[In-It] In the era of climate change, where to invest to get high returns

ESG management and eco-friendly energy are the hot topic.

Larry Pink, CEO of Black Rock, the world's largest asset management company, has been publicly speaking since last year that he will not invest in companies that do not respond well to climate change.

Tesla, an electric vehicle and solar power company, is also the best example of the low-carbon, eco-friendly trend.

However, in fact, how much the impact of climate change affects investment is a topic that has been discussed for a long time, and even the correlation has already been analyzed.

In particular, various reports came out ahead of the Paris Climate Change Agreement in 2015, one of which is Investing in a Time of Climate Change.

This report is not exhaustive or comprehensive.

It is very clear in terms of'numbers' how climate change will affect the profitability of each industry sector.

Let's take a look at the table below.

Among the 14 industries analyzed in the report, 8 industries, including IT and consumer staples, are not very large at less than 1% per year in their investment returns due to climate change. (It's not'yield rate' but'yield rate change'. Of course, since it is an annual rate of return, it has a significant impact when considering the cumulative effect.) However, when you look at the energy fields at both ends of the graph, the winners and losers due to climate change are clearly divided.

Renewable energy, represented by solar-wind power, generates an additional 3.5% annually, and is expected to increase the highest rate of return among 14 industries. After that, nuclear power showed a margin increase of less than 2%. The worst rate change is for coal-5%. In 2015, if the return on coal-related investment was 5%, the return would be 0%.

Petroleum is better than coal, but the annual yield change is expected to be around -4%, which is also expected to be a hit. In the case of assets related to electricity and heat generation, the rate of return changed to -2.5%, winning a bronze medal in the rate of decline. It does not mean that it will not use electricity or heat in the future, but reflects that most of the current power and heat production facilities use coal, oil, and natural gas that will soon be pushed back by renewable energy.

In fact, before and after the Paris Agreement on Climate Change in 2015, the stock prices of large European power producers fell significantly. In the United States, Peabody, the world's largest coal company for more than 100 years, filed for bankruptcy protection on April 12, 2016, and had a major impact on the market.

The sequel to the report, which was interesting and had a fairly accurate outlook, was published four years later, in 2019.

The second report was written in a stronger tone than the first.

At the United Nations Intergovernmental Council on Climate Change (IPCC) meeting in the fall of 2018, it seemed to be influenced by the scientific community's formalization that the climate change situation is far worse than previously thought.

Was it through'reality awareness time'?

As promised in the Paris Agreement, this report shows annual returns (%.pa) and cumulative returns to 2030, annual returns and cumulative returns to 2050, respectively, under the premise that temperature changes are suppressed within the range of '2 degrees rise' as promised in the Paris Agreement. I have organized how it will change.

It is summarized at a glance in the table below, and the result is quite pleasant (?).

For coal-related assets (mines, coal-fired power plants, etc.), the annual yield between 2020 and 2030 is -7.1%p, and cumulatively, the annual yield is -58.9%p, which appears to decrease significantly. For oil and natural gas related assets, the annual rate of return is -4.5%p, and the cumulative rate of return is -42.1%p. Power generation companies that make electricity are in a similar situation. The annual return is -4.1%p, and the cumulative return will increase to -39.2%p in 2030. In summary, the value of assets related to coal, oil, and natural gas, which are the main culprit of greenhouse gas emissions, will be cut in half after nine years.

Renewable energy, which ranked first in the 2015 report, is expected to record an annual return of 6.2%p and a cumulative return of 105.9%p until 2030 in this report. It was once again recognized as an asset capable of producing the highest rate of return among all analysis targets. The second most profitable asset is sustainability-related infrastructure (e.g. electric vehicle charger), with an annual return of 3.0%p and a cumulative return of 67.1%p by 2030.

One thing to be clear is that the renewable energy referred to in this report refers to the amount of solar and wind energy that produces no greenhouse gases during operation. Unlike this, in Korea, all kinds of energy technologies that emit large quantities of greenhouse gases during operation or during fuel production are defined as'new energy', and are tied together with renewable energy such as solar and wind power, and the item is called'new and renewable energy'. I made it. For this reason, both institutional and statistical data are creating a confusing situation.

It seems that the'rear book' is talking about the 2019 report in April 2021, but the international situation is moving to a point where it is compelling to see this report. On April 22, U.S. President Biden brought together the leaders of more than 40 countries, including President Moon Jae-in, President Xi Jinping, and Prime Minister Suga, and announced an increase in the greenhouse gas reduction target and demanded an active response. So far, if only some countries and some organizations have tried to take the issue of climate change seriously, it means that the mainstream is now starting to take it seriously.

The US government announced at the Climate Summit on April 22 that it would cut greenhouse gases by half compared to 2005 by 2030. Japan also announced that it would reduce it by up to 50%. The European Union has announced that it will reduce greenhouse gases by 55% compared to 1990. To explain the impact on real life, the demand for products that help reduce greenhouse gases such as solar power, wind power, and electric vehicles will increase explosively, and the demand for coal, oil, and natural gas will decrease rapidly.

In Korea, there is one way to check whether the outlook for the 2019 report is correct. First, Korea Electric Power, which uses coal for 40% of its electricity, and about 10 trillion won from 2009 to June 2020 are invested in the coal power generation business.According to the report, we will reserve about 60% of losses over the next 10 years. It is to confirm the actions of the National Pension Service. It is noteworthy how their performance will move and how they will respond.

There is no nuclear analysis in the PS 2019 report.

As the prices of wind and solar power facilities have fallen sharply, it may be because the price of electricity made from nuclear power has risen relatively.

The original 2019 report (English version) can be downloaded here.

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