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How Should Investors Approach the Climate Transition?

Both volatility and opportunities will reign in the years to come.
Solar Panel Farm

With so many variables and so little clarity, how should investors be thinking about the coming climate transition and how it affects their portfolios? I don’t have all the answers, but here’s what I told a recent climate opportunities investment conference sponsored by Societe Generale and Entelligent.

The prices of fossil fuels are rising because we have used them to power our economies for 150 years without putting adequate alternatives in place. The prices of metals like nickel, lithium, cobalt and copper have surged because supplies cannot meet the growing demand for batteries, wind farms and solar panels. Exacerbating that is extreme weather, which disrupts supply chains and raises commodity prices further. Extreme weather mitigation is no longer separable from adaptation. In fact, extreme events will make adaptation crucial.

These phenomena – “fossilflation,” “greenflation” and “climateflation” – tell us that the energy transition is going to be an increasingly complex process with many undetermined outcomes.

One factor we have already failed to predict, happily, is the cost of renewable solar and wind power, which has fallen much faster than ever predicted in many climate and economic models. This is a gift already bearing fruit. Capital expenditures on renewables grew 7% this year, topping expenditures on fossil fuels, which declined for the first time, according to the International Energy Agency. The challenge is to make sure this decline is exponential, that it goes from 1% to 5% to 25%, etc.

Another factor investors should watch carefully is how we use land. Renewable sources of energy like wind turbines and solar panels need land, competing with other uses such as agriculture. In Colorado, where I live, we are starting to see synergy between renewable energy and sustainable agriculture, showing that the same land can be used for both, creating energy and producing food for a growing population.

As I told my fellow panelists and attendees at the climate opportunities investment conference, three concepts are missing from the world’s climate response. The first is momentum. We may already have missed the train for the 1.5-degree target; if we don’t act quickly, we may miss 1.8 degrees and 2 degrees (or worse) as well. Momentum is key, and we didn’t see enough of it at the recent COP27 U.N. Climate Change Conference in Egypt. Too much emphasis was placed on compensating for climate losses and damages when there are more pressing problems to solve.

Second, we need to make sure the transition to lower carbon is a just one, especially with respect to mining metals, which typically has the most significant impact in poorer countries. And third, capital markets need to take on the role of catalyst.

As climate disasters worsen and as, I hope, more governments, companies, markets and individuals swing into action, investors should prepare for a very bumpy ride – but one filled with opportunities.

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