Investors are increasingly pressuring companies to offload their existing infrastructure that’s been normally dependent on the use of coal and oil to keep the transport and utility machines running.
And now, investors want to replace all that with electric vehicles and fuels with significantly reduced carbon output.
Not only is it a cultural shift among stakeholders who feel a stronger ESG approach will bolster the public image of their investments, it’s also heavily motivated by skyrocketing costs of fossil fuels, reaching boiling point following international sanctions imposed on Russia following its military invasion of Ukraine.
Such a radical transformation isn’t easy on companies, with experts warning investors to be prepared for the potential capital expenditure required for such a feat. But switching over to more eco-friendly technologies is the only sensible pathway for many companies according to Shane Hurst, ClearBridge Investments managing director and senior portfolio manager.
On a recent InvestorDaily podcast, Mr Hurst predicted that the world will become entirely electric over the next 20 to 30 years, increasing the demand for electricity from 25 per cent to 50 per cent over that time.
“Infrastructure and utilities are absolutely at the forefront of that move towards net zero,” Mr Hurst said.
“We're talking $2.5 trillion per annum in all areas of the power grid, massive ramp up in renewable spend,” he said.
Naturally eager to significantly reduce that cost burden, Mr Hurst advised companies and investors to also consider the impacts of climate inflation.
“Put simply, climate inflation is a cost impost of the move towards a decarbonised world,” Mr Hurst said.
So what does that mean in a nutshell?
According to Mr Hurst, there are a couple of factors that impact climate inflation.
“Firstly, higher energy costs and higher energy costs often come as we've seen from an under investment in fossil fuels around the world.”
Secondly, he explained, electrifying grids with sustainable forms of power generation will also inflate prices.
“Whilst that sounds somewhat bleak, certainly that's not the end of the world and utilities do have a number of ways to mitigate that. And we've seen that historically and we'll see that into the future,” Mr Hurst assured.
Mr Hurst lamented that Australia isn’t at the forefront in switching to renewables and still relies significantly on coal and other natural resources, but he remained hopeful on other fronts.
He hailed proactive initiatives from the private sector like ‘Hydrogen Hubs’, as well as acknowledging Australia’s natural sunshine and wind as being the winning formula for the path to ‘Net Zero’.
But it can’t happen smoothly without strong policy support from governments. Mr Hurst’s views echo that of Magellan Financial Group (MFG) Core ESG Fund’s portfolio manager Elisa Di Marco, who called for investors to push companies to adopt more eco-friendly policies.
