For the last several years, I’ve been tasked with investing my clients’ assets to better their financial futures.  While I believe in capitalism and that private investment tends to direct money more efficiently to profitable business opportunities than does the government, I also believe the government has a role through regulation and the tax code in making certain that environmental and social costs are accounted for so that investors are forced to think more long-term.  There are many sectors that can be affected by government directives to address social inequities and climate change, but for the balance of this piece, I’ll be focusing on renewable energy.

Forward thinking and a focus on technology has enabled Amazon (which BTW co-founded the Climate Pledge – a commitment to be net zero carbon across their business by 2040) to become the world’s most valuable retailer and forced others retail giants such as Walmart and Target to change their business models to compete.  While still a modest but growing portion of electricity generation, renewable energy sources such as solar, wind and hydro are now cost competitive with fossil fuels.  Indeed, the future of energy generation is so clear that even companies like BP and ExxonMobil have acknowledged the contributions of their products to climate change and are investing in renewables as they can’t lobby away the changing landscape.  While I’m generally not a proponent of excessive regulation, in my mind the tax incentives offered to cutting edge technologies have proven to be the right move.  Now companies like Tesla, who benefited from car-buyer credits, are leaders and forcing entire industries to up their games to compete.  We are also now witnessing how the government’s incentives to pharmaceutical companies in search of vaccines and therapeutics for the Covid-19 pandemic are resulting in successful trials in record time.

Another factor I believe is important in determining regulatory and tax incentives for renewables is that other countries are moving towards the future and if we don’t compete on incentives, our companies will be at a disadvantage and won’t remain viable as industries such as solar, wind and hydro energy take a larger piece of the global energy generation market.  Bear in mind, companies generally don’t make long-term investment decisions based on a single administration’s policies as they may have to reverse course should a new regime with different goals hold power.  It is very difficult for industries like auto and energy to retool their manufacturing and marketing each time new fuel or carbon emission standards are created or rolled back by those then in power.

When you think of behemoth energy companies, Exxon Mobil Corp likely comes to mind.  Within their 2019 annual report, a section titled “Alternative Energy” contains the following: “ExxonMobil is launching an innovative relationship with the U.S. Department of Energy’s National Laboratory network to bring low-emission energy breakthroughs to commercial scale. Our future results may depend in part on the success of our research efforts and on our ability to adapt and apply the strengths of our current business model to providing the energy products of the future in a cost-competitive manner”.  Likewise, the giant British oil company BP, PLC, is making large and increasing investments in biofuels, wind and solar power.  Just yesterday, there was an article stating that Royal Dutch Shell will encourage President-Elect Biden to reverse President Trump’s rollback of methane emission rules (https://www.chron.com/business/energy/article/Shell-Wants-Biden-to-Reverse-Methane-Emissions-15718553.php).  In short, the future is coming, and these global energy companies want to be a part of it.

Though I’m not certain just how large renewable energy and related infrastructure investments by the federal government will be under President Biden, they will undoubtedly be considerable relative to the current size of the industry.  Without sounding overly partisan, I believe humans do contribute to global warming and that Elon Musk and other innovators will be the Rockefellers of the 21^st Century.  Other countries, including China and India, are making enormous investments in innovative companies addressing climate change.  Competitive countries and companies will not only attract capital, but provide jobs.  In my opinion, it would be a huge misstep for the U.S. not to participate.

While the stocks of many of these innovative companies like Telsa are richly valued, there are many other companies that are currently profitable with solid balance sheets.  There are also ETFs which enable investors to own a basket of stocks (within a single security) in industries like solar power, wind power and lithium (a major component of electric vehicle batteries).   Although renewable energy companies have had huge gains over the last several months in anticipation of a Biden victory and the potential for a “Blue Wave”, I have no doubt that they will be meaningfully higher in five to ten years.  As both a parent and capital allocator, I want to be part of the future (solution) rather than the past (problem).

I hope you and your loved ones are safe and healthy. If you have any thoughts or questions about this commentary or anything else related to your financial life, my line is always open.

Best regards,

Steve