Green Energy: has it become our Casino Royale?

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casino royal

Can you guess I’m a big James Bond fan? I was reminded of a scene in Casino Royale the other day when our hero James was deeply engaged in a high stakes game of Texas Hold ‘em against the villain Le Chiffre. Bond believes he has figured out a “tell” while playing against Le Chiffre and decides to “go all in” making a regrettable losing bet.

This “all-in” attitude draws a significant parallel to what we are witnessing in the state of global energy supply. Economies have been decimated and policymakers are desperately trying to kick-start their recovery.

We have just entered the fall season and in parts of Europe, the population is experiencing pockets of an energy crisis. Gas stations were shut down in the U.K. Germany has had to restart coal-fired plants due to the lack of available natural gas. China is playing with brownouts, blackouts, moving around without the use of traffic lights, shuttering factories – all of which contribute to the supply chain issues we keep reading about.

Pre-pandemic, the narrative of “keep it in the ground” had started to take hold. Oil and gas supplies began to diminish and be supplanted by the green energy steamroller. Billions of dollars in vital capital shifted in key economies to the renewable sector without strategic forethought. ESG (Environmental/Social/Governance) -related projects became all the rage.

Watching this unfold, I knew if we ever faced a repeat of the 2008 financial crisis, we would pay a substantial price for this blind, “all-in” strategy. Given that I have devoted myself to the ESG/SRI sector for 30 years of a 40-year career, I can say with confidence that it is much too soon for such a significant and poorly planned move. It reminds me of the many “fashionable” trend investors bet on, only to find out afterwards, whoops, what did I do?

In the last couple of weeks, many names in the sector have been ravaged because of their very high valuations. The S&P 500 is trading around 25 times earnings but a whole host of ESG names are well over 100 plus! They have been cut down to size. Remember, any broker is happy to take your money on the way up and on the way down if you’re anxious to spend it.

Now consider that during the depths of the pandemic, these outspoken voices for change received a wider audience because people had time to listen. This only compounded the problem. Look at how oil has skyrocketed about $70 U.S a barrel due to demand. Natural gas, oil’s poorer cousin, is $25 mmBTU, and some extreme estimates suggest $75 mmBTU if we end up with a cold winter!! Consider the impact on transportation and the ripple effects on the supply sector.

Now while you may think I’m being overly pessimistic,  I cannot stress strongly enough that we just are not ready yet. Smart firms with a real grip on reality will hedge against this debacle. A lot of money has been wasted but a lot of smart money knows where to find the unseen benefits. In my estimation, it will be decades before the science has advanced sufficiently to make a serious dent in climate change. Not when China says one thing and still has 70% of its energy grid reliant on coal fired plants.

Canada is but a small drop in the bucket and no matter what we do, the impact will relatively minor. Germany, the voice of Europe on Green Energy, suffers from the same latitude issues as Canada. 30,000 wind turbines and a legion of solar panels were completely shut down in January of this year due to heavy snowfall and bitter cold. Total contribution – 2% to the grid. Coal plants at 100% capacity.

We scour the globe for transitional opportunities with companies who may be studying more efficient uses of traditional fuel sources like oil and gas. We screen for companies that score well in the ESG space, while producing conventional oil and gas and advancing research in pipeline efficiencies that cut down C02 emissions. In Canada, one such company has developed a pipeline outside Edmonton that has cut 20% of oilsands emissions and is operating at an 11% capacity equivalent of removing 300,000 vehicles from the roads. Among our international favourites is French group Total, one of the world’s biggest energy companies. They changed their name to TotalEnergies to signal its diversification in the cleaner energy sector.

This should be a huge signal to investors to avoid investment firms operating with a scattered approach to ESG investing. Rather, they should focus on searching out those with a carefully stewarded approach to investing wisely in this space and with vision. Perceptive global corporations see the future and have developed their own internal pathways for their shareholders – where everyone participates as an owner in a steadily developing green future.

To learn more, contact us at Exponent and stay tuned for more helpful guidance in this exciting space.

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