By Lei Zhen Chen
The successful closing of the COP21 conference in Paris marked the end of 2015 and made history as the first universal agreement on climate change. Since the middle of the 20th century, the world’s greatest leaders, corporations and other influential entities have recognized climate change as a top global priority. Therefore, setting worldwide and national targets, as well as coordinating government efforts seems to be the obvious plan of action.
Low-carbon energy sources are seen as the solution to our climate crisis, and are hoped to become the main source of power in the future. On the other hand, the fossil fuel industry, which dominated most world economies since the early days of industrialization, is being progressively phased out at the looming prospect of a low-carbon global economy. The drivers of this energy transition are twofold. One is the plunging cost of technology, and second is the shift of investments from carbon-intensive projects to zero-emission sources of energy.
While climate change deniers and the big oil companies are fighting a losing battle against climate science, some argue that the transition into low-carbon alternatives is inevitable. Tony Seba, a leading academic from Stanford University, says that the change is already occurring faster than we think, with the plunging costs of renewable energy, which will eventually drive fossil fuels into obsolescence by 2030. More precisely, “when you look at the industry from a technology cost curve and the adoption of the market of technologies such as solar and electric vehicles, and energy storage, and the astonishing progress in self-driving cars, it’s actually happening more quickly than I predicted.” Seba stresses that, regardless of the outcome in Paris, technology advances and rising consumer demand will drive down prices and push up adoption rates. Once costs fall below a certain threshold, the growth of renewables is exponential and inevitable.
Clearly, innovation and technology are at the forefront of this energy transition. On the other hand, the technology of renewables needs to be backed by coalescent efforts from policymakers and various pressure groups that push for their adoption. In the case of pressure groups, drastic change can be brought forth by the financial sector. Consider the Paris agreement, which will most likely act as a promoter of massive investment flows into solar, wind and other emission-free alternatives.
Also, numerous investment firms have been advocating for low-carbon investments at the detriment of fossil fuels. With rising concern for global warming, this new approach is being progressively integrated into mainstream global portfolios, as more investors become aware of the impact of corporations on the environment. Aside from lobbyists, investors can have direct influence over controversial corporations and may command the latter to reduce their ecological footprint. This can be done either through shareholder voting, which may force firms to consider more sustainable practices, or through short selling, which consists of mechanically retiring investments previously made in the extractive sector to push down stock prices and lowering investment attractiveness. In fact, the coal industry is the first of the fossil fuel sector to feel the blow coming from such massive outflows. As we all know, coal is a highly polluting energy source. The Stowe Global Coal Index, which tracks the stock performance of 26 major producers, has lost 59 percent of its value in 2015. This points to a shift of "many trillions of dollars toward low-carbon technologies and away from old fossil-fuel technologies," says Mindy Lubber, CEO of Ceres, an organization that works with investors to push companies for better environmental performance.
Additionally, investment firm JP Morgan recently announced that it has joined a new movement rallying investment banks around the world to scale back coal investment in high-income OECD countries. This move can be justified by the desire of the financial sector to take part in the combat against climate change, and by the falling attractiveness of coal as opposed to cheaper and cleaner renewable energy.
While we expect that the asset mix of global portfolios are reflecting the decline of coal and other carbon-intensive activities as a result of technology, government policies and investor pressure, the truth is that traditional energy sources will continue to play a big part in the global energy mix. Fossil fuels will continue to power many developing countries given their cheap extraction costs and abundance, but their demise is inevitable.
