· 5 min read
Welcome to the tenth edition of Talking Transformation, a fortnightly selection of my team´s views on recent developments in sustainable transformation and financial markets – and their long-term implications.
In this edition of the newsletter, which arrives the same week as this year’s Earth Overshoot Day (August 1), we look at three issues around economic and investment environmental “management”.
In this edition:
- Circular material use and investment in the sector
- The intersection of central-bank policy and higher food prices from climate change
- UK government plans to revitalise the renewable energy sector
Earth Overshoot Day
Investor perspective: circular material use
We published a new report on circular material use where we take a view on output forecasts and our ability to recycle, reduce consumption or make production more efficient – with a focus on aluminium, steel, concrete and plastics.
For an investor, it’s always difficult to separate out the impact of ESG ratings and initiatives from overall sectoral trends – but I think it’s already possible to see some interesting trends within the materials sector. Let’s consider one: that in recent years many more emerging market firms have improved their ESG rating than firms in developed countries. (~25% from our sample of slightly more than 100 companies, vs. 7%.)
Of course, emerging market firms may be starting from lower ESG base scores, but I do find this encouraging. Emerging markets will play an increasingly important role in the future, not only in terms of demand for materials, but also in terms of locations for sustainable production. Reasons for ESG score improvements include new strategic sustainability initiatives, partnerships to replace fossil resources with renewable raw materials in the production of chemicals and plastics, and plans to build advanced chemical recycling plants in countries with structural plastic pollution issues. I’d emphasize that investors need to consider ESG metrics as an add on to “traditional” financial metrics, but I do take this as an indication that the materials sector – a major CO2 emitter – will push on with the sustainability transition.
Under debate: food prices and inflation
Even as overall inflation rates fall back to more acceptable levels, problems with food price inflation may well persist. Climate change is causing supply disruption (olive oil, cocoa and orange juice are amongst recent examples) and this looks likely to continue. Higher temperatures and/or unpredictable weather is hitting both production and growers’ finances. The hit to final prices could remain substantial: one estimate (from the ECB/Potsdam Institute for Climate Change) is that higher food prices could add over 1 percentage point to overall global inflation each year.
Global price of olive oil in USD/t
How should central banks respond to rising agricultural prices? In the past, more volatile items (e.g. food, energy) have often been split out of their overall inflation calculations, creating a more stable “core” inflation index on which to base their monetary decision making. But the problem is now not just price volatility but the likelihood of permanently higher agricultural prices. Central banks can certainly raise interest rates in the hope of reducing demand across the economy and thus brake rises in prices, but this is a blunt tool – and managing demand doesn’t deal with the underlying food supply problem. As we’ve seen, many central banks (e.g. ECB, BoE) are now discussing the problem, but solutions are elusive.
Our view: UK renewable energy policy
Fiscal constraints are a problem for many governments. The new UK government’s renewable energy strategy should be seen in this context along with its pledges not to increase many forms of taxation. Political management of the effort will be critical to its success.
Key parts of the energy strategy, for example removing or scaling back planning restrictions, are quick and can be portrayed as not having high immediate upfront costs. But they aren’t completely “free” either. For example, one hoped-for result, the increase in the number of on-shore wind farms will eventually require higher public subsidy delivered via power auction contracts.
The proposed Great British (GB) Energy body will have costs – GBP8bn over five years. Its initial focus will be on off-shore wind (operating with the Crown Estate, which controls parts of the seabed) but it will look at emerging technologies too. The money will go into co-investment into energy projects. The aim is to bring in larger amounts from private sector investors, through reducing perceived project risk. This should have economic and financial benefits for the government, and the claim is that GB Energy could start to turn a profit in five years’ time.
Other planned changes – for example a planned new state-owned energy system operator to provide coordination on grid improvements and other issues – will have costs. But I think the hope is that by the time these start to kick in, the UK will already be seeing gains in terms of renewables output and energy security. I certainly think that co-investing is a concept that we will (and should) see more of elsewhere: attracting private capital is the way forward.
Will it work? To use a rather antiquated British phrase, “the proof will be in the pudding”. The government has set itself ambitious decarbonization objectives and says that it wants to double onshore wind capacity, triple solar and quadruple offshore wind capacity. Now it has to deliver.
This article is also published on the author's blog. illuminem Voices is a democratic space presenting the thoughts and opinions of leading Sustainability & Energy writers, their opinions do not necessarily represent those of illuminem.
