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Energy Crisis vs Climate Change: Are investors' priorities changing?

May 2022

A global pandemic and the gradual slowing of investment in fossil fuels collide with the Russian invasion of Ukraine to create a sharp rise in cost-of-living, particularly when it comes to energy costs. Is this perfect storm making investors rethink their betting on climate-friendly options and renewable energy?

It would be an understatement to say that these past few years have not been easy. Not only have our lives been turned upside-down by a global pandemic that has greatly affected both our professional and personal lives, but the sudden Russian invasion of Ukraine has also now contributed to a palpable rise in the cost of living.

According to a research briefing published by the House of Commons, in March of this year inflation hit its highest recorded level since 1992. Around 83% of households reported a rise in their cost of living around this time, with prices being the most noticeable regarding food, household goods, and energy costs. This, clearly, greatly affects the vast majority of us in our daily lives, but how exactly is it affecting how people invest, especially when talking about climate-conscious funds?

In an article published in Schroders in late 2021, Simon Webber wrote on how, even then, traditional energy prices were already set to hit all-time highs on a global level. He chalks it up to one of the factors being the sudden rise in demand for higher supplies of energy following the reopening of manufacturing industries after a series of Covid-19 related lockdowns throughout 2020 and 2021. Due to a previous fall in oil prices a few years before, however, investment in oil had already been winding down, so when the new demand came in, supply couldn’t quite catch up. Adding to that, climate change has become a more prevalent concern worldwide – for both governments and corporations – so investing in or promoting traditional energy sources such as fossil fuels purely for the immediate short-term good of the citizen is seen as an unwise decision when faced with the potential backlash.

Investing to meet demand

So, with a shortage of supply and a steady rise in the price of non-sustainable energy sources, it would be safe to assume that savvy corporate investors would want to go all-in on renewable energy, which, in turn, would promote the appeal of climate-friendly funds for the individual. Debbie Carlson writes for MarketWatch, however, that while assets under management in environmental, social and governance exchange traded funds and mutual funds have grown sharply in recent years due to a greater awareness of climate change, the recent Russian invasion of Ukraine has somewhat turned the everyday investor’s concern for the environment on its head.

The intangible war against global warming has been replaced in the headlines with the very tangible war on Ukraine. This is especially true when it comes to facing the sudden threat of losing the supply of oil coming into Europe from Russia and having to admit just how dependent we all seem to be on it.

In a move that would contradict global financial movements in the past few years towards higher investments in renewable energy and climate-friendly funds, we are now seeing a rise in interest and investment in fossil fuels, with Tony Tursich, co-portfolio manager at Calamos Global Sustainable Equities Fund, stating that “probably the ‘drill, baby, drill’ mentality is back in the U.S.”. Europe is in an even tighter bind to meet oil demand than the United States, as the continent is much more dependent on Russian oil and citizens are looking to pay astronomical prices to keep the lights on and the cars running.

The long-term plan

ESG fund managers, however, believe this will be a short-term situation. The shorter supply, higher demand and higher prices will boost oil production in the short term, but the renewable energy push and overall global concern over climate change is here to stay and will resume once the current peak has subsided. Cheryl Smith, of Green Century Balanced Fund, calls it “the last gasp” for fossil-fuel production.

We could also argue that this sudden worry over how much Europe is dependent on Russian oil to keep itself going might actually be a wake-up call to invest in renewable energy and climate-centred funds. After all, if, as a society, we could run on less oil, then we wouldn’t need so much of it, right? And despite what the headlines seem to say, the push for a better planet continues unabated in the background, with wind-turbine manufacturers being sold out of production through to 2023.

So how will all this affect how people – and companies – invest? Will the rise in cost-of-living affect people’s decision to go with a more climate-friendly option, or will the money go back to the oil drills? The answer seems to be less dramatic – and less disappointing – than expected.

While we are facing an energy crisis due to a beautiful tornado of factors that has been forming since early 2020, this seems to be more of a bump in the road than a change of direction and, despite short term bursts of investment to make up for a shortage of supply and a rise in demand, the long-term movement towards a better Earth is unchanged – perhaps even revitalised. People, companies, and governments alike still very much have their eyes on the real prize: a healthier planet and a better future for us all.

We might have a few oil-related problems we have to deal with right now that might take us slightly off-track, but the goal, ultimately, is unchanged, and the road to a more climate-conscious society that thrives on renewable energy is one we’re not leaving anytime soon.

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