Understanding this duality between greenflation and the greenium will become vital for policymakers and investors alike.
If the costs of the vital commodities required for the zero-carbon transition rise too far, too fast, they will significantly inflate the expense. Yet for investors the greenium means that there are potentially rich rewards in those sectors likely to make the transition happen most smoothly.
Source: Global Sustainable Investment Alliance
More than a third of all global investments in the world’s top five markets are now sustainable
OUTFRONT
If the journey to decarbonize is hard, the rewarding destination is the green asset premium, or greenium. Such is the demand for green assets from investors, and for the financial operating and competitive benefits, that they receive lower funding costs and higher asset valuations.
Source: Argus Media (as of 09/13/2021)
Sustainable Aviation Fuel vs Traditional Jet Fuel Price
Airbus A320neo: $110 Million*
Airbus A320ceo: $100 Million*
*Average price
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. )
The cost of sustainable aviation fuel is three to four times that of traditional jet fuel.
Take air travel:
As big events like November 2021’s COP26 climate conference show, climate change is the most pressing challenge of our generation. More than 30,000 people from over 200 countries will fly to Glasgow to urgently debate the path to net zero. With a third of all investments now sustainable, the momentum towards decarbonizing the globe is building.
But how do you engineer the transition without triggering runaway inflation (greenflation) in the costs of the very commodities needed for a green economy? The duality of greenflation versus a green asset premium, or greenium, plays out across a broad range of sectors, including metals, construction, consumer products,
real estate and the green economy.
The Journey to NET ZERO
from Greenflation to Greenium
Greenflation
Source: Wood Mackenzie
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.
Percentage increase in demand for Aluminum by 2040.
+91%
2020 Low Point
60.16 % YTD
Sept 2021
Mar 2021
Mar 2020
Mar 2019
MVIS Global Rare Earth/Strategic Metals Index (MVREMX)
Source: Refinitiv
0
100
200
300
800
700
600
500
400
Rare Earth Prices Index
Aluminum 75%
PRICE INCREASE SINCE 2020
COPPER 100%
PRICE INCREASE SINCE 2020
Source: Wood Mackenzie analysis
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.
Funding shortfall for Mining
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.
THE RISING COSTS OF RARE EARTH METALS
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.
Since their pandemic-induced low points early in 2020, the prices of the metals needed for the energy transition have risen substantially.
Governance Issuer Profile Score
Social Issuer Profile Score
Enviromental Issuer Profile Score
Credit Impact Score (CIS)
2
0
0
0
23
0
0
1
15
0
0
35
3
36
3
8
2
9
42
1
Very Highly Negative
Neutral-to-Low
Moderately Negative
Positive
Highly Negative
Source: Moody’s Investor Service
Distribution of ESG credit impact scores and issuer profile scores for the scored companies in this sector
Metals and Mining: Across Companies, Environmental Scores are Very Highly Negative
Metals bottlenecks
The Surge in Base Metal Prices
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.
Right now, Gen Z will pay 50% more for a sustainable T-shirt, according to a recent survey in Vogue Business.
The Fashion Green Premium
+220%
+100%
+20%
Sustainable Products
Conventional Products
+75-85%
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.
Green Products Tend to be More Expensive than Conventional Products
Source: Nielsen, International Renewable Energy Agency, Oeko Institute, World Wildlife Fund; Kearney Analysis (as of 09/25/2021)
Price Markups for Sustainable Products
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 PRODUCT MARKUPS
Source: How To Avoid A Climate Disaster, Bill Gates, 2021. (page 107)
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.
Another form of greenflation is the extra cost of decarbonizing steel and cement.
CONCRETE + CEMENT
Source: OECD, quoting IEA research
accounts for 6% OF GLOBAL CO2 EMISSIONS
If concrete were a country, it would be the fourth worst emitter after China, the U.S. and India.
IRON + STEEL
Source: OECD, quoting IEA research
accounts for 8% of CO2 Global Emissions
The world produces enough steel to build an Eiffel Tower every three minutes.
Construction Materials
Green Transition’s extra costs
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.
Supply of Sustainable Assets
Greenium for bonds
Plentiful and Cheaper Funding
Reaping Green Rewards
“
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
Source: 2018 World Green Building Trends report
PGIM Real Estate has committed to reduce operational carbon emissions of its global portfolio of managed properties to net zero by 2050. This commitment aligns to the Urban Land Institute’s (ULI) Greenprint Center for Building Performance Net Zero Carbon goal. ULI Greenprint provides a roadmap to net zero carbon emissions for buildings under operational control. The goal is designed to accelerate the reduction of carbon emissions produced by buildings at all stages, including the planning and construction processes, as well as during use.
The reason? Buildings with environmental certification have lower operating costs and command higher rents. That means the payback time on extra investment is short. Indeed, the top trigger for a green building is client demand, closely followed by regulations and then healthier buildings, according to the report.
30%
The percentage of owners reporting that new green buildings have an asset value more than 10% greater than that of traditional buildings.
New Green Building
Green Retrofit
Source: World Green Building Trends
Payback Time for Green Investments
Increased Asset Value (According to Owners)
Decreased 5-Year Operating Costs
(Medians Reported in 2012, 2015 and 2018)
Business Benefits Expected From Green Building Investments
Green Buildings See Higher Valuations
Ratings Gold
“
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
% shared-price performance over a 5-year period
Average of Green Economy Mark Cohort
130.90%
20.98%
15.82%
FTSE All-Share
FTSE 100
Source: LSEG Green Economy Report 2021
0
20
40
60
140
120
100
80
Green Economy Mark Share Price Performance
The Pursuit of Outperformance
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.
Judging the duality of decarbonization
Source: "How to Avoid a Climate Disaster" by Bill Gates
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.
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.
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.
It listed on the Nasdaq in 2019 at a value of approximately $1.3 billion while posting annual losses of about $30 million.
BEYOND MEAT
THE PLANT-BASED MEAT COMPANY BEYOND MEAT OFFERS SUBSTITUTE OPTIONS IN THE BEEF, PORK AND POULTRY CATEGORIES.
Companies Participating in the Green Economy Outperform
Green Economy Premiums
0
200
U.S. cents per gallon
400
600
1000
800
Aug 2021
Sept 2021
Jun 2021
Jul 2021
May 2021
Jan 2021
Apr 2021
Mar 2021
Feb 2021
Dec 2020
% premium of SAF above conventional jet fuel price
Jet Fuel
SAF (Sustainable Aviation Fuel)
greenium
Greenflation
Fashion
Canned Tomatoes
Vitamins
Baby Food
Energy
Apples
Eggs
Beauty & Health
Tomatoes
Milk
greenium
Greenflation
greenium
$0
Sustainable Bonds ($bn)
Source: Refinitiv
Sustainable Loans ($bn)
2021
2020
2019
2018
$50
$100
$300
$250
$200
$150
$350
Green and sustainable bond issuance surged since the beginning of the pandemic.
The sustainability and social bond categories each set all-time records during the first half of 2021.
During the first half of 2021, green bond issuance totalled $259.3 billion, nearly three times first-half 2020 levels, an all-time first-half record.
Sustainable Finance bonds totalled $551.6 billion during the first half of 2021, an increase of 76% compared to the first half of 2020 and an all-time first-half record.
But there is also surging growth in sustainability-linked debt, which ties the cost of capital to the borrower’s performance against agreed sustainability metrics. For example, Prudential Financial’s new $4 billion credit facility announced on July 30, 2021, links borrowing costs to reducing greenhouse gas emissions and increasing the diversity of senior management.
greenium
Read More
Learn More
greenium
greenium
Source: LSEG Green Economy Report 2021
A wide range of green companies – from electric vehicles to renewable energy to recycling – have outperformed in recent times and are trading at premium valuations. For example, companies with the Green Economy Mark (GEM) designation on the London Stock Exchange have outperformed the S&P 500 index by 109% over a five-year period. (The statistic covered the average market cap weighted share price performance of the current cohort of GEM companies in the 5Y from 25th June 2016 to 25th June 2021.)
Read More
13%
13%
14%
13%
14%
15%
2018
2015
2012
Arriving: Greenium
Traveling through three Greenflation dimensions
8 Years
7 Years
7 Years
8 Years
6 Years
6 Years
5%
7%
4%
7%
7%
5%
Greenium for bonds
There is some evidence of a “greenium”, where borrowers pay less for green or sustainable bonds, especially in the US. However, it’s not clear cut.
The Climate Bond Initiative analyzed 46 green bonds issued in the first half of 2020 and was able to create a yield curve for only 21 of them. Of that sample, only five showed evidence of a greenium, pricing inside the yield curve.
PGIM scores buildings on metrics that include drought-tolerant landscaping and LED lighting retrofits, as well as social factors like ‘walkability’ ratings that show how connected a building is to the local community. Buildings with high scores are less expensive to maintain and should command a premium value.
What’s more, PGIM is retrofitting its existing building stock to cut its carbon footprint rather than just focusing on new green buildings. There is an alignment of interest because improving the environmental profile of a building makes it more desirable for tenants and lifts the rental value.
PGIM’s
Green building ratings
the green economy
real estatE
consumer products
construction
METALS
INTRO
the green economy
real estatE
consumer products
construction
METALS
INTRO
the green economy
real estatE
consumer products
construction
METALS
INTRO
the green economy
real estatE
consumer products
construction
METALS
INTRO
the green economy
real estatE
consumer products
construction
METALS
INTRO
the green economy
real estatE
consumer products
construction
METALS
INTRO
Source: Aluminum, Cobalt, Copper, Nickel – LME, Lithium Carbonate – traded in China converted to US$, Trading Economics (as of 09/21/2021)
Aluminum
Nickel
Lithium Carbonate
Cobalt
Copper
Sept 2020
Jan 2021
Jan 2020
Aug 2021
Copper, Aluminum, Lithium Carbonate, Cobalt and Nickel Prices
60k
40K
50K
30K
10K
20k
0
US$ per ton
The Pursuit of Outperformance
For policymakers and investors, the duality of greenflation and the green asset premium 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 the green asset premium.
Judging the duality of decarbonization
Learn More
THE PLANT-BASED MEAT COMPANY BEYOND MEAT OFFERS SUBSTITUTE OPTIONS IN THE BEEF, PORK AND POULTRY CATEGORIES.
BEYOND MEAT
It listed on the Nasdaq in 2019 at a value of approximately $1.3 billion while posting annual losses of about $30 million.
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.
plant-based Meat greenium
greenium
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
greenium
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.
A wide range of green companies – from electric vehicles to renewable energy to recycling – have outperformed in recent times and are trading at premium valuations. For example, companies with the Green Economy Mark (GEM) designation on the London Stock Exchange have outperformed the S&P 500 index by 109% over a five-year period. (The statistic covered the average market cap weighted share price performance of the current cohort of GEM companies in the 5Y from 25th June 2016 to 25th June 2021.)
Source: LSEG Green Economy Report 2021
Green Economy Premiums
Companies Participating in the Green Economy Outperform
Green Economy Mark Share Price Performance
80
100
120
140
60
40
20
0
Source: LSEG Green Economy Report 2021
FTSE 100
FTSE All-Share
Average of Green Economy Mark Cohort
% shared-price performance over a 5-year period
130.90%
20.98%
15.82%
Teresa Ho Kim, CFA, Managing Director, Jennison Associates
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.”
“
Ratings Gold
Green Buildings See Higher Valuations
The percentage of owners reporting that new green buildings have an asset value more than 10% greater than that of traditional buildings.
30%
greenium
The reason? Buildings with environmental certification have lower operating costs and command higher rents. That means the payback time on extra investment is short. Indeed, the top trigger for a green building is client demand, closely followed by regulations and then healthier buildings, according to the report.
PGIM Real Estate has committed to reduce operational carbon emissions of its global portfolio of managed properties to net zero by 2050. This commitment aligns to the Urban Land Institute’s (ULI) Greenprint Center for Building Performance Net Zero Carbon goal. ULI Greenprint provides a roadmap to net zero carbon emissions for buildings under operational control. The goal is designed to accelerate the reduction of carbon emissions produced by buildings at all stages, including the planning and construction processes, as well as during use.
Source: 2018 World Green Building Trends report
Eric Adler, President and CEO, PGIM Real Estate
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.”
“
2012
Green Retrofit
New Green Building
2015
2018
8
Years
7
Years
7
Years
8
Years
6
Years
6
Years
Payback Time for Green Investments
2012
2015
2018
5%
7%
4%
7%
7%
5%
Increased Asset Value (According to Owners)
Business Benefits Expected From Green Building Investments
(Medians Reported in 2012, 2015 and 2018)
2012
2015
2018
15%
14%
13%
14%
13%
13%
Decreased 5-Year Operating Costs
Source: Global Infrastructure Outlook
Read More
PGIM scores buildings on metrics that include drought-tolerant landscaping and LED lighting retrofits, as well as social factors like ‘walkability’ ratings that show how connected a building is to the local community. Buildings with high scores are less expensive to maintain and should command a premium value.
What’s more, PGIM is retrofitting its existing building stock to cut its carbon footprint rather than just focusing on new green buildings. There is an alignment of interest because improving the environmental profile of a building makes it more desirable for tenants and lifts the rental value.
Reaping Green Rewards
Plentiful and Cheaper Funding
Arriving: Greenium
If the journey to decarbonize is hard, the rewarding destination is the green asset premium, or greenium. Such is the demand for green assets from investors, and for the financial operating and competitive benefits, that they receive lower funding costs and higher asset valuations.
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
greenium
But there is also surging growth in sustainability-linked debt, which ties the cost of capital to the borrower’s performance against agreed sustainability metrics. For example, Prudential Financial’s new $4 billion credit facility announced on July 30, 2021, links borrowing costs to reducing greenhouse gas emissions and increasing the diversity of senior management.
Sustainable Finance bonds totalled $551.6 billion during the first half of 2021, an increase of 76% compared to the first half of 2020 and an all-time first-half record.
During the first half of 2021, green bond issuance totalled $259.3 billion, nearly three times first-half 2020 levels, an all-time first-half record.
The sustainability and social bond categories each set all-time records during the first half of 2021.
Green and sustainable bond issuance surged since the beginning of the pandemic.
Read More
$350
$150
$200
$250
$300
$100
$50
2018
2019
2020
2021
Sustainable Loans ($bn)
Source: Refinitiv
Sustainable Bonds ($bn)
$0
There is some evidence of a “greenium”, where borrowers pay less for green or sustainable bonds, especially in the US. However, it’s not clear cut. The Climate Bond Initiative analyzed 46 green bonds issued in the first half of 2020 and was able to create a yield curve for only 21 of them. Of that sample, only five showed evidence of a greenium, pricing inside the yield curve.
Green Transition’s extra costs
Construction Materials
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
greenium
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.
The Fashion Greenium
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.
Price Markups for Sustainable Products
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.
+75-85%
Conventional Products
Sustainable Products
+20%
+100%
+220%
Energy
Tomatoes
Milk
Eggs
Beauty & Health
Baby Food
Vitamins
Apples
Canned Tomatoes
Fashion
Source: Nielsen, International Renewable Energy Agency, Oeko Institute, World Wildlife Fund; Kearney Analysis (as of 09/25/2021)
If concrete were a country, it would be the fourth worst emitter after China, the U.S. and India.
accounts for 6% OF GLOBAL CO2 EMISSIONS
Source: OECD, quoting IEA research
CONCRETE + CEMENT
The world produces enough steel to build an Eiffel Tower every three minutes.
accounts for 8% of CO2 Global Emissions
Source: OECD, quoting IEA research
IRON + STEEL
Metals bottlenecks
The Surge in Base Metal Prices
Traveling through three Greenflation dimensions
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.
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
+91%
Percentage increase in demand for Aluminum by 2040.
PRICE INCREASE SINCE 2020
COPPER 100%
Greenflation
PRICE INCREASE SINCE 2020
Aluminum 75%
Copper, Aluminum, Lithium Carbonate, Cobalt and Nickel Prices
60k
40K
50K
20k
30k
10k
US$ per ton
0
Aluminum
Nickel
Lithium Carbonate
Cobalt
Copper
Sept 2020
Jan 2021
Jan 2020
Aug 2021
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.
Greenflation
Rare Earth Prices Index
400
500
600
700
800
300
200
100
0
Source: Refinitiv
MVIS Global Rare Earth/Strategic Metals Index (MVREMX)
Mar 2019
Mar 2020
Mar 2021
Sept 2021
2020 Low Point
60.16 % YTD
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
Highly Negative
Positive
Moderately Negative
Neutral-to-Low
Very Highly Negative
Source: Moody’s Investor Service
42
3
0
0
0
Enviromental Issuer Profile Score
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
1
8
35
1
0
Credit Impact Score (CIS)
9
36
0
0
0
Social Issuer Profile Score
2
3
15
23
2
Governance Issuer Profile Score
+
PRESENT
from Greenflation to Greenium
The Journey to NET ZERO
OUTFRONT
More than a third of all global investments in the world’s top five markets are now sustainable
Source: Global Sustainable Investment Alliance
As big events like November 2021’s COP26 climate conference show, climate change is the most pressing challenge of our generation. More than 30,000 people from over 200 countries will fly to Glasgow to urgently debate the path to net zero. With a third of all investments now sustainable, the momentum towards decarbonizing the globe is building.
But how do you engineer the transition without triggering runaway inflation (greenflation) in the costs of the very commodities needed for a green economy? The duality of greenflation versus a green asset premium, or greenium, plays out across a broad range of sectors, including metals, construction, consumer products, real estate and the green economy.
Sustainable Aviation Fuel vs Traditional Jet Fuel Price
Source: Argus Media (as of 09/13/2021)
SAF (Sustainable Aviation Fuel)
% premium of SAF above conventional jet fuel price
Jet Fuel
Dec 2020
Feb 2021
Mar 2021
Apr 2021
Jan 2021
May 2021
Jul 2021
Jun 2021
Sept 2021
Aug 2021
800
1000
600
400
200
0
Understanding this duality between greenflation and the greenium will become vital for policymakers and investors alike.
If the costs of the vital commodities required for the zero-carbon transition rise too far, too fast, they will significantly inflate the expense. Yet for investors the greenium means that there are potentially rich rewards in those sectors likely to make the transition happen most smoothly.
*Average price
The cost of sustainable aviation fuel is three to four times that of traditional jet fuel.
Take air travel:
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. )
Airbus A320neo: $110 Million*
Airbus A320ceo: $100 Million*
greenium