Climate Change: The Value Investor’s Perspective by Balint Anton Francisc
The current attitude towards renewable energy sources should be a deja vu: almost a century ago, John D. Rockefeller ruled the oil industry with his Standard Oil’s empire. He made his fortune by accessing and developing a commodity (oil) which served as the principal basis for energy generation across the world, especially in the United States. I would like to underline the importance of this: he provided a product that fulfilled a fundamental economic need – energy generation. However, what exacerbated his fortunes was the moment when he invested in oil: at a time when the majority of businessmen were reluctant to do so. Seems familiar? Seems like a contrarian investor?
A year ago, in September 2014, the Rockefeller name made headlines across the financial press when The Rockefeller Brothers Fund decided to join the USD 50bn divestment campaign ahead of a UN summit on climate change. This move alone should have been enough to suggest the shift ahead. However, the Paris Climate Change Conference (COP21) held between November 30 and December 11 in 2015, marks a fundamental step towards the same moment that made John D. Rockefeller one of the richest men that ever walked Earth.
In its details, the Paris Agreement establishes that the Conference parties (around 200 countries signed it) recognize that climate change ‘represents an urgent and potentially irreversible threat to human society and the planet’, ‘that climate change is a common concern of humankind’ and that there is an ‘urgent need to enhance provision of finance, technology and capacity-building support’ to tackle climate change. The end result is a turn away from oil, coal and other sources of energy that release high quantities of carbon. The shift will not be immediately as an economic and sustainable alternative to coal and oil still needs to be found and accepted.
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Nevertheless, investors can see the same old opportunity: investing in new sources of energy at this point can render very nice return in the future when the whole world embraces them. We have the opportunity to be part of the future. The political climate is more and more favoring renewable sources of energy, especially wind and hydro in the UK. In the United States the market is even more colourful with solar being the major focus but hydro and wind following closely.
In the UK, for example, deep mining is officially dead: the last deep mine at Kellingley officially closed on 18th December 2015 according to the Financial Times. Moreover, according to data from the UK Government’s Department of Energy and Climate Change’s publication, Energy Trends (September 2015), energy generated from greener sources, more specifically from wind and natural flow hydro, grew by 19% and 69.3% for the period between 2014-2015. At the same time, coal consumption has been dropping at alarming rates.
Moreover, investors keen to profit from uncertain situations are out looking at mining and oil companies. Based on what I have seen, in the UK at least, a lot of coal miners are looking to branch into renewables and other businesses. For example, Hargreaves Services Plc, one of the biggest surface coal miners and coke producers and traders, is investing in a wind farm project and applied for property development license. At the same time, the company barely sold 2x its liquidation value in early December 2015. This situation can still be found across the ‘carbon-heavy’ energy markets. Consequently, a lot of undervalued companies can be found. However, the trick is to find businesses managed by people that want to embrace change not to oppose it: coal and oil will still play major roles in emerging economies but they are highly likely to drop in the developed worlds.
Value investors look for unlocked value – true, the margin of safety is an unlocked value in itself; however, the more ‘unlocked values’ you find the more you are going to profit if they are recognized by the market. In this case, refocusing, restructurings and spin-offs are a few of the ‘unlocked values’.