I'm worried about climate change and the path that we're taking to lower
emissions. It's going to have impacts in three key
areas real assets, the economy and inflation.
We're worried about real assets because they're part of the problem and the
solution. Farmland and farmland, agriculture and
real estate are some of the biggest producers of emissions.
And then infrastructure is part of the solution.
As we electrify the grid, when you take a look at inflation, we're already
dealing with multi decade highs and inflation because of wages and more
consumer spending. But there's going to be tight supplies
of inputs into clean energy and traditional energy that should be heavy.
Add even more to inflation going forward and then the economy will be impacted by
climate change volatility as well as geopolitical conflicts as some countries
may not agree on the path to lower emissions and climate change and also
shareholders voting with their feet and how companies think about capital spend.
This idea that, you know, inflation can be brought down by financial measures
seems to conflict with what you're saying here.
How does that work out? Are there things that people are not
seeing in terms of how climate in particular will drive prices higher?
So think about the inputs that go into traditional energy, starting with oil.
Our peak investment in oil was in 2014. Supply has remained tight since then.
Demand is increasing and producers are focusing on returning cash to
shareholders over pulling more barrels out of the out of the ground.
So the bridge from traditional energy to renewable energy is going to be long.
We're still going to need oil. We think prices remain in a higher range
than in the past. In the 60 to 80 dollars per barrel range
and even with upside to 100, that's inflationary.
Then when we take a look at renewable energy, metals go into solar, wind.
The grid infrastructure and hybrid vehicles and batteries.
This is cobalt, copper, lithium and nickel.
Just taking a look at copper. In the last twenty five years, U.S.
production of copper has dropped by about 50 percent.
But we expect a man for copper to double by the year two thousand thirty five
because of the demand for copper and renewable energy.
And from discovery to production of a copper mine take 16 years.
So inflation in metals and inflation and oil prices should continue to exacerbate
the already high inflation problem that we have right now.
Inflation has been impacted post the pandemic because of higher wages,
consumer spending on goods, which has now switched to consumer spending on
services, higher shelter prices. Some of that may start to abate,
especially because of the Fed continuing to raise interest rates and tighten the
economy so they can tackle inflation from a demand point of view by dampening
consumer spending and and cracking the employment market at some point.
But these supply issues should continue to exacerbate the inflation problem on
the other side. And this is the supply of metals.
The supply of energy. And that's to a challenge for the Fed
because they I don't think they can tackle that by just raising interest
rates other than increasing funding costs.
But the demand for renewable energy should continue to keep that supply
tight. Well, you know, the one thing that's
interesting is we're having this conversation coming off of a year where
that any year energy sector rose more than any other sector.
When you looked at the S&P 500 and it rose very, very meaningfully.
Is that a signal to you that maybe there isn't as much investor demand for
cleaner renewable energy as there is for the ways that things have always been
done? I just think that we're just not
technologically very. When it comes to renewable energy.
So there's a lot of positives as we race to creating more renewable energy.
But we're just the bridge to that is going to be long, which is why
traditional sources of energy remain important, specifically oil, even coal
and natural gas. And we've been under investing in many
of these areas for many years. And I think the path is just going to be
longer than we think. So what happens if change does not
happen as quickly as you'd like it to over your planned investment horizons?
What happens to the assets that you. Oh, that's most important for the real
assets. Real estate and farmland are the most
significant producers of emissions worldwide.
They need to think about, for example, 80 percent of buildings in existence
today are going to be the ones in existence in 2050.
So this is about transitioning your buildings to lower emissions rather than
just building newer green buildings. Now, for real estate companies to do
that, it can cost up to 20 percent of the net asset value of a building to
move it to low carbon. Also, they have to think about the
physical risk, whereas the building located is it near sea level rising?
They need to think about funding. Green bonds can have lower funding rates
for buildings that are more carbon efficient.
And when it comes to farmland, yields can be impacted by up to 50 percent by
climate. And a lot of crops are concentrated.
Rice is mostly made in China and India. Soybeans in the U.S.
and South America. And as well as corn, which is in the
U.S., China and Brazil. So that can also be impacted by weather
patterns. So both of these areas need to think
significantly about how they transform their businesses so they can end up on
the right side of the equation. Interestingly, you out of nine people
we've interviewed for this project over a number of years are the first person
despite all of the. Haitian in the industry about climate to
bring up climate as the biggest risk, and so I'm wondering if you think that
there is a disagreement in the investment community on how big of a
risk it actually is relative to everything else out there.
I think there's disagreement in the investment community politically, also
with business leaders and with scientists.
As with any other issue, that is something that is out in the future.
You do look at the sort of big picture of climate change.
So there's going to be challenges, opportunities.
And as an investor. Winners and losers on the Challenger
side, exactly this political disagreements on the path that we should
be taking shareholders and how they're voting and how that might impact
companies and their capital spending. What I'm very optimistic about is we're
starting to see these opportunities from gathering that at the cop meetings every
year, the Paris agreement, which has come into place, as well as the
Inflation Reduction Act. And from an investment point of view,
which is key as we go through the next number of years and even decades,
thinking about which companies can win over time if climate broadly is a risk.
What is underpinning that risk for you? What keeps you up at night?
You don't think about climate change, not only the human element of it with,
you know, what were the implications of the world heating up?
If we go past that tipping point and cause things such as sea level, rising,
glaciers melting, ice shelves collapsing, what does it mean for
companies, the winners and the losers? What is the regime for decades going
forward? Mean, if interest rates are higher and
inflation is higher than we've seen before in our careers, all of that is
important. But I think, you know, the good news is,
as were we're working on solutions to it.
And as investors, there's companies that will very much transform towards if
there's large companies already working on the solutions to it.
And there will be a lot of winners and losers over time, but more winners and
losers in areas, as I mentioned, like infrastructure.
I think farmland and real estate will evolve over time to lower emissions and
all of these great companies popping up to help these areas become more climate
friendly.