addressing the investment challenge in a world of climate ...€¦ · electric vehicle sales have...
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Addressing the Investment Challenge in a World ofClimate Change
Lucas White
Lucas White
Mr. White is a member of GMO’s Focused Equity team. Previously at GMO, he served in other capacities, including portfolio management for the Global Equity team and leadership of strategic firm-wide initiatives. Prior to joining GMO in 2006, he worked as a programmer and analyst for Standish Mellon Asset Management. Mr. White earned his B.A. in Economics and Psychology from Duke University. He is a CFA charterholder.
1Proprietary information – not for distribution. Copyright © 2017 by GMO LLC. All rights reserved.
It Would be More Surprising if Humans Were Not Dramatically Impacting the Environment
Global Population
Source: NASA
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0 200 400 600 800 1000 1200 1400 1600 1800 2000
# o
f P
eo
ple
(B
illio
ns)
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Greenhouse Gases Have Spiked to Record Levels
150
200
250
300
350
400
450
-800 -600 -400 -200 0
As of 12/2016Source: NOAA
Historical CO2 Levels
CO
2 (P
arts
pe
r M
illio
n V
olu
me
)
Thousands of Years Before Today (0 = 1950)
3Proprietary information – not for distribution. Copyright © 2017 by GMO LLC. All rights reserved.
Methane Levels Are Often Overlooked…
…despite methane being more than 20 times more potent than carbon dioxide as a greenhouse gas
Met
han
e (
Par
ts p
er
Bill
ion
)
Thousands of Years before Today (0 = 1950)
Source: EPA
Historical Methane Levels
150350550750950
1,1501,3501,5501,7501,950
-800 -600 -400 -200 0
4Proprietary information – not for distribution. Copyright © 2017 by GMO LLC. All rights reserved.
Carbon Dioxide Concentrations andTemperatures Are Accelerating Upwards
As of 2016
Carbon Dioxide Concentration and TemperatureC
arbo
n D
ioxid
e C
on
cen
tration
(Parts p
er M
illion
)
Tem
pe
ratu
re A
no
mal
y (°
C)
250
300
350
400
450
-0.4
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1880 1897 1914 1931 1948 1965 1982 1999 2016
Temperature
CO2
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Sea Levels have Risen in Tandem with Temperatures
Source: NASA
Glo
bal
Me
an S
ea
Leve
lV
aria
tio
n (
in)
Year
Sea Levels (1880-2016)
0.00
2.00
4.00
6.00
8.00
10.00
1880 1895 1910 1925 1940 1955 1970 1985 2000 2015
6Proprietary information – not for distribution. Copyright © 2017 by GMO LLC. All rights reserved.
The Consequences of Climate Change Have been Widespread
Average Annual U.S. Coastal Flooding Wildfire Impact in the U.S.
Extreme Precipitation Events in the U.S.* Global Natural Disasters
Source: EPA, NOAA, National Interagency Fire Center, The WorldWatch Institute* 48 continental states
0
5
10
15
1950-1969 1970-1989 1990-2009 2010-2015
Ave
rage
Nu
mb
er
of
Flo
od
Eve
nts
Pe
r Y
ear
020406080
100120
1984-1999 2000-2015
Acr
es
Bu
rne
d (
Mill
ion
s)
0.0
0.5
1.0
1.5
2.0
2.5
1971-1985 1986-2000 2001-2015
Pe
rce
nta
ge o
fLa
nd
Are
a
0
200
400
600
800
1980s 1990s 2000s
Ave
rage
Nu
mb
er
of
Dis
aste
rs
7Proprietary information – not for distribution. Copyright © 2017 by GMO LLC. All rights reserved.
“When Global Warming Ends, About the Year2060, the Ice Age Will Begin”
An alternate view from Samsung Chemical Coating Co. in a full page NY Times ad on March 7, 2017
“There is No Relationship between Amount of Carbon Dioxide Emission and the Global
Warming.”
“During the Ice Age, which lasts for about 200 years…the creatures living in the sky, the land, and the sea will become mass extinctions. Large tsunamis and
earthquakes will make dead creatures like coal and oil as in the past…At this time, the creatures that are exposed to solar radiation at the time of the ice age would
become mutations and begin the birth of new species.”
“…the current global warming is caused by the synergy effect of increase of the Earth’s
precession due to sea level rise.”
“The future of mankind depends on you and President Trump.”
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From an Investment Perspective,Climate Change Presents Risks and Opportunities
Quality Strategy
■ Holistic integration of climate change and other ESG risks
■ Exposure to Integrated Oil & Gas peaked at more than 13% in 2009
■ By 2015, had sold all Integrated Oil & Gas companies due to stranded asset concerns (not divestment!)
9Proprietary information – not for distribution. Copyright © 2017 by GMO LLC. All rights reserved.
Quality Has Lower Risk From Environmental Impact
Source: Bloomberg, GMO
0%
50%
100%
150%
200%
TotalGreenhouseGas & CO2Emissions
Total EnergyConsumption
Total WaterUsed
Total WasteDiscarded
GMO Quality S&P 500 Index MSCI World Index
Me
dia
n Im
pac
t/$
Inve
ste
dR
ela
tive
to
S&
P 5
00
10Proprietary information – not for distribution. Copyright © 2017 by GMO LLC. All rights reserved.
Is “Green Resources Strategy” an Oxymoron?
Our Resources Strategy:
■ Excludes coal and tar sands companies
■ Excludes particularly poor ESG offenders
■ Has a much lower energy exposure than the benchmark
■ Part of energy exposure targeted to be Alternative Energy
Maybe, but…
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As Costs Continue to Drop for Wind and Solar,We Are Reaching an Inflection Point
As of 12/31/16Source: Lazard
$/M
Wh
(Lo
g Sc
ale
)
$400
$100
$50
Unsubsidized Levelized Cost of Energy over Time
2009 2010 2011 2012 2013 2014 2015 2016
Onshore Wind
Utility Scale Solar
12Proprietary information – not for distribution. Copyright © 2017 by GMO LLC. All rights reserved.
Battery Costs Continue to Drop as Well
Source: Bloomberg New Energy Finance, 2017. Sustainable Energy In America Factbook
1,000
800642 599 540
350273
0
200
400
600
800
1,000
2010 2011 2012 2013 2014 2015 2016
Pri
ce ($
/kW
h)
-20% -20% -7% -10% -35% -22%
Lithium-ion Battery Pack Prices
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Renewables Are Increasingly CompetitiveWith Conventional Generation
Solar bids have been as low as $29.10/MWh in Chile and $24.20/MWh in Abu Dhabi
$/M
Wh
As of 12/31/16Source: Lazard, IJGGC, EIA
Unsubsidized Levelized Cost of Energy in the U.S. by Source
$0$20$40$60$80
$100$120$140$160$180$200$220$240$260
OnshoreWind
Solar PV -UtilityScale
NaturalGas
CombinedCycle
Coal Nuclear OffshoreWind
NaturalGas
Peaking
WithStorage
WithStorage
14Proprietary information – not for distribution. Copyright © 2017 by GMO LLC. All rights reserved.
Now We’re Focused on Opportunities in the Climate Change Sector
The Climate Change Sector:
1. Companies involved in climate change mitigation
− Alternative Energy
− Batteries and Storage
− Energy/Buildings/Transportation Efficiency
− Pollution Control
− Technology and materials (copper, lithium) used in technology aimed at the mitigation of climate change
2. Companies involved in adaptation to climate change
− Water treatment, processing, and recycling
− Agriculture
− Energy efficient air conditioning
15Proprietary information – not for distribution. Copyright © 2017 by GMO LLC. All rights reserved.
We Need a Massive Amount ofInvestment to Head Off Climate Change
■ $9 trillion to decarbonize electricity between 2016 and 2050
■ $6.4 trillion towards energy efficiency efforts in the building, industry, and transport sectors
■ $4-5 trillion to overhaul archaic electric grids
Source: IEA
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Despite Tremendous Growth,Renewables Are Still a Small Piece of the Global Energy Puzzle
Source: BP
Mill
ion
Met
ric
Ton
s O
il Eq
uiv
ale
nt
Global Energy Consumption
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
1990 1995 2000 2005 2010 2015
Fossil Fuels Nuclear/Hydro Wind/Solar
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The Climate Change Sector Will Experience Rapid Growth
Al Gore: “…we must…ramp up our transition to a clean energy economy at a pace previously unimaginable.”
Mill
ion
Met
ric
Ton
s O
il Eq
uiv
ale
nt
As of 2/2017Source: BP
Projections for Renewables Consumption
0
200
400
600
800
1,000
1,200
1,400
1,600
1990 1995 2000 2005 2010 2015 2020 2025 2030 2035
2011
2015
2016
2017
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0
2,000,000
4,000,000
6,000,000
8,000,000
10,000,000
20
09A
20
10A
20
11A
20
12A
20
13A
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14A
20
15A
20
16A
20
17E
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18E
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19E
20
20E
20
21E
20
22E
20
23E
20
24E
20
25E
Electric Vehicle Sales Have Been Growing Dramatically
…and are projected to grow rapidly over the next few decades
CAGR: 65%
As of 2016Source: International Energy Agency (IEA)Electric vehicle sales include both battery electric cars and plug-in hybrid electric cars
Global Electric Vehicle Sales
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0
10,000,000
20,000,000
30,000,000
40,000,000
50,000,000
60,000,000
70,000,000
2008 2009 2010 2011 2012 2013 2014 2015 2016
Gas Powered Vehicle Sales Electric Vehicle Sales
Electric Vehicles Represent a Tiny Fraction of Global Vehicle Sales
Source: International Energy Agency (IEA), International Organization of Motor Vehicle Manufacturers (OICA)Electric vehicle sales include both battery electric cars and plug-in hybrid electric cars
Electric Vehicles
Global Passenger Vehicle Sales
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Many Are Concerned About the Impacts of the Trump Administration on Climate Change Mitigation Efforts
But will President Trump endanger an industry with job growth 8 times that of the broad U.S. job market?
U.S. Renewable Power Generation Job Growth Estimates
0
500,000
1,000,000
1,500,000
2005 2010 2015 2020 2025 2030 2035Tota
l Cu
mu
lati
ve In
dex
Source: USDA, Twitter
21Proprietary information – not for distribution. Copyright © 2017 by GMO LLC. All rights reserved.
Global Policies Will Support the Move to Sustainable Energy
The Paris Accord, Global Covenant of Mayors, and other initiatives target greenhouse gas emission reductions
Greenhouse Gas Emission Reduction Targets India’s Renewable Energy* Capacity
Chinese Electric Vehicle Fleet Incremental Energy Efficiency Standards
Targ
ete
d P
erc
en
tage
GH
G R
ed
uct
ion
Cap
acit
y (G
igaw
atts
)
Nu
mb
er
of
Ele
ctri
c V
eh
icle
s o
n t
he
Ro
ad
An
nu
al S
avin
gs
Targ
ets
0%
25%
50%
75%
100%
California
2050
New York
State 2050
London 2040 0
50
100
150
200
2016 2022 Target
0
2,000,000
4,000,000
6,000,000
2016 2020 Target0%
1%
2%
3%
California Maine Massachusetts Rhode Island
Source: Compact of Mayors, Global Covenant of Mayors, Government of India’s Ministry of Power Central Electricity Authority, EVVolumes.com, ACEEE*Refers to wind and solar
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Have You Had to Sacrifice Returns toInvest in Companies That Do Good for the World?
No…after over a decade, the Climate Change sector kept up with the broad market
As of 4/30/16Source: Bloomberg
Ab
solu
te R
etu
rns
-50%
0%
50%
100%
150%
200%
2003 2005 2007 2009 2011 2013 2015
MSCI ACWI
HSBC Climate Change Index
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Companies Positioned for Dramatic Secular GrowthAre Trading in Line With the Broad Market…
As of 12/31/16Source: MSCI, IBES, GMO
Price/Forward Earnings
17.0 16.6
0
2
4
6
8
10
12
14
16
18
MSCI Global Environment Index MSCI ACWI
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The Existence of Secular Growth Doesn’t Mean Investing Is Easy…
Despite impressive growth in solar, solar companies have been terrible investments
Source: BP, GMOVertically-Integrated Solar is comprised of First Solar, SunPower, Canadian Solar, and Jinkosolar
Ab
solu
te R
etu
rn
Guggenheim Solar ETF (LHS)
Global Solar Consumption (RHS)
Teraw
att Ho
urs
0
50
100
150
200
250
300
-100%
-80%
-60%
-40%
-20%
0%
2007 2008 2009 2010 2011 2012 2013 2014 2015
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0
100
200
300
400
500
600
700
800
900
-100%
0%
100%
200%
300%
400%
500%
600%
700%
800%
2001 2003 2005 2007 2009 2011 2013 2015
However, a Value Orientation to aSecular Growth Sector Can Produce Outstanding Opportunities
Source: BP, GMOFootnote: Wind turbine manufacturers are Vestas, Gamesa, and Nordex. P/E ratios are based on normalized earnings.
Wind Turbine Manufacturers (LHS)
Global Wind Consumption (RHS)
P/E: 93.4P/B: 7.7
P/E: 6.2P/B: 0.53
Ab
solu
te R
etu
rn
Teraw
att Ho
urs
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Value Has Worked Well in the Environmental Sector Recently…
As of 12/31/16Source: MSCI, GMO
Performance of Cheapest Quartile P/E Stocks within the MSCI Global Environment Index Relative to the MSCI Global Environment Index
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
2010 2011 2012 2013 2014 2015 2016
Re
lati
ve R
etu
rns
Price/Forward Earnings
Price/Normalized Earnings
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It’s Reasonable To Think ThatThis Could Be a Particularly Inefficient Sector
Value has worked well
Analyst coverage is low
■ The average MSCI ACWI stock had 50%+ more coverage than the average HSBC Climate Change Index stock as of March 2016
The companies are relatively small
■ The largest solar company is around $3b in investable market cap
■ The largest wind company is around $15b in investable market cap
This is a relatively new, poorly understood sector
■ Requires a combination of being able to see the big picture and analyze companies
This sector is unlikely to be picked over by value managers
■ This is a volatile, high growth sectorAs of 12/31/16Source: HSBC, MSCI
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Conclusions
■ Climate change is a critically important investment issue that poses risks…and presents opportunities
■ Economics will drive the transition to a clean energy world
■ There will be tremendous investment opportunities in the climate change sector…but we believe a disciplined, value-oriented approach will be critical in navigating this high growth sector