Climate change is among the biggest risks facing humanity but is leading to new companies and changing industries, says Paul Flood, manager of Newton's Multi-Asset Income strategy.
According to Flood, the risks associated with climate change are proliferating – with the number of extreme weather events climbing steadily over the past four decades. In 1980, for instance, there were almost 250 recorded extreme weather events. By 2018 that number had risen to 848.2
Although the Trump White House has been sceptical about climate change, Flood notes that, in the US, policy is largely driven at the regional level. Several states have actually sought to accelerate their clean energy targets, he says.
Even so, economics are in the driving seat when it comes to determining the pace of adoption of renewables. "While the cost per megawatt3-hour (MW) of electricity derived from coal or gas is expected to flat-line in the coming three decades, the same can't be said for onshore wind and utility-scale photovoltaics," he says. "Here, costs are forecast to drop from around US$60 per MW-hour at present to around US$20 per MW-hour by 2050, making both far more cost-effective than established fossil fuels generation methods."4
For investors, as ever, the challenge is to find the right way to access the opportunities formed from this change in the cost of renewables.
While the high level of government subsidies in renewables might make for attractive-sounding economics it doesn't mean investors should be blind to the risks.
"Selecting the right investments could mean factoring in the price of solar panels, for example, or scrutinising the potential for change to government subsidies, along with counter-party risks," says Flood. "Even so, with some companies delivering an expected return of around 6-7%5 and historically low correlations to other asset classes, we'd argue renewables could offer both a decent return and a diversifier for the average investor."
1 Investment Managers are appointed by BNY Mellon Investment Management EMEA Limited (BNYMIM EMEA) or affiliated fund operating companies to undertake portfolio management activities in relation to contracts for products and services entered into by clients with BNYMIM EMEA or the BNY Mellon funds.
2 Munich Re: 'NatCatService', March 2019
3 A unit for measuring power, one megawatt is equivalent to the energy produced by 10 automobile engines.
4 Bloomberg: 'New Energy Finance, Outlook', 2018
5 Source: Newton
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Mellon was formed on 31 January 2018, through the merger of The Boston Company and Standish into Mellon Capital. Effective 2 January 2019, the combined firm was renamed Mellon Investments Corporation.