Green Energy has a Bright Future Yahoo Finance Lede

Early in the morning before Trump was expected to announce his decision relative to the Paris Climate Accord, Yahoo Finance’s Rick Newman called me for some insight and perspective. The topic is familiar ground for us, having discussed climate change, disruptive technology, Saudi Aramco’s IPO, the cultural bias against renewable energy and a host of related topics over the past few years.

And while the article captures the key issues at stake, what is missing is some of the conversation that didn’t land in the article. Namely, my assertion that the decision is primarily political theatre, and that Trump’s decision – while important from a signaling perspective – is less important than the responses, both shrill and triumphant, would imply. As Tallulah Bankhead was fond of saying, “there is less here than meets the eye.”

The bottom line is that walking away from the Paris accord means fewer regulations for the coal and autos sector (CAFE standards could be revoked?) whereas it triggers minimal/no shift at this point for the domestic renewables sector. Having said that, it appears that there will be no significant change in the behavior of coal miners and minimal change in the behavior of the principal O&G players. Further, the transition to clean/sustainable modes of transportation should continue, as California – one of the largest auto markets in the world - has already recommitted to high fuel efficiency standards. Although Trump wants to renegotiate the deal, the initial response from other participating countries has not been positive, indicating that there may be less wiggle room than Trump expects. As a result, while the headlines scream disaster or victory, the event could turn out to be net neutral (if the U.S. ends up getting more relaxed treatment) or net positive (if China/India adhere to more stringent emission standards). At this point, it is simply too soon to tell.

Meanwhile, in a moment so delicious that you simply couldn’t make it up, Exxon was compelled by shareholders in a major proxy battle to join the ranks of major oil companies providing additional climate-related disclosure. This is a classic example of ESG materiality relative to stranded assets in the oil & gas sector, an evolving dynamic we have explored in past blogs. (As a quick reminder, in October 2016, Exxon announced that it would be writing down some of its tar sand assets. Since then there has been significant investor demand to conduct 2-degree sensitivity analysis, demand that peaked during this year’s proxy season, in which shareholders at both Exxon and Occidental Petroleum passed resolutions that would require these companies to provide additional climate disclosure.) We expect more companies to provide climate risk disclosure in the future, considering the potential of $2 trillion worth of stranded assets in the energy sector by 2035.

In other words, in the same week that Trump announced that the US would withdrawal from the only international framework to address climate change, the largest publicly-traded oil company in the world was compelled by its owners to disclose business risk relative to climate change. Bravo for life’s small ironies.

And to wind out the week, I received an email update from a friend who works in the ESG team at Deutsche Bank, a team that manages a proprietary ESG index. The takeaway? Their index has outperformed the S&P by 6% YTD and by 4.5% since February. The cumulative market cap of the 59 stocks in their index is $1.8T, primarily based in the U.S. and is heavily weighted towards the Sustainable Transportation (35%), Health & Fitness (30%) and Power Infrastructure / Smart Grid (13%) sectors. What's even more interesting is that this outperformance stands against a broadly negative backdrop for ESG investors (with all the negative press around Trump policies, the recovery of the O&G sector, airlines flying at capacity, etc.). And, the Deutsche Bank team observes that ESG strategies have been generally unaffected by Trump's Paris announcement.

While there could be many attributions for this outperformance, and while we have observed in the past that the sector can be hugely volatile, I believe that it underscores our thesis that energy and sustainability are technology plays rather than commodity plays. Just as in technology, disruption, product cycles, innovation and consumer/market demand drive uptake and adoption rates, the same dynamics play out in the energy and sustainability sectors. At The CAPROCK Group, we expect these two sectors to continue outperforming over a full market cycle… but with a terrifying amount of volatility along the way. Investing in these sectors is not for the faint of heart!

In summary, all of this supports our view that The Industrial Revolution 2.0 (industrial IoT, auto tech, ag/water tech, low-carbon energy), supported by ESG 2.0, will be driven by unprecedented tech innovation directly and indirectly impacting industries worth north of $11 trillion in market cap.

And while our President grabs the headlines and dominates the Twittersphere, the cold reality is that markets trump policy, and geopolitics trump national politics.

Written by Matthew Weatherley-White


Read the full article here. Written by Rick Newman and published by Yahoo Finance.


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