Investing for a Zero-Net 🌎 part 1
I remember participating in a game in my early 20´s where we had to define our life purpose. I had a hard time writing one for myself, and I finally came up with something like this "live and learn enough so that I have something to teach to my kids and make them greater than I am". I have to say, I was pretty inspired back then, and I still feel such a purpose does make sense, but I don´t feel I live with it every day.
I did have kids, they did give me a higher sense of responsibility and altruistic meaning for my life, but I don´t think of this as a purpose. Everyday life gets trapped in "business as usual", and if you business life does not have a clear purpose, it´s hard to feel you do have one. "Grow as a professional", "keep learning", "grow as a person" or even "retire by my 50´s" are not meaningful purposes. Sometimes I feel jealous about entrepreneurs who make their business model intrinsically dependant on making the world a better place. Now that I actively invest, I do feel I can have an incremental positive impact on society as a whole, by taking environmental and social responsibility (aka ESG) as a prime factor before choosing where to invest.
Retire earlier by doing good
This is a no brainer. Even if having a purpose does not ring any bell for you, there are enough studies to prove that ESG aware investments outperform the broader market. Now evaluating environmental, social and governance levels of a company with a common base is a developing field with a lot of opportunities to improve, but there as some firms trying to solve it, including ones that provide some of their "ESG ratings" for free. You can now have basic ESG ratings of most firms on Yahoo Finance under the tab "sustainability", for free. By the way, yes, I did sell Facebook recently because of their extremely high social and governance risk score. I have updated my methodology to include the ESG dimension when choosing an investment, here is the updated version of my scoring checklist.
What investment opportunities bring a Zero Net world
Japan is the latest in declaring it will be carbon free by 2050, as did Britain and the EU before that. China is a bit more conservative but still set a carbon-free target by 2060. Many countries will most probably follow their way, even the US of Joe Biden is elected, so a Zero-net world is mostly a matter of how and when- Investing towards a Zero-Net goal is an excellent way to bet for a plausible future and accelerate the survival probability of any living entity on planet earth. You can hardly feel any better by doing so.
The investment opportunities to grab can be categorized into 4: infrastructure and logistics to cope with the climate change risk, search for energy efficiencies, renewables, and carbon removal / offsetting. Let´s dip into each of these.
Better Infrastructure and logistics for new temperatures levels
Infrastructures at risk range from exposure to power cuts to supply chain disruptions. The less a manufacturer is exposed to a multitude of suppliers, and the more diverse the countries where there are located, the better. Here is a concrete example of how a supply chain can be disrupted: the Chilean port of San Antonio had 30% more exceptional closure events in 2020 than the year before, because of higher waves than normal, a direct impact of climate change. Smart management of inventories helps by allowing goods to be sold even if the weather is disruptive. Pharmaceutical companies with bases in Puerto Rico track storms and move their products off the island ahead of hurricane season, says Katherine Klosowski of fm Global, an insurer. For small products, storage can be cheap. McKinsey estimates that warehousing for semiconductors adds only 1% to the total price.
Here, my bet is a small self-storage company called Life Storage (LSI), which offers a B2B value added service to help optimize warehousing across the country named WarehouseAnywhere. You can read the complete analysis of Life Storage I made about a month ago.
On the other hand, infrastructure firms have seen climate-related work pick up since the Paris agreement in 2015. AECOM, an engineering firm, is designing measures to stop floods engulfing Route 37, a coastal road in California, including raising it 150cm (five feet) off the ground. The payback for such measures is high. Often a dollar invested in adaptation yields ten dollars in avoided damage, says David Viner of Mott MacDonald, another engineering firm. In Boston, Skanska implemented design and adaptation strategies that account for the area’s vulnerability to severe weather and flooding when developing buildings located near the harbor. These actions included elevating mechanical and electrical rooms 12 meters above the 100-year floodplain and making provisions for portable flood barriers that can be easily installed around the building perimeter to protect against flood water intrusion.
My bet here is still in development, I added to my watchlist Skanska, Jacobs Engineering, Aecom, John Laing Group and Arcadis. I will soon make a full analysis to pick one, so stay tuned and subscribe!
There is just too much to analyze for one post, so I will split it into parts. The next edition will focus on opportunities that arise from the search for energy efficiencies to lower carbon emissions in just about every industry.
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Happy investing and let me know what you would like to read about in my next publications.