We believe that over the coming decades we will see winners and losers as the global economy shifts to a low carbon future. The debate about climate change is now over with COP21 finally arriving at a global consensus. The discussion now is what happens next.
The single most important thing for investors to understand about those changes is that the transition to a low carbon economy amounts to nothing less than a full-scale industrial transformation — one whose impacts cut across virtually every industry sector.
In effect COP21 provides the framework that will support industrial transformation to a low carbon economy because it creates the necessary regulatory and policy framework in much the same way as governments supported innovation during the Industrial Revolution by supplying courts of law to enforce trading agreements, supplied legal modes of organisation, subsidized railways and canals, as well as providing free compulsory education and transport systems.
Even if we accept that we are heading towards a low carbon economy, a very important question is what will that future economy look like? Is it as simple as simply replacing fossil fuel energy with renewable energy?
We do not believe that it is; we think that virtually every industry sector will be affected, yet this is not yet widely recognized. Transition to a low carbon economy will support new business models and new ways of organising society.
The reason is that over the last one hundred years cheap fossil fuel energy shaped the way we built our society and economy. One example is that cheap fossil fuel energy produced urban sprawl, as the automobile enabled workers to commute to work over longer distances.
History offers valuable lessons on which businesses will succeed. Peter Drucker in his article “The Discipline of Innovation”, originally published in May 1985, provides the examples of De Havilland Aircraft Company Limited, a British aviation manufacturer established in late 1920 that designed and built the first passenger jet.
Drucker argued that “De Havilland did not analyze what the market needed and therefore did not identify two key factors. One was configuration— that is, the right size with the right payload for the routes on which a jet would give an airline the greatest advantage. The other was equally mundane: How could the airlines finance the purchase of such an expensive plane? Because de Havilland failed to do an adequate user analysis, two American companies, Boeing and Douglas, took over the commercial jet-aircraft industry.2
Drucker believed that innovation needs to be purposeful and systematic, “whatever the situation, innovators must analyze all opportunity sources. Because innovation is both conceptual and perceptual, would-be innovators must also go out and look, ask, and listen. Successful innovators use both the right and left sides of their brains. They work out analytically what the innovation has to be to satisfy an opportunity. Then they go out and look at potential users to study their expectations, their values, and their needs.”
Innovation is not just about invention. As the Industrial Revolution demonstrated, plenty of opportunities arose from developing new processes or utilising new infrastructure in innovative ways. Drucker’s insights are as valuable today as they were in 1985. For investors, the challenge is to find the companies that have the right structures and processes to understand the changes that are influencing their businesses, and ensure that they have the capacity to innovate in response.
We expect that industrial transformation that COP21 will support, will create opportunities for businesses, many of which, like the importance of the ice industry, may not be recognised for years to come. But how can investors recognise the difference between megatrends and fads?
In 1982, John Naisbitt established the word megatrends in our vocabulary with his book Megatrends: Ten New Directions Transforming Our Lives. Writing at the time of the rapid development of computer technology, Naisbitt rightly identified that society was in a time of flux, stating, that “although the time between eras is uncertain, it is great and yeasty time, filled with opportunity. If we can learn to make uncertainty our friend, we can achieve much more than in stable eras”.
One of the challenges that Naisbitt identified was the need to differentiate between trends and fads. Trends which represent fundamental change were according to Naisbitt “like horses are easier to ride in the direction they are already going.” Naisbitt’s edict applies to our current era. We are living in an era where new innovations come to market on a daily basis.
Our contention is that government support under the COP21 framework creates an environment that will favour companies that ride in the same direction as governments are heading. Innovations that are targeted at supporting transition to a low carbon economy are “sailing with the wind”, that is they are supported by government.
There a host of examples of industrial transformation that we are already seeing. Examples include:
Rio Tinto’s Diavik Diamond Mine, located on an island in a subarctic lake in Canada’s remote Northwest Territories, where the company has built a four turbine 9.2 megawatt wind farm. In 2015, the wind farm reduced the mine’s annual diesel fuel requirement by 5.2 million litres, offsetting 14,404 tonnes of CO2. The wind farm, which utilises specialist turbines designed to operate in temperatures as low as -40°C, reduces reliance on winter ice roads, which are only available for a short period of time each year to transport oil.
Air France-KLM has announced that it has ordered 21 Boeing 787 Dreamliners that have the capability to reduce CO2 emissions by at least 20%. Air France —KLM refitted its medium haul fleet with new lighter seats that weigh only 11.6kg. Each kilogram that is not on board saves around 69 tons of CO2 per year.
Lift operators including Kone Corporation, Schindler & ThyssenKrupp AG are competing to build eco- friendly products utilising smart technology. Schindler has developed energy efficient elevators including its Schindler 7000, high rise elevator that achieved an A class energy rating from the VDI 4707, the highest rating under the classification. The elevator changes includes use of regenerative drive technology and gearless motor technology that reduce energy consumption.
Inflection Point Capital Management’s White Paper on Climate Change and Industrial Transformation is available at the following link:
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