Schroders predicts that there will be large yield differences in the coming years between companies that take the climate crisis seriously and companies that don’t like it.
Technological changes can have a huge impact. Think of the internet, the electric car, or in the distant past the first steam engines and airplanes.
With all these changes there are always early movers and companies that are very slow to respond. Both options have their pros and cons. An early mover has the disadvantage that there is still a lot to figure out, everything is new, the technology is not yet fully mature.
On the other hand, the early bird can conquer the market and develop technology without having to suffer much from competition. The question is whether the latecomers can still catch up.
According to British asset manager Schroders Asset Management, this is exactly what happens in companies that do not take the climate issue seriously. There are already big differences between early movers and latecomers among energy producers, but other sectors will follow, the most energy-intensive first.
CO2 emission rights play an important role in this. Until a few years ago it was still quite cheap to buy these rights. The principle of ‘the polluter pays’ only applied to a limited extent.
But Schroders sees this changing rapidly in the last few years. The best example is Europe where it EU Emissions Trading Scheme (ETS) has picked up pace in recent years.
“Compared to 2018, the CO2 price has more than quadrupled”
In 2020 – at the start of the corona crisis – the issue price fell briefly, but after that it went up like an arrow. At around 80 euros per ton, the price is now about twice as high as it was just before the corona crisis. Compared to 2018, the price has more than quadrupled.
Which stock funds have benefited from this? These are companies such as Orsted and Verbund, two energy companies that invested in green energy very early on. The exchange rate differences with latecomers such as E.on and SSE are enormous, but Orsted and Verbund are also doing better from a purely commercial point of view.
Schroders thinks the European ETS trading system is a harbinger of what is about to happen in other countries. For example, China, Canada and the US are all working on a similar emission allowance system.
Moreover, Europe is not standing still. The ETS trading system is not yet reaching all sectors, but the EU has announced that this will change. For example, the system will be expanded to include shipping, road transport and commercial real estate. This will increase the demand for emission rights and thus the price.
According to Schroder, this price increase can go even faster because it will become more difficult and more expensive to participate in compensation projects.
So far, companies can choose to look for compensation for their CO2 emissions instead of reducing their own emissions. The most obvious is by planting a lot of trees.
The problem is that the number of suitable forestry projects is slowly starting to dry up. Moreover, there is quite a bit of criticism of these kinds of projects.
There is therefore a good chance that this way of reducing emissions will dry up in the coming years, forcing even more companies to buy emission rights or invest in energy-saving measures.
Schroders predicts that companies that are late will feel that in their wallets and in the stock market.
The Editors of IEXProfs consists of several journalists. The information in this article is not intended as professional investment advice, or as a recommendation to make certain investments. Editors may hold positions in one or more of the listed funds. Click here for an overview of their investments.