Investment outlook for 2022 - Part 2 (Climate)

In the next few weeks, I’ll bring you four key investment themes I’m watching for 2022. I provided a brief overview last week, if you missed it you can read the note here. The first theme and my focus in this note is on Climate. Timing is good with the Glasgow Climate Summit set to commence tomorrow.

The summit will likely follow in the footsteps of Paris, Copenhagen and Kyoto. The only difference this time is that the world is moving from concepts to direct strategies. Glasgow will have a firm commitment for net zero emissions by signatories by 2050.

I’m not too worried about Glasgow itself, instead my focus is on “net”. What we’ll see next year is many countries starting to implement policies which will see their emissions get on a track towards…net zero. Of course, net zero doesn’t mean zero. It means balancing emissions out with offsets and this is where I believe the big investment opportunities lay ahead.

New framework — voluntary to mandatory

Before the opportunities, let’s focus on the framework. What we’ll see post-Glasgow and in 2022 is developed economies moving from voluntary policies towards mandatory. The law is about to change. I’ve previously written on the shift towards mandatory emission disclosures and the measures already in place across Europe and the United States under Biden’s administration (read We could be at a tipping point for carbon conscious investments)

Carbon disclosure will become mainstream. It will start with the biggest polluters but will probably expand quickly across large, listed businesses. For example, I’m expecting Commonwealth Bank in Australia to start disclosing its carbon footprint together with its cash profit on a regular basis before it actually becomes a legally binding obligation by both the corporate regulator and the stock exchange.

The shift from voluntary to mandatory carbon disclosure means there will be huge demand for measurement services. When you’re a big business and the law changes forcing you to disclose something as important as your carbon footprint, you can’t get it wrong. Investors will actually reward you for investing in technology and processes. So I expect to see listed companies announcing large investments into their carbon disclosure and compliance capabilities.

The big accounting firms (KPMG, Deloitte, PwC) and the likes of McKinsey are already offering these services.

Government policy will be investment focused

There’s two ways governments can implement a transition to net zero — the easy way or the hard way. Let’s start with the hard first. Net zero means all the carbon generated in a country is offset by credits created. The hard way would be to slash emissions without the need to offset.

That means big changes to electricity consumption and an across the board disruption of the entire economic ecosystem. This is hard and politicians, particularly in developed economies, operate on short term election cycles.

So I expect many will follow the easy way. What we’ll see is something similar to what Australia’s government is saying publically.

The thing that stands out to me is not the technology part, which sounds great. It’s the clear and obvious preference in policy towards offsetting.

In the interview above, Taylor makes mention of the fact that government offsetting credits will be regional, a sign that money will be spent across the Pacific in an effort to fund projects that create carbon credits and this would in effect be used to offset Australia’s net position.

When I look forward to 2022, I’m expecting to see an explosion in carbon creation projects, no doubt assisted by government stimulus in an election year, that will set off a chain of investment in the creation of carbon credits.

It’s for this very reason that I continue to invest in carbon credits and exposures such as the KRBN ETF in the United States which is up 113% over the past year.

Technology is a term that gets thrown around very easily. We’ve come a long way in consumer innovation — solar panels, battery technology, electric vehicles. The real disruptive technology is already being built by private companies.

When I hear governments talking about technology, I see finance schemes around carbon credit markets and the funding of quick fix schemes that help alleviate election cycles, particularly in developed economies. So that’s where my Climate focus will be from an investment perspective.

My focus next week will be on a completely different theme — Food. Around 60 percent of global food production occurs in just five countries: China, the United States, India, Brazil, and Argentina. Even within these countries, food production is concentrated in a few regions, such as the Midwestern United States and the Brazilian state of Mato Grosso.

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