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Written by: Martin Grosskopf | AGF Investments
What is your view on investing in the energy transition?
There is a prevailing investor attitude that pits newer “clean” sources of energy such as wind and solar against conventional “dirty” sources like oil and coal, but this may be dangerous thinking if we want the energy transition towards a net-zero carbon future to succeed. There is no way that we can just abandon fossil fuels “cold turkey” and expect renewables to immediately take up the slack without enduring serious economic consequences. Europe’s energy crisis has made that loud and clear over the past year. That’s why we believe an investment strategy in support of energy transition should invest across a full spectrum of opportunities with the goal being to own companies that are positioning themselves in a way that contributes to a reduction in carbon emissions over time, while benefiting their stock price in the process.
What is the difference between this type of approach and others that are defined as sustainable or ESG strategies?
The biggest difference is probably the inclusion of fossil fuel companies. When you think of the type of company that may be included in a transition strategy, think about a conventional power company that is switching over to natural gas from coal or investing significantly in renewables to bring down their carbon footprint in the future. A company like that couldn’t be held in a traditional sustainable or ESG strategy because its current carbon footprint would be too high..
Beyond this example, what other types of companies fit within the concept of a transition investment?
In addition to a significant component of conventional energy companies utilizing carbon capture technology, transition investments may also be focused on certain names in sectors such as mining and materials or industrials. Lithium companies, for instance, is an area of interest as are rare earths companies. An energy transition strategy also provides the flexibility to own nuclear exposure, which is something, again, that 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.
What about companies that are helping us adapt to climate change while in the process of transitioning. Do they have a place in a strategy like this?
Without doubt, adaptation is part of the transition process.Every year, we are faced with another catastrophic event whether it be fires, floods or a whole list of other tragedies that can be linked to climate change. That is not going to change anytime soon and there are firms that are helping us adapt to that today. Think engineering and design firms, for example, which are helping cities protect against these catastrophes. It’s critical that capital flows in their direction as well.
What role do government incentives like the U.S. Inflation Reduction Act (IRA) play?
The IRA is hugely important. There is real money now on the table to support the transition that wasn’t there even a year ago and countries like Canada will need to follow with their own initiatives to stay competitive. In turn, we see potentially huge opportunities to invest in companies that will benefit from this capital infusion.
How do you assess whether a company is committed to transition and not just virtue signalling?
They need to be deploying capital in pursuit of it. In other words, they can’t just be marketing their support of the transition, they must be putting their money to work, whether that means re-powering from coal to renewables or investing significantly in carbon capture. And, unfortunately, this isn’t always the case. Climate Action 100+, an investor-led initiative that “aims to ensure the world’s largest corporate greenhouse gas emitters take necessary action on climate change.”, recently published a report saying only 5% of the companies on their radar have committed capital to the transition. But my guess is that all of them are marketing their support of the transition, often giving the false impression that they are playing an active role in it when, clearly, they are not. This can be incredibly misleading to investors and there’s no excuse for it. We are past the stage of “evaluating.” If you are not making capital decisions now, you are not part of the solution.
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