Private and public companies, governments large and small are called upon. It serves as a reminder that we will have to innovate around the bottlenecks, shortages, price spikes and climate damage. Gone are the days in which low emitter countries can think “not my fault” equals “not my problem,”. So too are the days when people in high emitter countries could just decide to kick the can down the road.
Divestment and Engagement
To transition to a better, healthier planet, both divestment and real advocacy to engage with companies are methods of dealing with “controversial” companies or industries. Divestment is the active exclusion of a company. Engagement is actively working with a company through shareholder involvement and corporation resolution to highlight what needs to change and to bring ideas as to how to make that change and then working mutually to achieve that goal. There is not a company that is 100% sustainable, so advocacy work is exceptionally important and is an effective strategy for making change more quickly.
You’ll hear more about the urgency to price carbon. To get the funding and investment to achieve our goals, the market will need to be incentivized. Incentives come in different forms; however, capital markets follow the dollar.
Positive reporting changes
Corporate reporting on their sustainable efforts has become mainstream and standard. And there are now several rating companies to decipher the complex data. In addition, there are more tools to evaluate the impact on investment choice. Currently, the SEC (Securities and Exchange Commission) has proposed new disclosure rules requiring corporations to document their risk and emissions. Europe is way ahead of the U.S. in this regard; perhaps we can learn from their experience.
In closing, progress toward climate goals will be on a continuum, becoming more and more sustainable. People tend to overestimate what can be accomplished in the short term but vastly underestimate the progress that can be made in the long term. The implications are vast and so are the opportunities.
If you would like to learn more about ESG and net zero investing, do let me know. I always welcome a conversation about what is important to you.