AGF Investments Guest Blog
By Hyewon Kong, Associate Portfolio Manager
Hyewon Kong, M.Sc., CFA is an Associate Portfolio Manager at AGF Investments Inc., providing research and analysis on environmental thematic opportunities. She is part of the team that manages AGF Global Sustainable Growth Equity Fund, one of Canada’s first thematic funds focused on sustainable investments, which does not invest in fossil fuel producers.
The world is undergoing a shift to a low-carbon economy and we believe that the future investment climate will be much different than the current one. It could take decades to play out, but it is undeniably underway, given the change in posture of huge fossil fuel producers and consumers in addition to the commitments to limit carbon pollution made at last year’s climate change conference in Paris.
Along with this permanent, structural shift, there are also smaller changes at work that are unearthing investment opportunities. In this piece, we describe some of the changes taking place, as well as their impact as it pertains to sustainable investing.
A CHINESE ECONOMY IN TRANSITION
China is in the midst of enormous change, shifting from an export-oriented economy into a consumption-focused one. Already, services such as retail, health care and finance, have surpassed commodities, such as oil, mining, and natural resources, as the largest part of the Chinese economy. With services now dominating growth in China, economic activity is far less energy-intensive than during the last twenty years.
With this transition, the story of China-driven demand for commodities and its thirst for more fossil fuels to drive industrial expansion is an outdated thesis. China’s changing economy is one factor contributing to the structural decline for international fossil-fuel usage, which has already begun. Moreover, China’s declining appetite for commodities has far-reaching knock-on effects on the investment landscape. We would argue that relying on fossil fuel growth is problematic for long-term investors.
A SHIFT IN SAUDI POSTURE
Saudi Arabia is another country where there has been a remarkable change in positioning. This began with the decision to maintain increased levels of crude oil production, which sent global oil prices significantly lower. Moreover, senior Saudi officials have begun to express concern about longer-term demand for oil.
In April, Prince bin Salman announced a historic initiative to reduce Saudi dependence on oil revenues. His “Vision 2030” paper calls for a partial sale of Saudi Arabia’s national oil company and proposes using proceeds to set up the world’s largest sovereign wealth fund in order to invest in non-fossil-fuel sectors. This development is in part due to greater public concern about climate change and more stringent government action to limit carbon pollution. Indeed, the Saudis are attempting to shift instead towards renewable energy, with “Vision 2030” aiming to deploy 9.5 gigawatts of renewable energy by 2023.
A TRANSITION IN POWER UTILITIES
Saudi Arabia isn’t the only country paying attention to renewables. Renewable energy is now a significant part of the global energy mix – a trend that is expected to grow in the coming years. Solar module prices have declined by 70 per cent in the last five years – and by a factor of over 150 times since 1970. Meanwhile, utilities in the United States are boosting investments in renewable energy in anticipation of tougher new regulations on carbon emissions. Here in Canada, emissions-intensive economies like Alberta and Saskatchewan have unveiled plans to phase out coal-fired electricity and replace it with renewable power.
CHANGE IN THE AUTO SECTOR
The low-carbon transition is also apparent in the auto sector. In the case of Volkswagen, the company could not meet both price and emissions requirements at the same time, which resulted in scandal. More broadly, the auto sector is now in the midst of substantial change, driven by consumer desire for increased fuel efficiency and active safety and disrupted by companies such as Tesla. Rising demand for electric vehicles is now major growth driver for the auto industry. Here in Ontario, a leaked draft of the climate action plan includes a target for 12 per cent of all new vehicle sales to be electric by 2025.
PROFITING FROM TRANSITION
We believe that these events have signalled an era of transition to a low-carbon economy that is occurring within the global economy. In the case of China and Saudi Arabia, change is being brought on by governments that are changing with the times, attempting to evolve to produce a more sustainable and less volatile economy. In other cases, such as in the auto sector, consumers have been the catalyst for change, voting with their wallets – in part because they care about the environment – but also because they want to save costs, be more efficient, or get their hands on the latest innovative technology.
We believe these trends provide a powerful lens through which investors can target profitable investments. Indeed, we would argue that the broad transition to a clean economy is already a reality and that investors should consider acting to capture opportunities that benefit from this transition.