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Investors refuse $9trn net-zero bill

By Adrian Holliday

12:42, 26 January 2022

Stock market crash newspaper headline
Net-zero bill rejected by investors – Photo: Shutterstock

Public companies are facing intense investor pressure to reach climate change targets, with much of the bill to be front-loaded this decade. To hit net-zero by 2050 will take $275trn (£204trn) in total spending claimed McKinsey and Company in a report published this morning – and $9trn invested annually.

Which companies and sectors look most vulnerable to these fast-approaching costs? And how sensitive will share prices be to climate change news?

Big bill, lots of froth

“Who would pay for the transition?” McKinsey asked. “How would the transition affect companies’ markets and operations? What would it spell for workers and consumers?

The market has already answered. Currently investors are not buying the transition – hence the massive recent sell-off across almost all sectors. For example, Tesla fell from almost $1,200 per share on 3 January to $918.40 on Tuesday.

“If you go to an investor,” London-based investment manager and author David Ko told Capital.com, “and you say, you’re going to need to spend 10% of the global market cap on costs, the first thing they’re going to do is let someone else pay.”

The MSCI All Country World Index is worth $70trn itself. “Would you buy a house when you know you’re going to have to pay 10% in repairs every year? It’s a very destabilising approach to go to investors and say ‘pay up this way’ – and in advance.”

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Up-front costs inflation fear

Ko fears the push for net-zero will make already tight supply chains even tighter, driving inflation higher. “We’re hearing stories,” he adds, “of property development projects that are front-loading their purchases, in part to avoid future material restrictions.”

It’s just naive to believe “business won't seek ways to arbitrage the timetable” he adds.

Some of the environmental, social and governance (ESG) pressure centres around tracking emissions, known as Scope 3 reporting. Scope 3 reporting distances itself from direct emissions like car tailpipe data or business energy costs. It’s more about indirect emissions, like the knock-on effects on how your product or service affects a value chain overall.

Scope 3 is also highly tricky to calculate – but this publication gives you a flavour of the maths involved.

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Show me the data quality

Chris Bennett is the founder and managing director of environmental services software company Evora Global which works with real estate companies as well as private equity investors.

“Scope 3 is a challenge,” he says. “For them [clients] one problem is tenants in buildings. The biggest challenge there is when tenants procure their own energy. There’s no responsibility on that tenant to provide that data to the landlord.

“We need the government to make it mandatory to share consumption data, otherwise you just end up with a part-understanding of a building.”

In a real estate development, there’s also embodied carbon emissions in the supply chain. “Understanding it is complex and their ability to [make any] impact on it is the biggest challenge, with pretty limited leverage on steel and cement manufacturers,” he adds.

Dirty inputs, big costs

Many of McKinsey’s own clients, their report today acknowledges, come from the oil, gas and mining industries which face intense transition cost risks.

The right market solution, David Ko says, “is to restrict fossil fuel production and let the capital market work out the costs.

“This will let whichever sector most exposed seek their best solutions within the constraint of the carbon budget, and effectively stop all greenwashing.”

Is Scope 3 a ‘short position’?

  • “Most companies,” wrote Robert Eccles and John Mulliken in the Harvard Business Review in October 2021, “don’t recognise this [Scope 3] liability because these emissions are priced at zero today, were priced at zero last year, and so it seems natural to assume that they will be priced at zero in the future.”
  • “One could say,” they go on, "that companies are engaging in the carbon futures market, assuming that this fundamental ‘input cost’ will never change.”
  • “Anyone who works in commodity markets,” they finish, “knows uncovered positions can turn from profit to significant loss in the blink of an eye.”

Market caution – sectors, patterns, timelines

All industrials and property developers, including sub-sectors, may be more exposed longer term.

  • British Land, for example, saw a share price hit last year on concern over EPC ratings. From 2030 a minimum ‘B’ rating is proposed. “The estimation of the cost of doing that against British Land’s Estate impacted the share price by about 4%,” said Evora Global's Bennett.
  • ESG regulation is only startling to trickle through now adds Bennett. “Regulation is still more about transparency and reporting than it is for forcing things to get done.”
  • Shares in Derutsche Bank’s DWS asset management arm fell more than 13% in a day late August 2021 after Bloomberg reported the group was being investigated by the authorities over its ESG strategy.
  • 80% of primary energy comes from fossil fuels – still.

Markets in this article

BLNDgbp
British Land
3.590 USD
0.1 +2.890%
TSLA
Tesla Inc (Extended Hours)
202.53 USD
2.01 +1.000%

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