Embracing the energy transition: imagining the future
- Discussing stories about possible futures can help us to anticipate opportunities and risks that might affect the companies we invest in
- We have created a series of climate change-related narratives to help us consider the years leading up to 2050
- Topics we are considering include the energy transition’s need for raw materials, changes to people’s diets and the possibilities of geoengineering
All investment strategies have the potential for profit and loss, capital is at risk.
WATCH: Head of climate change Caroline Cook discusses ways to anticipate opportunity in her Disruption Week webinar
As long-term investors, we think about what the world might be like in the future. Not because we believe we have a crystal ball but to help alert ourselves to opportunities and risks by trying to anticipate them.
“Take the example of carbon capture,” says Caroline Cook, Baillie Gifford’s head of climate change, referring to efforts to remove carbon dioxide from the air and store it underground.
“A decade ago, nobody thought it was remotely likely to be economically efficient. But things move on, as our holdings in carbon-capture pioneers Climeworks and Aker demonstrate. And what might look weird today might be normal in another 10 years.”
Cook has recently been thinking about another geoengineering idea: spraying vast amounts of sulphur dioxide into the stratosphere. The theory is that the particles would reflect sunlight back into space, cooling things below. It sounds like the stuff of science fiction, but nature suggests it could work.
“In 1991, the volcano Mount Pinatubo erupted in the Philippines,” Cook says.
“It shot 10 million tonnes of sulphur dioxide into the atmosphere. That seems to have cooled the Earth by about 0.5C over the following two years, with the effect being strongest nearest to the explosion.”
Trying to replicate the effect wouldn’t be without its risks. It might create a new hole in the ozone layer, leading to skin cancers and other sun damage. It could mess up wind flows, intensifying wild weather. And then there’s the danger of ‘termination shock’.
“If we didn’t do anything to reduce CO2 emissions, they’d continue to build,” Cook explains. “So if one day we stopped spraying sulphur – maybe because of a war – and the shade dispersed, temperatures might shoot up, creating furnace-like conditions.”
Assuming such dangers could be addressed, what might the investment implications be? Cook believes there could be opportunities for companies to monitor the effort and suggest where to add further dust.
“Chipmaker NVIDIA could be a beneficiary because we’d need a lot of advanced AI to do this well,” she suggests. “It’s already working on a project, Earth-2, that creates a digital twin of the planet to improve climate modelling, which could help manage this sort of intervention.
Other holdings Cook highlights include:
- SpaceX, whose satellites could track progress from orbit
- AeroVironment, whose autonomous aircraft could do likewise from the stratosphere and other high altitudes
- Zipline, whose drones could supply data from closer to the ground
“We don’t think geoengineering is a meaningful part of the investment case for these companies,” Cook says.
“But thinking about such a possible future is a way to consider the potential market for Earth-monitoring solutions and other products that increase understanding of natural systems. It also helps us see the wider climate and energy transition picture.”
Cook was prompted to think about geoengineering by her work on a series of ‘scenario narratives’. Each aims to create a plausible, internally consistent story about the future that touches on the human and natural worlds to give a system-wide view of different climate outcomes.
Earlier this year, our investment teams began using them to hone their thinking about how climate and energy-related developments might affect clients’ holdings between now and 2050 depending on whether there is:
- a smooth, orderly transition to net zero
- a failure to tackle climate change, leading to a ‘hot house’ world
- an in-between scenario in which we ultimately hold back temperature rises but in a disorderly manner
The initiative addresses a regulatory requirement to demonstrate we take account of climate-related risks and communicate them to our clients. And it seeks to do so in a way that captures the complexity and uncertainty that don’t fit neatly into numerical models.
“We’re not forecasting what will happen,” explains Cook. “Rather, the stories are meant to help our investors understand the assumptions and sensitivities embedded in their current holdings and portfolio balance. And they should help them pose better questions to company management and spot emergent themes.”
Protein and lithium
Cook and her team initially developed the narratives at a high level, focusing on industries, regions and countries with particular sensitivities. However, when running workshops, they found it useful to take some deep dives to explore how the process of change might work out in a few key regions. One of these stretches across parts of Argentina, Uruguay and Brazil.
The storyline describes heatwaves and droughts wreaking havoc on crops and livestock in the area, encouraging a shift to growing meat from cultured animal cells and farming insect protein. It also tells of new lithium extraction techniques addressing local communities’ concerns about the environmental impacts of mining the mineral, which is in high demand for use in electric cars and other battery-powered technologies.
“Part of the original investment expectation around alternative proteins was the idea that people would proactively choose them to help reduce emissions,” says Cook.
“But maybe where they take off is when you have climate failure, causing the price of traditional foods to rise, making alternatives appeal because they are cheaper.”
This might benefit holdings, including cultured meats specialist UPSIDE Foods and synthetic biology pioneers such as Ginkgo Bioworks and Solugen, but pose challenges to others, like Nestle’s more conventional food and dairy business.
The lithium advance could help miners gain access and attract the capital they need to meet the scale of demand that we need to advance the energy transition at pace,” says Cook.
“Achieving genuine sustainability could be a key competitive advantage.”
This forms part of our regular conversations with mining company holdings, including Albemarle, FQM, Rio Tinto and Zijin Mining.
“Another company to consider is the Latin American ecommerce firm MercadoLibre,” Cook adds. “This is a whole-economy company, so its success is tied to the region’s success in the broadest sense. We’ve had some really positive discussions with management. They are very engaged on issues of climate and the energy transition, both directly for their own operations and in the messaging they send out to customers.”
Several of our strategy teams have started using these narratives as part of their investment process, and there are plans to roll them out to others in 2024.
“This is a living project,” says Cook.
“We intend to develop and revisit the narratives, with different investment teams bringing their own styles and perspectives. Then we will communicate our conclusions to clients over the months and years ahead.”
Three transition scenarios
Failed, ‘hot house’ world
Volatile, disorderly transition
Smooth, orderly transition
First divided, then united
Strong cooperation and openness
Fragmented, supports incumbents, adaption bias
Initially weak, then strong dislocating interventions
Coordinated, supports transition
Innovation struggles, fossil fuel dependency remains, low optimisation, higher costs
Additional late-stage radical innovation, rapid deployment
Rapid, reinforcing adoption
Short-term, limited public spend, insurance fails
Private finance leads, then public. Greater asset stranding
Long-term. Blended public/private. Infrastructure focus
Individualistic, higher inequality
Uneven development, self-reliance
Circularity, equality, community
Regional collapses, compounding food/water system failures
Notable, varied, acute events
Significant but managed,
Hear more from Caroline Cook about the scenario narratives project by watching the video of her Disruption Week seminar at the top of the page and reading this earlier article she wrote about the initiative.
Words by Leo Kelion
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