The Continuing Green Revolution

With some grey areas!

The big investment trend last year was sustainability, which many confuse with virtue. A growing number of us want to use our savings more positively to make money and at the same time, make the world a better place.

In 2020, many funds with this aspiration did relatively well because the oil price plunged, taking down a big component of global indices. Tech companies, which tend to employ relatively few people and do not have the challenges of pollution that manufacturers face, prospered.

However, as money has piled into this part of the market, stocks considered virtuous have shot up in value. Results ahead may leave investors disappointed. Investing sustainably means at least not making the world a worse place. This is harder still if at the same time you want consistently to outperform the global index.

Investment teams with a strong focus on environmental, social and governance (ESG) issues tend to avoid investing in gambling, tobacco, munitions or carbon fuel stocks and avoid places such as Russia, where the government has a history of appropriating assets. The inconvenient and complex truth is that many so-called ‘positive’ investments have a dark side that is too easily overlooked and, in turn, some ‘dirty’ stocks merit closer consideration.

For instance, as the world appears to be entering a period of government-sponsored economic expansion with huge plans for investment in infrastructure, much of it to help us transition to a low-carbon world, will lead to growing demand for copper. Copper has the greatest thermal and electrical conductivity of any non-precious metal, so is a critical component in solar and wind power. However, we still have to mine for copper and we all know mining is dirty, but it cannot be avoided if we are to meet these ‘green’ targets. We need companies that do it well and responsibly.

Electric cars are another good example. Pure electric vehicles come in two varieties: battery electric (BEV) and hydrogen fuel cell (HEV). Many governments are announcing dates not far into the future where no petrol-powered vehicles can be sold (including hybrids), thus requiring drivers to buy BEVs, the only electric vehicle currently in mass production.

There are a few problems here, starting with the overall pollution of making BEVs. The battery stack in a BEV needs changing completely every few years as the cells degrade. What do you do with the dead batteries? The carbon footprint of a BEV is also dependent on how the electricity to power it is produced. In a country like Germany, which still burns a lot of coal, the carbon footprint of a BEV fleet could be high.

In Japan there are doubts that the grid has sufficient capacity to deal with the whole petrol vehicle fleet switching to BEVs on the timescales desired by politicians and that must be the same in many countries. Indeed, recent low wind speeds in the UK have led electricity prices to rocket and the nuclear plants to run flat out to make up supply. Cheerleaders for renewables prefer to ignore the nuclear waste implications and let’s not discuss how broken wind farm blades go into landfill.

By contrast, hydrogen fuel cell vehicles do not require batteries and their emission is steam. However, most hydrogen is currently made from fossil fuels. When the carbon dioxide emissions are captured this is called “blue hydrogen”. However, in recent years wind farms and other producers of renewables have started producing hydrogen directly, so-called ‘green hydrogen’. This also helps renewable systems become more efficient, as hydrogen production can be reduced when electricity demand is high.

Hydrogen needs to be stored under high pressure. It contains much more energy per unit of mass than petrol (120MJ/kg vs 44MJ/kg) but much less per unit of volume (8MJ/L vs 32 MJ/L).

This has led many to believe it is best suited as a fuel source for trucks and trains. However, Toyota recently launched the world’s first hydrogen car, the Mirai, which has three fuel tanks that take less than five minutes to fill, giving a range of over 300 miles.

Toyota says governments have been foolish in announcing dates to phase out petrol cars when the full array of new technologies is not yet developed. Staying with hybrids while hydrogen vehicle development matures would allow a broader range of transport solutions more suitable for a variety of vehicles and requirements.

Much has been made of how Tesla has captured the electric vehicle market. Tesla is valued at about $795bn and in 2020 it sold around 500,000 cars and made £31bn of sales – about $72,000 a car (which is beyond most people’s budgets). If the company can make a massive 15% net margin, this means the present valuation represents about 135 years of current cash profits. Of course, Tesla plans to sell many more cars than this in future, but the market is growing more competitive.

Toyota is a company few ‘ESG’ funds would own because it makes petrol cars. Yet, it may prove to be the world leader in the environmentally preferable solution. Toyota has a valuation of $250bn and makes 10m cars a year and a normal net margin of about 7%, the valuation represents around 20 years of cash profits.

Equity investing is a hazardous business, morally and financially. The recent focus on ESG products and ratings may hurt some important companies and inspire a level of confidence in some stocks that is unjustified given current uncertainties. It is worth remembering the words of French poet Paul Valér, “the trouble with our times is that the future is not what it used to be.”

For further information about our ESG investment solution, please contact your Prosperis Adviser on 01423 223640 or email us below