25 August, 2020 / Analysis

How to make money from the sustainable revolution

ESG Clarity

Investors should consider how changes to the global population will affect major resource themes, says Earth Capital's CIO.

How to make money from the sustainable revolution

Gordon Power, chief investment officer of Earth Capital, gives his view on how oil majors should navigate the energy transition and outlines the major trends affecting how we invest sustainably…

How would you describe attitudes towards sustainable investing, post Covid-19?

We are currently going through a transition. People have started disposing of their ‘business as usual assets’ which are not going to conform to ESG in the long run.

At the same time, ESG approaches to rating things will also change and improve. ESG ratings are still very much in their infancy as we speak.

What are the emerging sustainable trends influencing how people think about investing?

Between now and 2050, we are going to see a 2.7 billion increase in the population around the world, according to the United Nations. That shift is going to require around 80% more energy, 55% more water and 60% more food. In macro-economic terms, this is an enormous shift and a big opportunity. If you are going to do that in a sustainable way, you are going to need to invest in more businesses that score well on ESG.

In the end, markets will adjust to what is required. Will companies with positive ESG profiles gain overweight? It’s relatively simple. If the ESG businesses don’t produce profits and aren’t sustainable, they won’t be overweight, and the pricing will change.

What about outlying companies with poor ESG credentials which are still performing?

If you look at these assets and say, ‘there may be an opportunity’, the question becomes whether, in the longer term, anyone will want to buy them?  Investors and pension funds have to consider their situations, so they don’t find they have stranded assets.

For those scoring badly on environmental criteria, will they be able to survive in a changing climate?  As climate change and ocean temperatures increase, there is an awful lot of energy businesses that require being close to the coast. Take oil refineries, for example. A lot of the refining capability in oil and gas is coastal. If you are a coastal-based business, and you are looking to raise capital, is anyone going to back it?

What is the best approach for companies looking to evolve their business model?

Some of these companies are going to have to transition anyway. Traditional oil companies can command big prices for renewables. They have a lot of money being thrown off by their “sin business”.

The transition for those will be really interesting. Take, BP, for example. If it transitions successfully, then it is pretty much undervalued. It will become a major supplier of the future.

It might take the opportunity to sweat its “sin assets” as best it could during the transition period. There is no question in my mind that there has to be a controlled transition, otherwise there will be gaps in the supply of our energy requirement.

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