Why Carbon, why now?
The difference between short and long term success is often about how you ask a question:
>In the case of climate change, given uncertainty around pricing carbon, should I do anything to my portfolio?
The outcome of individual international negotiations will not change the fact that we are looking at a more carbon constrained world within the time frame of many institutional investors.
>The question on climate change becomes – how do you best structure a long term investment portfolio to maximise opportunities in an increasingly carbon constrained future?
Carbon will ultimately become a major new asset class. The risks and opportunities are both substantial.
RISK
- Emissions trading pervasive – implemented across 25 EU states, legislation pending in the US, Japan, Australia and New Zealand.
- Exposure is broad - US the largest trader of carbon allowances (EUAs and CERs) despite having no national scheme [Point Carbon 2009]
- Exposure is growing - US$100bn in carbon traded in 2008 [Point Carbon] expected to grow to over US$1trillion by 2020
- Australia is exposed – ASX 200 emits 20% more greenhouse gases than MSCI for every dollar of revenue generated [Carbon counts 2008]
OPPORTUNITY
- Unprecedented expenditure - UN estimates $20 trillion needs to be spent on climate change abatement
- Immediate opportunities - Investing $170bn per year for next 13 years would capture energy efficiency opportunity with an average IRR of 17% and annual energy savings of $900bn by 2020 [McKinsey]
- Change is structural – added power capacity from renewables in US and EU exceeded added power from conventional power (including gas, coal, oil, and nuclear) for the first time in 2008 [Ren21]
- Greener alpha – it is not all “cleantech”; portfolios can be optimised for carbon without significant reweighting.
