This material is intended for Institutional Investors (as defined in the Securities and Futures Act, Chapter 289 of Singapore) only and is not suitable or intended for persons who do not qualify as such.
As the coronavirus pandemic continues to immobilise the global economy, recessionary conditions are looming large. But what will recession mean for the energy transition?
In the near term, demand for residential solar energy will go down and perhaps you won’t rush out to buy that electric car. After all, petrol prices have been coming down a lot!
It might also be harder to source equity financing for renewable energy projects (or any financing for that matter). Don’t be fooled, however, because unfortunately, the climate crisis is here to stay. Yes, emissions have temporarily gone down, but remember C02 remains in the atmosphere for centuries on average and we had another record year of emissions in 2019. So much for reducing our footprint.
As soon as the COVID-19 pandemic moderates and our economies start to recover, which they gradually should do in a couple of months, so too will emissions. Storms, fires and floods will not stop at all.
Furthermore, we have all been reminded how fickle oil prices are. If you are the government, you might start thinking about supporting industries that will more reliably create jobs and grow tax receipts (renewables) instead of ones that are shrinking (fossil fuels).
If you are a big oil company, you might start questioning whether you should still allocate those billions of capital expenditure dollars to projects with an uncertain future. Either return the money to shareholders, or, if you want your business to stick around and grow, pivot to… you guessed it, renewables.
Meanwhile, we have been shown that a corporate culture of just-in-time inventory with its global supply chains is fragile. Resilience has generally fallen to the wayside in favour of efficiency and speed.
The idea of resilience is particularly relevant when it comes to power generation. While utilities have much less demand to meet at present, COVID-19 can still impact utility operations, and so too could a badly timed storm.
Imagine if a hospital’s power went out now – just when it is needing extra electricity for hundreds of ventilators. Microgrids and distributed generation with storage, whether from fuel cells or solar, are even more important now than when California’s forest fires sparked an up-swell of activity in these sectors.
What else might we see? There is a long list of possibilities:
One thing I do know, though, is that the energy transition question will come back into focus for politicians, the public and investors. Let’s see if elements of a green new deal make it into stimulus package #4 in the US, or perhaps even come along with a Democratic president by year-end.
Even without those things, however, the energy transition will eventually do what it did pre-COVID-19, which was to lead the market. This is not because of lower interest rates, but because it is what happens when you have strong-growth industries that help to solve an existential problem and make money while doing so (and if they manage to duplicate Moore’s Law, the economics keep getting better, too). Right now, we are all getting a chance to get back into this core long-term theme at much lower prices. If you don’t do it, ESG (environmental, social and governance) funds, which are receiving inflows, will.
A closing thought. We have all been harshly awakened to how fragile our global system is. Things that either seem under control or are invisible can rise up and upend the way we currently assume we can live tomorrow. This is true for both pandemics and climate change.
Over the past couple of months, we have also seen the power of a digital world that can share and accelerate scientific work and, in places, the spirit of a world that comes together.
I hope this can provide inspiration for what we must collectively do in the face of climate change.
Oh and about that electric car: amid the COVID-19 outbreak, the UK moved forward by five years its deadline for banning internal combustion engines, so it could still be worth a look.
For more on the merits of sustainable investing in volatile market environments, the potential implications this crisis will have on the energy sector and broader economy, and an assessment of sustainable asset management, read:
Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients.
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