Business·Analysis

The market battle for climate supremacy heats up: Don Pittis

Some long term investment funds are betting that climate change matters to financial markets.

While politicians may choose to ignore climate science, money managers cannot

Oil or wind energy: which is the better investment for the long term? The real battle over cutting carbon may be happening in the world of money. (Lucas Jackson/Reuters)

As U.S. President Donald Trump's decision to withdraw from the Paris climate accord moved to its next step just after a Canadian election fought on green issues, you might think the battle over how or whether to address climate change was all politics.

But this week there have been renewed reminders that the real battle over decarbonizing the atmosphere may be happening in the world of money.

Investors, led by giant money management funds that invest for the long term, must make crucial decisions about the future of energy. And while inevitably politics plays a role in what they decide, there is only one important issue.

The essential concern for those betting their own and their clients' money is whether the investment will make more money in the long run. In other words, will the oil and gas industry continue to be a cash cow or, as some have suggested, is the sector in its sunset years?

Clearly Canadian bank RBC thinks oil still has a big financial future. The bank is one of the underwriters for the launch of Saudi Arabia's giant government oil corporation Saudi Aramco, which is finally going ahead with its sale of shares onto world stock markets.

Other investors have been more reluctant, as Encana relocates to the United States saying it is having trouble raising funds. But that is not just a Canadian complaint. U.S. shale drillers have reported similar shortages of money.

Will Saudi Aramco be a good long-term place to put your money? Pension funds and money managers have to decide. (Hamad I Mohammed/Reuters)

Now a new report from the business news service Bloomberg says some big funds have decided they can make money by betting that companies doing nothing to fight climate change are going to get weaker.

Called short selling, the widely used investment technique involves renting the stocks from another investor who's planning to hold for the long term and then selling the shares in the hope of buying them back at a lower price before the rental contract is up, and profiting from the difference.

"In an unusual move, they're not only buying stakes in the companies favoured by green investors, but also shorting firms that are failing to make the shift to sustainability," says the Bloomberg report.

Long or short?

Apparently the technique is spreading, as green fund managers have adopted the "long-short" strategy traditionally used by hedge funds to select their investment mix. The money-making idea is to go long, in other words buy and hold for the longer term, on companies that have figured out ways to adapt to the market rigours of a changing climate and go short on those companies that have not yet got on board.

Following data showing that green energy firms have outperformed energy firms of all kinds, now there are reports that regular hedge funds are planning to adopt the strategy.  

One of those investment funds decidedly going long on climate change investment is the Canada Pension Plan Investment Board, the body that invests the billions of dollars that most Canadians pay into the fund in the expectation the money will still be there when they retire.

This week the fund announced it was investing $2.63 billion to buy Canada's biggest producer of wind power, San Francisco-based Pattern Energy. The CPPIB's investment strategy is to scoop up companies it believes are undervalued that it expects to grow and prosper over the long run.

In 20 years or so, U.S. President Donald Trump and Senator Mitch McConnell won't be in charge anymore. Greta Thunberg's generation will be. (Yuri Gripas/Reuters)

In what seems like a sudden flurry of activity, the battle is definitely not one-sided. As the New York Times reported on Sunday, countries around the world including Brazil, Canada, Norway and Guyana are looking to expand production, something the paper claims will drive down prices and make people want to burn more oil and gas.

Of course low prices are not good for investors. The North Dakota leak in the Keystone pipeline pushed the gap between Alberta and U.S. crude prices to about $22 US a barrel, a blow to Canadian producers.

Deciding where to invest is not just a choice between green energy and fossil fuels, but a choice about which fossil fuel companies will continue to prosper while others decline.

Some analysts have suggested that Saudi Aramco's vast reserves of light sweet crude will still be profitable even as more expensive sources of oil get squeezed out of the market. Of course that assumes governments and consumers will ultimately take climate change seriously enough to reduce the total demand for oil and gas. Many are sceptical people will be willing to make the necessary sacrifices.

The generation in charge

Certainly boomers are attached to their gas-guzzling cars, and it is unlikely they will stop buying gasoline at least until those cars begin to need replacement. In recent decades oil-producing giants have used their economic clout to get people like Trump on side. But two other tidbits of news this week show it's possible the longer-term trend may favour the short sellers and the CPPIB.

Automaker Volkswagen announced it is launching a campaign to build hundreds of thousands of electric cars with the aim of using mass production and economies of scale to bring the price of a battery electric car below $30,000 Cdn. It is hard to imagine Toyota is not planning to compete with its global rival on price when it bring out its line of all-electrics, which will soon make replacing a gas-burner with another fossil fuel vehicle a losing proposition.

The other instructive story was an Economist magazine report on the importance of demographics in political change. Rather than politics changing people's views, the magazine said, it is the changing views of a new generation that matter. For example, fear of communism faded only because an older red-under-the-bed generation died off. 

"Demographic shifts accounted for a bigger share of overall movement in public opinion than changes in beliefs within cohorts," reported the magazine.

No doubt wise long-term investors are beginning to take into account that in 20 years or so, it won't be Donald Trump's generation in charge, but Greta Thunberg's.

Follow Don on Twitter @don_pittis

About the Author

Don Pittis

Business columnist

Don Pittis was a forest firefighter, and a ranger in Canada's High Arctic islands. After moving into journalism, he was principal business reporter for Radio Television Hong Kong before the handover to China. He has produced and reported for the CBC in Saskatchewan and Toronto and the BBC in London. He is currently senior producer at CBC's business unit.

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