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Wall Street’s big green bet

January 30, 2021
Turning Points
Bloomberg


In a week when the crazy hijinks of day-traders networking on Reddit grabbed headlines, a major development in what's shaping up as the biggest business story of our time didn't get nearly the attention it deserved. In a nutshell: Wall Street and Washington have just aligned on an ambitious green agenda.

Larry Fink, the CEO of BlackRock, which oversees $8 trillion in assets, announced he would start pushing companies to publish their plans to eliminate greenhouse gases by 2050. The billionaire hedge-fund manager, Christopher Hohn, is going one step further. He's funding a campaign to force the world's biggest listed companies to reveal their emissions plans, if necessary by proxy battles at annual shareholder meetings.

Meanwhile, U.S. President Joe Biden launched a climate policy blitz that goes further and faster than even his supporters expected. Biden wants a 100% clean energy economy and net-zero emissions no later than 2050.

Christopher Hohn

Photographer: Peter Macdiarmid/Getty Images Europe

This week in the New Economy

 

Together, finance and government are speeding up the transition to "net-zero" emissions. And it looks like corporate America is along for the ride. General Motors, maker of gas-guzzling SUVs, announced it is going fully electric on an accelerated timeline. GM plans to launch robo-taxis in San Francisco, ahead of Tesla and Alphabet and the other digital giants already scrambling for a share of the autonomous car market.

Could this be a bubble, too? There's no doubt that Tesla and other "green" investments look inflated these days. It's also clear that markets in general are well into the speculative stage of investment mania, what the 19th century Scottish journalist Charles Mackay famously called "the madness of crowds."

But let's not confuse fads with fundamentals. The market insanity we've witnessed in the past couple of days, producing wild gyrations in the price of GameStop and AMC, is very much a temporary phenomenon. Essentially, armies of online investors with time on their hands and cash to spare are going nuts on their couches.

The drive toward net-zero, by contrast, picks up on two mega-trends that will long outlive current market frothiness: Digitization and decarbonization. Between them, these two forces will remake the global economy. Both have been accelerated by the pandemic, and the place at which they intersect is where the next wave of innovation will occur—and where profits await serious investors with a bit of patience.

For Fink, net-zero is first and foremost a business proposition. He may have reached his epiphany on climate change via fly fishing trips to Alaska with his pals (where in 2019 they found themselves choking on smoke from the burning tundra in nearby Siberia), but as he points out in his latest note to investors outlining his net-zero push: "Climate transition presents a historic investment opportunity."

The data support his investments thesis. It's been evident for some time that greener companies are also smarter. Since the global financial crisis, according to a recent European Investment Bank report, a portfolio of "green" equities has typically outperformed a portfolio of "brown" equities.

Thus, more and more funds are heading in that direction. The Global Sustainable Investment alliance estimates that at the beginning of 2018, more than $30 trillion in institutional assets worldwide were invested in products that were sustainable, environmental, social and governance-focused—or green.

Larry Fink, chief executive officer of BlackRock Inc

Photographer: Bloomberg 

Of course, as Fink also pointed out in his "Larry's Letter" to investors, the flip side of the investment proposition that climate change offers an unprecedented opportunity for businesses is that it also represents an historic risk.

The risk isn't just from physical damage as a result of rising sea levels, floods, hurricanes and droughts. Over time, it's very likely that government policy and state-driven investments in smart infrastructure, aimed at mitigating the effects of global warming, will litter the planet with vast quantities of "stranded assets." Think reservoirs of valueless oil, or mothballed coal-fired power power plants.

Companies that aren't astute enough to recognize both kinds of dangers will get progressively marked down by Fink and his fellow investment fund managers. Business-as-usual is no longer an option. Indeed, it's precisely this interplay between giant investment firms mobilizing the world's savings, and governments mandating change, that represents our last best hope to avoid a climate cataclysm.

And companies like GM are acting accordingly, making huge bets on green technology in the name of profitability, but also prudence.
 

Bloomberg New Economy Conversations With Andrew Browne. Join us Feb. 23 at 10 a.m. EST for The Big "Bounce-Back," where we'll discuss the post-Covid recovery, and the outlook for investors and innovation. Will a flood of consumer spending rescue commercial real estate or bolster online giants? Can business travel recover and does Big Oil have a future? Will Asia remain ascendant or will Europe become a rival? Register here. This conversation is brought to you by IDA Ireland.

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