CEO of FFI Advisors, a performance- and mission-driven investment manager focused on developing pragmatic climate-aligned strategies.
Now that 2021 is officially underway, investors will be evaluating the risks and opportunities presented by an anticipated post-pandemic world and a new Biden administration. I am confident that one of the key themes of 2021 will be the heightened focus on the energy transition — the divestment away from fossil-fuel companies and the investment into clean energy opportunities.
At FFI Advisors, we focus on developing and managing climate-aligned investment strategies. A variety of institutions, from foundations and university endowments to faith-based institutions, have joined the fossil-free fight, using the power of their $14.5 trillion in assets to effect change. However, two recent events highlight this significant paradigm shift and may be a barometer of more change to come.
In early December 2020, Thomas DiNapoli, the New York State Comptroller, announced that the state would begin divesting its employee pension fund of gas and oil holdings (roughly $12 billion in investments). This warning to the fossil fuel industry is one part of the state’s bigger plan to decarbonize its pension portfolio over the next two decades. In a New York Times opinion piece by Bill McKibben, a founder of the climate advocacy group 350.org, he indicates that this bold divestment position is the largest by a pension fund in the United States.
Then, in mid-December, in an ironic sign of our changing times, Bloomberg Green reported that the Rockefeller Foundation “plans to divest from fossil fuels as it commits more capital to green investments. Under the plan, already underway, Rockefeller is expected to more than halve the portfolio’s total exposure to fossil fuels to less than 1% in the near future.”
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The fossil fuel divestment movement started as a moral cause, with investors using divestment to align their portfolios with their beliefs about the institution of a more sustainable economy that respects the planet. Today, however, investors like the New York State Common Retirement Fund are making divestment decisions that account for the financial risks relating to decarbonization. Further, climate change presents ways for investors to reposition their portfolios and capture returns from the energy transition underway across the global economy. Investors are increasingly taking note that the capital markets are recognizing the differences in long-term value between new and traditional energy systems.
Energy Transition Opportunities
As Bloomberg Green noted, we may remember 2020 “as the year the world started to reverse centuries of damage to the climate.” Despite the efforts of the Trump administration and the fossil fuel industry to maintain a “business as usual” approach, breakthroughs in technology, coupled with increasing market demand for renewable energy, have continued to accelerate the pace of the energy transition.
That said, the energy transition is still in its early stages and has thus far been driven by technological advances that in most parts of the world have made clean energy cheaper than fossil fuels for electricity generation. Similar technology advances are dramatically lowering the cost of energy storage. For example, advances in electric storage technologies have reduced concerns regarding reliability and intermittency and enabled the wide installation of solar and wind power. These new technologies are joining batteries as effective mechanisms for large power storage, with new battery technologies expected to help make electric vehicles comparable in price to their conventional internal combustion engine counterparts by 2024, if not sooner. Another emerging technology with competitive costs is liquid air energy storage, which uses excess electricity to liquefy air via cold temperatures. When power is needed, the liquid air is allowed to warm. As it returns to gas form, the pressure spins a turbine that converts the energy back into electricity. Importantly, LAES technology has some of the lowest storage costs.
Some traditional energy companies have announced plans to participate in the ongoing energy transition. For example, Italy’s Eni released plans to move to net-zero emissions and is reorganizing into two areas: one to focus on traditional energy assets and the second to manage renewable energy assets. Regrettably, the transition plans of the major U.S. oil and gas companies continue to lag behind their European peers — thus the decision by DiNapoli in New York.
It’s clear to us that the energy transition is a structural, not cyclical, change driven by emerging technologies that are causing older, legacy technologies to become obsolete. This has two significant implications for investors: First, technology disruptions and their impact on markets almost always happen faster than the experts predict. Second, the reliance on past performance to guide future investment decisions carries significant risk.
Looking ahead, market uncertainties will undoubtedly translate into some volatility in 2021, but the long-term technology, policy and social trends all point toward more favorable conditions for accelerating the energy transition. I’m seeing several options that investors can pursue: First, obtain an understanding of the carbon exposures and energy transition risks embedded in your portfolio. Second, determine the most appropriate way to implement any changes deemed necessary. There is no right or wrong answer, and divesting from fossil fuels and making investments in clean energy funds are two approaches to consider.
The optimal solution for any institutional investor should reflect an organization’s goals, operating structure, manager mandates and performance objectives. While these sound like traditional considerations, keep in mind that we are on the cusp of a massive disruption of the energy sector, and decisions made solely by looking at historical sector performance may not yield actions that effectively manage transition risks or capture associated opportunities.
As we say at FFI Advisors, the green bus has left the station, and it’s barreling down the road. It’s time for investors to get on board.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.