Addressing the Investment Challenge in a World of Climate ...€¦ · Electric Vehicle Sales Have...

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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Greenhouse Gases Have Spiked to Record Levels

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-800 -600 -400 -200 0

As of 12/2016Source: NOAA

Historical CO2 Levels

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Thousands of Years Before Today (0 = 1950)


Methane Levels Are Often Overlooked…

…despite methane being more than 20 times more potent than carbon dioxide as a greenhouse gas

Met

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e (

Par

ts p

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Bill

ion

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Thousands of Years before Today (0 = 1950)

Source: EPA

Historical Methane Levels

150350550750950

1,1501,3501,5501,7501,950

-800 -600 -400 -200 0


Carbon Dioxide Concentrations andTemperatures Are Accelerating Upwards

As of 2016

Carbon Dioxide Concentration and TemperatureC

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Sea Levels have Risen in Tandem with Temperatures

Source: NASA

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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

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“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.”


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!)


Quality Has Lower Risk From Environmental Impact

Source: Bloomberg, GMO

0%

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TotalGreenhouseGas & CO2Emissions

Total EnergyConsumption

Total WaterUsed

Total WasteDiscarded

GMO Quality S&P 500 Index MSCI World Index

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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…


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


Battery Costs Continue to Drop as Well

Source: Bloomberg New Energy Finance, 2017. Sustainable Energy In America Factbook

1,000

800642 599 540

350273

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600

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1,000

2010 2011 2012 2013 2014 2015 2016

Pri

ce ($

/kW

h)

-20% -20% -7% -10% -35% -22%

Lithium-ion Battery Pack Prices


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


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


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


Despite Tremendous Growth,Renewables Are Still a Small Piece of the Global Energy Puzzle

Source: BP

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Global Energy Consumption

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1990 1995 2000 2005 2010 2015

Fossil Fuels Nuclear/Hydro Wind/Solar


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.”

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As of 2/2017Source: BP

Projections for Renewables Consumption

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1990 1995 2000 2005 2010 2015 2020 2025 2030 2035

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2017


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09A

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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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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


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

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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


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

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London 2040 0

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2016 2022 Target

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2016 2020 Target0%

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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


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

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-50%

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2003 2005 2007 2009 2011 2013 2015

MSCI ACWI

HSBC Climate Change Index


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

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MSCI Global Environment Index MSCI ACWI


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

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Guggenheim Solar ETF (LHS)

Global Solar Consumption (RHS)

Teraw

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urs

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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

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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%

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2010 2011 2012 2013 2014 2015 2016

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Price/Forward Earnings

Price/Normalized Earnings


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


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

Addressing the Investment Challenge in a World of Climate ...€¦ · Electric Vehicle Sales Have...

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