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Compelling reasons for a green portfolio
IN ASIA Pacific, directing capital towards socially responsible investments has historically been seen as a philanthropic endeavour rather than as a tool for portfolio optimisation. This mindset was supported by the belief that the health of the planet does not impact the wealth in your wallet.
But this is changing. The trend towards environmentally and socially responsible investment now has solid economic arguments in its favour as well.
China's Ministry of Ecology and Environment issued over 166,000 penalty notices and over US$2 billion of fines in the first 11 months of 2018 alone. Investing in a company that harms the planet is now a clear risk to your personal wealth.
It is not just fines or shifting regulations that investors need to be mindful of. The economics of renewable power are becoming irresistible and driving disruptive change. Better technology and increasing scale continue to cut the costs of renewable power generation. Over the past 10 years the cost of solar power has fallen by over 70 per cent globally and renewables now represent a major risk to fossil-fuel based energy systems.
These risks have already started to play out in Europe. Over the last 10 years, the growth of solar and wind power has knocked hundreds of billions of dollars off the market capitalization of the utility sector. In this new paradigm, investors need to consider sustainability issues as disruptive risks and opportunities that could have a material impact on the value of their portfolios.
This was reinforced by recent research into the economics of oil and renewables as competing energy sources.
We compared the economics of oil to renewables for powering vehicles. Of course, the oil industry has a huge scale advantage compared with renewables owing to the infrastructure that has been built up over the last 100 years, and this means that the amounts of oil that can be purchased on the spot market can provide large and effectively instantaneous flows of energy. By contrast, new wind and solar projects deliver their energy over a 25-year operating life.
Nonetheless, we think the economics of renewables are impossible for oil to compete with when looked at over the entire capital investment cycle. With oil at $60/bbl, our analysis found that investing US$100 billion in new renewables projects and then using the electricity generated to power electric vehicles (EVs) would yield 6-7 times more useful energy - i.e. energy at the wheels - than would spending the same amount on oil on the spot market for gasoline-powered vehicles, and 3-4 times more useful energy than oil used for diesel vehicles.
Accordingly, for oil to remain competitive with renewables and EVs as a fuel for road transportation over the long term, we estimate the price would need to drop to around US$10bbl (or US$20bbl for diesel).
Moreover, our analysis did not price in the environmental and public-health externalities of burning oil. Yet as governments worldwide increase the scale and urgency of the public-policy response to climate change and polluted air, the risk of oil being taxed more heavily will surely grow.
The recent haze in Malaysia and Singapore has underlined once again the problem that Asia's big cities face with polluted air, and this has obvious implications for public health.
The clear conclusion is that if we were building the global energy system from scratch today, economics alone would dictate that road transportation infrastructure would be built up around EVs powered by wind- and solar-generated electricity. Increasingly though, the more favourable economics of renewables versus oil are likely to be reinforced by governments taking action to price the externalities of fossil fuels.
The rise of renewable energy and EVs have wide-reaching implications for the energy and auto industries as well as policy makers. For investors, the disruptive shifts in these industries could be a source of risk or opportunity. Is your investment portfolio ready for the sustainability revolution?
Mr Wilson-Otto is head of stewardship Asia Pacific, BNP Paribas Asset Management; Mr Lewis, head of sustainability research, BNP Paribas Asset Management