As we continue to face the consequences of climate change, investors are increasingly interested in supporting companies committed to transitioning towards a net-zero carbon future.
Martin Grosskopf, VP & Portfolio Manager at AGF Investments, believes that the prevailing attitude among investors that pits “clean” sources of energy against “dirty” ones may be dangerous for the energy transition to succeed. In his view, we cannot abandon fossil fuels abruptly without facing severe economic consequences. Instead, an investment strategy should support a full spectrum of opportunities and own companies that are positioning themselves in a way that contributes to reducing carbon emissions while benefiting their stock prices in the process.
Grosskopf suggests that an investment strategy for the energy transition should not exclude fossil fuel companies entirely, but instead include companies that are transitioning to natural gas or investing in renewables to reduce their carbon footprint. He notes that this approach differs from sustainable or ESG strategies that tend to avoid fossil fuel companies altogether due to their high carbon footprint.
In addition to conventional energy companies utilizing carbon capture technology, Grosskopf believes that transition investments may also be focused on certain names in sectors such as mining and materials or industrials. Lithium and rare earths companies are areas of interest, and an energy transition strategy also provides the flexibility to own nuclear exposure, which is not seen in most traditional sustainable or ESG strategies. Moreover, there are opportunities to own financial firms that are specifically engaged in providing transition financing.
As we face the realities of climate change, adaptation is also an important aspect of the transition process. Grosskopf emphasizes that firms that help cities protect against catastrophes, such as engineering and design firms, should receive capital flows as well.
The role of government incentives like the U.S. Inflation Reduction Act (IRA) is critical to support the transition. According to Grosskopf, the IRA is a significant source of funding to support the transition that was not available a year ago. Countries like Canada will need to follow suit with their own initiatives to stay competitive. As a result, Grosskopf sees potentially huge opportunities to invest in companies that will benefit from this capital infusion.
He stresses that it is essential to assess whether a company is genuinely committed to the transition or just virtue signalling. He explains that companies must be putting their money to work, whether that means re-powering from coal to renewables or investing significantly in carbon capture. Unfortunately, not all companies are deploying capital to support the transition. A report by Climate Action 100+ revealed that only 5% of the companies on their radar have committed capital to the transition. Grosskopf believes that many companies may be marketing their support for the transition but not taking active steps, which can be misleading to investors. He insists that companies must make capital decisions now to be part of the solution.
In conclusion, Grosskopf believes that investing in the energy transition towards a net-zero carbon future requires a comprehensive strategy that includes fossil fuel companies transitioning to reduce their carbon footprint. Companies focused on carbon capture technology, lithium and rare earths companies, and nuclear exposure should also be considered. Adaptation to climate change is an essential part of the transition process, and firms that help cities protect against catastrophes should receive capital flows. Government incentives like the IRA are critical to support the transition, and companies must deploy capital to be considered genuinely committed to the transition.
Footnotes:
Adapted from source: Grosskopf, Martin. "(Un)Conventional Wisdom: Investing in the Energy Transition." AGF Investments Inc, 17 Feb. 2023, perspectives.agf.com/unconventional-wisdom-investing-in-the-energy-transition/
