Born Ready: Millennials and the Financial Impact of the Energy Transition

I’m old. Well, old as millennials go. I was born in the early 1980s, which makes me one of the first entrants into the millennial generation. My senior status implies that I may remember some significant societal transitions more vividly than my younger generational counterparts. For example, I still remember what it was like being lost, driving with a road atlas spread upon the dash while cursing unreadable street signs. I’m not ashamed to admit that payphones and VHS tapes spark a bit of nostalgia somewhere deep inside of me. Of course, now we have abandoned those relics for a world of GPS, smartphones, and video streaming. Growing up in the information technology revolution of the 1990s and 2000s impressed upon me that things can change before we have had a chance to say farewell to the technologies and cultural legacies of years past.

It is with this perspective that I tend to fret over the implications of the next dramatic economic and cultural shift our generation will experience: the energy transition. The world is ready to abandon the foundation of modernity, fossil fuels, and embark on a journey toward an electrified future powered by renewable energy. And similar to the information technology revolution, this comes with enormous financial implications. In the last transition, Eastman Kodak gave way to Apple while Circuit City and Borders crumbled before Amazon. Vast sums of wealth were wiped away in one part of the economy while fortunes were created in others. History tends to repeat itself, and one must wonder if the millennial generation is adequately prepared for the next great economic upheaval.

In all likelihood, the energy transition is coming faster than we anticipate. Consider that wind and solar are projected to be the least expensive forms of energy generation everywhere in the world by 2030.[1] That’s the same date that the global fleet of internal combustion engine vehicles begins to shrink due to the electrification of transport.[1] And that’s just what market forces have in store for us. Humanity is waking up to the dire implications of the climate crisis. On our current trajectory, we will warm the earth by 4?, leading to global crop failures and mass migrations.[2] This sobering reality makes government policy responses inevitable and destined to accelerate the energy transition.

While the convergence of market and political forces to stem the tide of climate change is undoubtedly welcomed by most millennials, a poorly managed energy transition poses significant threats to the stability of financial markets. Rapid decarbonization would significantly disrupt and reduce the value of the oil, gas, automobile, utility, financial, and insurance industries.[2] A recent analysis from the Principles for Responsible Investment (PRI) suggests that policy responses to climate change alone will erase $2.3 trillion of market capitalization from publicly traded companies.[3] Noted impact investor and economist, John Fullerton, has asserted that the energy transition could result in the devaluation of $20 trillion in assets across various sectors of the economy. When compared to the $2.7 trillion in write-downs that triggered the 2008 financial crisis, the gravity of the situation comes into full focus.[1]

So the world could rapidly decarbonize. Great! But that process may dislocate the global financial system. Not great!

Where does this leave millennials? In reality, it leaves them doing what they should be doing, pursuing careers and taking care of their families; too busy to research the financial implications of the energy transition. The investing habits of millennials indicate that they tend to avoid expensive, actively managed funds in favor of low-cost index products. Sixty-two percent of millennial investors favor index products due to cost; however, the same percentage stated that those indexes would provide access to the best opportunities in the market.[4] These statistics indicate that millennials may not realize the degree to which those broad index products expose them to the good, the bad, and the ugly of the energy transition.

The lack of low-cost index funds that position investors for the energy transition was a notable factor that led to the founding of Change Finance, PBC. Our mission is to provide millennials, and all investors, with simple and cost-effective methods to invest in alignment with their values while avoiding the risks associated with unsustainable corporate behavior. We analyze companies on 50 factors that are relevant to the well-being of people, the planet, and profit. Unsurprisingly, companies that extract, process, or burn fossil fuels for electricity are viewed as too risky and are excluded from our portfolios.[5] We also include criteria for the use and production of renewable energy in our 50-factor screening methodology to better align investors with the opportunities presented by the energy transition. [5]

The millennial generation was born into a rapidly changing economic landscape that juxtaposed enormous investment opportunities and financial crises. That experience should inform us of the diligence required for the next economic revolution. Thousands of individuals, corporations, and institutions are moving investment assets away from fossil fuels and towards renewable energy. Millennial investors should follow suit. We can then one day tell our grandchildren about the days when the world turned its back on fossil fuels…and how we were ready for it.

 

Article by Dan Carreno, who has 15 years of experience working in the investment industry. Before joining Change Finance as Executive Vice President of Business Development, he served as a Regional Marketing Manager for Fred Alger & Co. where he consulted with hundreds of firms to help them meet the financial goals of investors. This experience allows Dan to efficiently provide investors with the knowledge and tools they need to make prudent investment decisions that minimize risk and maximize public benefit. Dan holds a BA in International Economics and Commerce from Lafayette College, an MS in Environmental Policy and Management from the University of Denver, and the designation as a Certified Investment Management Analyst® from the Investments and Wealth Institute.

Article Notes:

¹BloombergNEF. 2019. “New Energy Outlook 2019.” Bloomberg New Energy Finance. https://about.bnef.com/new-energy-outlook/

²Lovins, Hunter L., Stewart Wallis, Anders Wijkman, and John Fullerton. 2018. A Finer Future: Creating an Economy in Service to Life. New Society Publishers: Gabriola Island, BC, Canada.

³Principles for Responsible Investment. 2019. Impacts of the Inevitable Policy Response on Equity Markets. https://www.unpri.org/download?ac=9857

⁴Natixis Investment Managers. 2017. Breaking the Millennial Myth. Investor Insight Series. https://www.im.natixis.com/us/resources/breaking-the-millennial-myths-report

⁵Change-Finance.com. 2019. Methodology. Change Finance, PBC. http://change-finance.com/methodology/

Disclosures

The opinions expressed herein are those of Change Finance, P.B.C. (Change Finance) and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Change Finance reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. Change Finance, P.B.C. (Change Finance) is an independent investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about Change Finance, including our investment strategies, fees and objectives, is available on our website at http://change-finance.com