Europe’s gas crisis is a warning that climate change is rapidly morphing from a faraway prospect for investors to direct input into asset allocation decisions.
The transition away from the dirtiest fossil fuels is not the only reason for the spectacular rally in UK natural gas prices, which have almost tripled this year.
Russia has been slow to refill Europe’s gas storage that was depleted by the last long, cold winter. The state-controlled energy group Gazprom has been fulfilling long-term contracts but has not stepped up with extra short-term supplies. On the margins, peculiarities such as a lack of wind in the UK this summer (who knew?) have also boosted reliance on this fuel.
Still, efforts to green up our energy have contributed. Europe has been phasing out coal power plants, and the price of permits to emit carbon in the UK and EU has rocketed this year, making it painfully expensive to keep on burning coal. That makes gas, while still a fossil fuel, an essential and cleaner alternative.
The impact on companies, from food processors to fertiliser manufacturers, has been severe. To prevent households and businesses from having to turn off the lights or shiver through the winter, governments also are stepping in with billions of euros in support.
A long-term solution, with fully renewable energy, implies massive investment and intense demand for the commodities that make wind turbines and batteries.
This is no longer something investors can afford to ignore. Television screens filled with images of floods and fire have strengthened asset managers’ resolve to try and do the right thing. But what really spooks them is the sobering image of rising natural gas price charts and the growing realization this might hit where it really hurts: in their returns.
It is becoming, in investment parlance, a macro risk. The finance industry’s fondness for a portmanteau means it already has a name: greenflation.
For fund managers, macro risks generally encompass the big global shifts that underpin their strategy: geopolitics, the ascent of China, the broad sweep of global monetary policy, and so on. Climate is now earning a place on this list.