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Jan 13, 2017

Sustainable Investing Gets Real

The chief investment officer of Boulder, Colo.-based Green Alpha Advisors on the abundance of opportunities in sustainable investing—who wins, who loses, and why.

All over the financial world, investment experts are rethinking what it means to invest in energy. The British economist Nicholas Stern recently said, “Strong investment in sustainable infrastructure—that’s the growth story of the future… Any attempt at high-carbon growth would self-destruct.” And last year, the investment bank division at Morgan Stanley advised clients that long-term investment in fossil fuels may be a bad financial decision. “Investors cannot assume economic growth will continue to rely heavily on an energy sector powered predominantly by fossil fuels,” the bank said.

Stern and Morgan Stanley understand that the world has changed and our approaches to investment need to change with it. As chief investment officer for a firm that focuses on sustainable investing, I think a lot about portfolio theory and next economics, the argument that the field of economics must change in order to incorporate the realities of climate change. In thinking about next economics and investing, I ask myself two questions that I recommend to all investors. “What will the world’s economy look like in 10 and 20 years?” And, “What would I like it to look like by then?”

Our answers should inform where we invest. By formulating a thesis about the economy’s evolution, rather than its past, we can position ourselves to take advantage of high-growth areas. We can also help effect a far more efficient economy.

Let me explain. Every year since my partners and I founded Green Alpha, we’ve observed innovations emerge and compound like a fast rolling snowball. Each innovation, improvement and tool in the economy is smarter than the last and is immediately put to work in the development of a new generation of smart tools, a cycle that shows no sign of slowing or reversing. I’d write a book with a title like Special Topics in Next Economics 2017, but the pace of innovation is so fast that it would be out of date before I could get it done. Several of these trends merit not just our attention, but also our optimism.

Renewable Energies

They’re cheap and getting cheaper. In 2016, we saw the price of solar-generated electricity fall below that of wind, making it the least expensive source of power generation available, half the price of new coal. Because they’re tech-based rather than commodity-based, wind and solar will continue getting cheaper, generating more and more of the world’s energy until they ultimately have most of the energy market share. At some point, markets will understand solar for what it is and begin to value it appropriately.

Is renewable energy adoption at scale for real? President Obama just wrote about the “irreversible momentum of clean energy” in Science, and many of the world’s largest companies are on the same page, working towards running all operations on wind and solar. The poster firm for this is Google Alphabet, which says it will hit its goal of 100 percent renewable power for all operations this year. The company is a huge consumer of power, and its transition to wind and solar is resulting in large emissions cuts for the economy, as well as business stability and cost controls for their business. Cities are getting in on this too, with San Francisco, San Diego and others planning to run entirely on renewables by 2035 or sooner.

Inevitably, all this adds up to jobs in renewables. Though coal jobs were a focus of the 2016 presidential election, there are more paychecks in renewables. Wind power supports 88,000 jobs, while close to 209,000 U.S. workers are currently employed in solar—and that number is predicted to rise to 420,000 workers by 2020. As of October, coal employed fewer than 54,000, according to the Bureau of Labor Statistics. That these economic changes don’t get more recognition says more about politics than reality.

Across the country, wind power has become the “new corn” for red state farmers, providing a steady source of income in low-income rural areas. In fact, the 10 congressional districts that produce the most wind energy are represented by Republicans. California and other states, meanwhile, vow to push ahead in the fight against climate change—with or without President-elect Trump’s blessing.

China is doing more to develop and install renewable energies than any nation. Already the world leader in wind and solar capacity, China now says it will “plow $361B into renewable power generation by 2020, and create more than 13 million jobs” (via Reuters), leaving the U.S. in the dust. According to The Guardian, “China now owns five of the world’s six largest solar-module manufacturing firms and the largest wind-turbine manufacturer.” It’s also far and away the world’s leader in electric vehicle production and sales. Also, China is spending over $500 billion to expand high-speed rail. Its war on pollution and commitments to mitigating global warming are real, and China clearly is happy (and even excited) to accept the leadership mantle in sustainable economics, a title many perceive the U.S. to have abdicated. Having taken the reigns on renewable energy and technology leadership, China is now shoring up the case for its moral leadership as well, as suggested by Beijing’s recent announcement that it will now ban all imports of ivory.

Renewable Energy Adoption

What about renewable energy adoption, plus zero-emissions transportation, plus energy storage? Well, Tesla. I don’t mention this company as a stock recommendation but rather as a catalyst—it’s a firm at the nexus of the next economy. It’s close to impossible to overestimate Tesla’s importance. Tesla re-introduced, made sexy and popularized electric cars at a time when major automakers and oil companies were trying to prevent that from ever happening. Tesla’s ambitious approach to battery storage for cars and renewable energy has resulted in its Gigafactory, capable of doubling the world’s annual output of lithium-ion batteries and lowering costs commensurately. Don’t think storage is a big deal? Consider just one example: After the massive Porter Ranch natural gas leak, the city of Los Angeles decided to invest in battery backup for its electricity supply instead of gas, and it hired Tesla to provide some systems.

What of Tesla’s and others’ plans to scale up mass-market electric cars? Will that become huge or remain niche? There are plenty of signs that it’s the former. Germany, The Netherlands and Norway have all taken steps to ban internal combustion engine-driven passenger vehicles between 2025 and 2030; more major economies surely will follow. India, for example, is considering a similar move. Yes, these are ambitious goals that could easily be missed, but even if these nations get only halfway to their targets, it is not only incredibly bullish for any car maker selling electric vehicles, it’s bearish for oil, because ground transportation is its primary source of demand.

Farming

A New Yorker article said it best: “Vertical farming can allow former cropland to go back to nature and reverse the plundering of the earth.” Vertical farms are revolutionary for several reasons:

  • They use a fraction of the water required for traditional farming,
  • They’re close to or within cities, meaning no need for long-haul transport,
  • Their indoor location eliminates the need for pesticides and herbicides, thereby mitigating multiple systemic risks (e.g., ocean pollution from agricultural runoff).
  • They can be maintained at a lower cost than conventional farming.
  • They’re more resilient to climate change.

No question, vertical farming is what’s next. If you’re interested in how it looks, Business Insider has posted a nifty photo essay of an indoor farm in Brooklyn.

Additional Key Areas

Computing power. Our ability to collect data is now and will increasingly be unprecedented. The question is, what can we do with this amazing ability? And don’t forget the related areas of cybersecurity and fast-emerging artificial intelligence and robotics, all of which are ushering in an era of heretofore-unimagined economic efficiencies. What about the Internet of Things? After a slow start, it is coming into its own, thanks to ubiquitous connectivity and the diminished costs of sensors. Lots of opportunity there. In medicine? Don’t get me started on CRISPR-Cas9, a technique to edit genomes, thus opening up endless possibilities in medicine and biology, with equally endless humanitarian, ecological and commercial applications.

Okay, enough. You get it: We’re overwhelmed with innovations. The point is this: It’s in seeing the world for what it is becoming and not for what it was that investors and markets are going to allocate capital to manage risks and profit from new opportunities. This all leads, not incidentally, in the opposite direction from fossil fuels.

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