The importance of identifying companies less vulnerable to climate change
Climate change and the growing resource requirements of the global economy are pushing up against the finite ecological resources of the natural world – which will naturally affect businesses.
In our view, stocks which are well-positioned for the disruption to the economy as society shifts from fossil fuel-based energy to renewables will perform better than those which are not. Traditional assets, networks and utilities based on fossil fuels will eventually be disrupted and replaced by distributed energy systems. For example, the time will come when households have the ability to capture, store and share cheap renewable energy using solar panels and batteries – and their need for fossil fuels will be far less pressing.
The cost of renewable energy has declined dramatically in recent years, making large-scale energy production from wind, solar and hydro feasible. This is good news, as it signals the transition to a phase of decentralisation of energy production and storage
In our view, structural disruption due to renewable energy is likely to be far-reaching, initially impacting resource, utility, transport and infrastructure sectors. Further, the finite nature of our natural resources makes unbridled consumerism unsustainable.
As a result, we expect the benefits of compounding returns across the board to be dampened going forward. Growth will not be as widely spread across the economy but rather limited to the disruptors in certain sectors of the economy or individual businesses. It is our view that capital-heavy, CO2 intensive businesses will struggle to compete going forward, and that it therefore makes sense to limit investment exposure to these industries. On the other hand, if we are able to successfully identify disruptive businesses, these are the companies which have the potential to experience strong growth in a weakened economy.
We expect the rate of growth in the global economy to decline over the coming decade and beyond due to several structural headwinds. One of the most challenging of these is the constraints on our natural resources, and the environmental impact of using fossil fuels as our main source of energy.
Long-term investors who ignore the impact of climate change and the imperative to reduce our reliance on fossil fuels will do so at their own peril. In our view, investment portfolios with direct exposure to fossil fuel-based energy businesses, utilities or the resources sector will struggle to compete with those more attuned to our changing economy and the headwinds it faces. Disruptive businesses, those with large and growing addressable markets, and which do not rely on economic growth but rather on a strong business proposition to grow their revenues and profits will be in a position to grow at rates well above that of the overall benchmark during periods of subdued economic growth.