FROM GREENFLATION TO GREENIUM

TAKE AIR TRAVEL:

THE COST OF SUSTAINABLE AVIATION FUEL IS THREE TO FOUR TIMES THAT OF TRADITIONAL JET FUEL.

There are rewards for green innovation. Today’s most fuel-efficient aircraft available, the A320neo, sells at a 10 percent premium to its predecessor. (Note: Aviation has a long journey ahead to zero carbon, and may include green hydrogen 15 years from now. )

*Average price

Sustainable Aviation Fuel vs Traditional Jet Fuel Price

Source: Argus Media (as of 09/13/2021)

TRAVELING THROUGH THREE GREENFLATION DIMENSIONS

THE SURGE IN BASE METAL PRICES

METALS BOTTLENECKS

GREENFLATION

ALUMINUM 75%

PRICE INCREASE SINCE 2020

COPPER 100%

PRICE INCREASE SINCE 2020

SINCE THEIR PANDEMIC-INDUCED LOW POINTS EARLY IN 2020, THE PRICES OF THE METALS NEEDED FOR THE ENERGY TRANSITION HAVE RISEN SUBSTANTIALLY.

Copper and aluminum are two of the most important metals for greening the economy. In addition, the cost of metals that are needed for batteries in electric vehicles—lithium, cobalt and nickel, among others—are also rising quickly. Yet supply is stalling as environmental, social and governance considerations slow new mining projects.

+91%

PERCENTAGE INCREASE IN DEMAND FOR ALUMINUM BY 2040.

In a scenario where the global temperatures rise between 2.8 and 3 degrees celsius, demand for aluminum would rise from 2.4 to 4.6 million tons per year. Demand for copper would rise from 0.4 to 0.7 million tons per year. Solar or wind farms use up to six times more copper wiring than conventional power plants.

Source: Wood Mackenzie

Copper, Aluminum, Lithium Carbonate, Cobalt and Nickel Prices

60k

50K

40K

30K

US$ per ton

20k

10K

0

Jan 2020

Jan 2021

Aug 2021

Sept 2020

Source: Aluminum, Cobalt, Copper, Nickel – LME, Lithium Carbonate – traded in China converted to US$, Trading Economics (as of 09/21/2021)

THE RISING COSTS OF RARE EARTH METALS

Rare earth metals – a group of 17 chemically similar elements – are used in low-energy lighting, wind turbines and electric vehicles. Their prices are also rising sharply and demand outstrips supply. If governments push the energy transition too fast, they may push it out of reach.

Rare Earth Prices Index

800

700

600

500

400

2020 Low Point

60.16 % YTD

300

200

100

0

Mar 2019

Mar 2020

Mar 2021

Sept 2021

Source: Refinitiv

MVIS Global Rare Earth/Strategic Metals Index (MVREMX)

FUNDING SHORTFALL FOR MINING

Exacerbating the problem is the lack of funding for mining and hydrocarbon sectors. Many global mining companies have become out of favor due to their poor ESG credentials. A recent analysis from Moody’s scored them especially poorly on environmental and social grounds. Yet miners need to invest $240bn over the next five years in base metals and gold to meet energy transition and other end-use requirements.

Source: Wood Mackenzie analysis

Metals and Mining: Across Companies, Environmental Scores are Very Highly Negative

Distribution of ESG credit impact scores and issuer profile scores for the scored companies in this sector

Credit Impact Score (CIS)

Enviromental Issuer Profile Score

Social Issuer Profile Score

Governance Issuer Profile Score

Source: Moody’s Investor Service

Very Highly Negative

Highly Negative

Moderately Negative

Neutral-to-Low

Positive

GREEN TRANSITION’S EXTRA COSTS

CONSTRUCTION MATERIALS

CONCRETE + CEMENT

ACCOUNTS FOR 6% OF GLOBAL CO2 EMISSIONS

Source: OECD, quoting IEA research

If concrete were a country, it would be the fourth worst emitter after China, the U.S. and India.

IRON + STEEL

ACCOUNTS FOR 8% OF CO2 GLOBAL EMISSIONS

Source: OECD, quoting IEA research

The world produces enough steel to build an Eiffel Tower every three minutes.

ANOTHER FORM OF GREENFLATION IS THE EXTRA COST OF DECARBONIZING STEEL AND CEMENT.

In his 2021 book, “How To Avoid A Climate Disaster,” Bill Gates puts the additional cost of decarbonizing steel at 16% to 29% and the cost of decarbonizing cement at 75% to 140%. However, when these costs feed through to the end consumer, they are much diminished.

Source: How To Avoid A Climate Disaster, Bill Gates, 2021. (page 107)

GREEN PRODUCT MARKUPS

When it comes to retail consumption, consumers are often willing to pay more for sustainable products, often accepting exorbitant markups, according to a Nielsen study.

GREEN PRODUCTS TEND TO BE MORE EXPENSIVE THAN CONVENTIONAL PRODUCTS

The highest markups are in fashion, beauty and health. Yet this example of greenflation in products also shows how the companies that market them can command a premium valuation globally.

Price Markups for Sustainable Products

+75-85%

+20%

+100%

+220%

Conventional Products

Sustainable Products

Source: Nielsen, International Renewable Energy Agency, Oeko Institute, World Wildlife Fund; Kearney Analysis (as of 09/25/2021)

THE FASHION GREEN PREMIUM

RIGHT NOW, GEN Z WILL PAY 50% MORE FOR A SUSTAINABLE T-SHIRT, ACCORDING TO A RECENT SURVEY IN VOGUE BUSINESS.

Often called the second most polluting industry after oil, the fashion industry is responsible for 10% of all global carbon emissions, more than all international flights and maritime shipping combined. What’s more, 87% of the fiber used in clothing is eventually incinerated or sent to landfill. With the escalating pace of fast fashion, there’s pressure on the industry to reinvent itself. There’s a move to recycle cloth and plastic, use more sustainable materials and even source materials like wool from local or family-owned farms. Fashion may well be going back to its roots as an artisanal business.

ARRIVING: GREENIUM

REAPING GREEN REWARDS

PLENTIFUL AND CHEAPER FUNDING

SUPPLY OF SUSTAINABLE ASSETS

As a flood of institutional investment seeks sustainable assets, so there is a plentiful supply of cheap capital for companies that are viewed as sustainable or becoming more sustainable. That has led to sustainable investments accounting for a third ($35.3 trillion) of all investments in the world’s five biggest markets, according to the Global Sustainable Investment Alliance.

GREENIUM FOR BONDS

RATINGS GOLD

GREEN BUILDINGS SEE HIGHER VALUATIONS

“

With the future in mind, and through our expanded ESG program, we’ve accelerated efforts to significantly mitigate our impact on the environment by creating a multi-year plan for our assets, which includes deep energy retrofits, on- and off-site renewable energy, green utility power, and climate risk assessments.”

Eric Adler, President and CEO, PGIM Real Estate

BUSINESS BENEFITS EXPECTED FROM GREEN BUILDING INVESTMENTS

(Medians Reported in 2012, 2015 and 2018)

DECREASED 5-YEAR OPERATING COSTS

PAYBACK TIME FOR GREEN INVESTMENTS

INCREASED ASSET VALUE (ACCORDING TO OWNERS)

New Green Building

Green Retrofit

Source: World Green Building Trends

GREENIUM

GREEN ECONOMY PREMIUMS

COMPANIES PARTICIPATING IN THE GREEN ECONOMY OUTPERFORM

JUST AS INVESTORS ARE PREPARED TO PAY A PREMIUM FOR SUSTAINABLE DEBT, SO TOO ARE THEY PREPARED TO DO SO FOR THE EQUITIES OF COMPANIES VIEWED AS SUSTAINABLE (EFFECTIVELY LOWERING THE COST OF EQUITY CAPITAL). THIS HAS IMPLICATIONS FOR INVESTORS LOOKING FOR COMPANIES THAT WILL OUTPERFORM.

“

While we understand that investing in green companies can be more expensive and can contribute to rising costs in the near term, we believe that the long-term benefits of investing in companies committed to decarbonization and clean energy significantly outweigh these short-term costs.”

Teresa Ho Kim, CFA, Managing Director, Jennison Associates

Green Economy Mark Share Price Performance

140

130.90%

120

100

80

% shared-price performance over a 5-year period

60

40

20.98%

15.82%

20

0

FTSE 100

FTSE All-Share

Average of Green Economy Mark Cohort

Source: LSEG Green Economy Report 2021

PLANT-BASED MEAT GREENIUM

TAKE, FOR EXAMPLE, COMPANIES IN THE EMERGING LAB-GROWN MEAT SECTOR THAT ARE COMMANDING EXCEPTIONAL VALUATIONS AS THEY CULTURE ARTIFICIAL MEAT THAT IS RELATIVELY ECO-FRIENDLY.

This avoids the problem with beef cattle producing methane, as well as forests being cut down to grow animal feed. Methane and nitrous oxide from farmed animals emit an estimated equivalent of 7 billion tons of carbon dioxide a year.

Source: "How to Avoid a Climate Disaster" by Bill Gates

BEYOND MEAT

THE PLANT-BASED MEAT COMPANY BEYOND MEAT OFFERS SUBSTITUTE OPTIONS IN THE BEEF, PORK AND POULTRY CATEGORIES.

It listed on the Nasdaq in 2019 at a value of approximately $1.3 billion while posting annual losses of about $30 million.

JUDGING THE DUALITY OF DECARBONIZATION

For policymakers and investors, the duality of greenflation versus greenium lies at the heart of the zero-carbon transition. Too fast a transition will drive up greenflation, thwarting policymakers. But investors allocating assets stand to benefit from a green asset premium, or greenium.