In August 2021, President Joe Biden signed an executive order that set a target for zero-emissions vehicles to make up half of new car sales in the U.S. by 2030. Electric vehicles (EVs) accounted for just 2% of new car sales in the U.S. in 2020, so there will likely be a lot of growth in sales over the next eight years—even if sales of zero-emissions vehicles fall a little short of the target.
The push to electric vehicles is only one part of Biden’s climate change agenda, with the President seeking to make the U.S. government a net-zero contributor to the climate crisis by 2050. Those efforts are mirrored by other governments and organizations around the world. According to the International Renewable Energy Agency (IRENA), investments in energy transition could total $110 trillion in global spending by 2050.
If you’re interested in aligning your portfolio with this energy transition, here are three things to know about the coming changes and how they could reshape your investment strategy.
1. Expect Increased Demand for Copper, Cobalt, Graphite, and Lithium
Clean-energy technologies are typically mineral-intensive, which could lead to surging demand for mineral inputs over the coming decades.
Consider copper: a typical EV needs 132-193 pounds of copper, compared to 33 pounds for a conventional car. According to a U.S. Geological Survey, the demand for copper from EVs and associated infrastructure could be 13-15% of 2020 global supply by 2030.
An offshore wind plant needs 13 times more mineral resources than a gas-fired power plant. The demand for cobalt, graphite, and lithium could increase by 21, 25, and 42 times, respectively, during the next decade.
2. The Energy Transition is Going to Impact Companies Across the Market
The energy transition is not only going to impact companies involved in the creation of clean energy technologies and the production of fossil fuels but also companies that are reliant on those energy sources. This shift towards sustainability is also expanding into new spaces and new sectors, including agriculture and smart resource management.
It’s also important to note that the transition will take place over a long period of time and traditional companies will need to be involved in many of the changes happening as initiatives progress and client demands change.
3. Commodity-Based Investments Could Help to Offset the Effects of Inflation
Inflation was one of the biggest stories in the market in 2021, with the 7% annual move in December 2021 being the fastest increase since June 1982.
In an inflationary market environment, real assets—including natural resources and commodities—tend to outperform stocks and bonds. It’s possible that global central banks will raise rates over the next couple of years, but highly leveraged global financial markets and high debt levels could prevent them from increasing rates enough to fight off inflation.
If there is sustained inflation, coupled with increasing demand for green metals, we could see large price increases for copper, cobalt, and lithium, as well as higher share prices on companies involved in the production of these metals. This “greenflationary” aspect should be viewed as different from traditional, monetary and fiscally driven inflation, and could linger for some time. As supply is constrained for many critical inputs and consumer demands develop, this imbalance may keep prices elevated for some time.
Consider Investing in Funds That Give You Exposure to Commodities Associated with Clean Energy
There is little doubt that the U.S. economy is going to shift towards clean energy technology over the next few decades, but it’s unclear what commodities and companies are going to be the top performers.
What if the average EV needs more copper in the future? Or a cheaper copper substitute is discovered?
Since there is no sure way of knowing what will happen, diversification is likely to be the best strategy. The VanEck Green Metals ETF and Environmental Sustainability Fund are two ways to get broad exposure to clean energy commodities and companies.
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