A Financial Speed Bump for Sustainability

Impact Reflection | March 11, 2022

Inflation is the primary financial worry gripping not only consumers but also investors. It is driven both by pandemic-induced disruptions of labor and transportation, as well as by the dramatic rise in energy prices due to Russia’s destabilizing invasion of Ukraine. In the past forty years since the massive inflation of the 1970s, stock and bond prices have had a tremendous tailwind from falling interest rates. From 1982 through 2022, the S&P 500 stock index provided a 9.3% compounded annual return. Bonds had their own tremendous streak of performance following the retreat from sky-high interest rates, and with current yields at historic lows, bonds also face price declines as interest rates increase.
 
Awareness and concern for the environment have also grown dramatically over that time. We’ve seen the expansion of recycling and composting, concern over ocean health, industrial innovation to reduce pollution and make more efficient use of natural resources. Organic agricultural practices became common again following decades of heavy chemical fertilizer use, and we’ve seen the introduction of carbon trading and carbon taxes, as well as nuanced negotiations between urban and agricultural areas around water sharing and wildfire management. Over time we have achieved greater clarity about the environmental cost of nearly every area of our economy. 

Climate concerns remain urgent despite all these advances, especially in the context of increasing inflation. There is a growing consensus that massive spending will be required to achieve a conversion to energy consumption that doesn’t damage the environment and savage public health. Governments, however, are facing the need to withdraw the financial support that has driven markets in recent years. Instead, the private sector is the likely candidate to lead spending to slow climate change and create a sustainable future. While that spending may exacerbate inflation over the intermediate-term, the longer-term benefits will have value for both investors and consumers.
 
At the center of the leap to a sustainable energy economy is the automobile industry. Now well underway with an intended transformation away from the internal combustion engine, the industry expects continued high prices for both conventional and electric cars to help fund the tremendous cost of creating at-scale production facilities for electric cars.¹ Whether powered by gasoline or a lithium battery, cars are likely to become more expensive to operate as we go forward.
 
Beyond lithium, there are many metals and minerals that are on their way to becoming the “oil of the future.” There have been dramatic price increases for not only lithium but also other key manufacturing materials such as nickel and aluminum due to the war in Ukraine and the consequent sanctions on Russia. Separately, dependence on commodities such as silicon and copper are inflating the cost of clean energy development via solar and wind farms. Prices for polysilicon needed for solar panels have quadrupled in the last two years.² Happily, investor demand for green projects is strong – but higher demand increases the cost of materials. That reduces profits for investors in the projects and also pushes higher the future consumer cost of sustainable power and other clean energy innovations.
 
While the US may not have invented conspicuous consumption, it is a hallmark of our economy and our culture, and one we have exported around the world. Increases in consumption broadly increase our dependence on energy, and despite the massive push to increase renewable power generation, fossil fuels still provide over 80% of our current absolute energy need.³ This highlights the complexity we face in trying to accomplish climate goals while retaining affordability of energy and other essential needs.

Summer is coming and with it, Americans’ desire to pack their cars and head out. Gas will be more expensive on the road than it’s been since the last major economic downturn in 2008, and food prices for meals out are likely to be higher as well. At the same time, electric cars are making their mark, and the federal government is undertaking a massive effort to quadruple the number of charging stations across the country.⁴ The transition to renewable energy may be costly, but it is moving forward quickly.
 
Across the Atlantic, Russia’s war in Ukraine has exacerbated instability in energy, materials, and grain markets, and at the same time provoked humanitarian crises. It has also prompted Germany to radically rethink its commitment to buying natural gas from Russia and is energizing coordination among many other countries. This is an uncertain moment, unnerving for investors and consumers alike. While we expect today’s geopolitical and financial instability to reverberate for years, we also expect increased collaboration and progress on clean energy efforts.

Resources

¹ Conor Sen, “You Didn’t Buy an Electric Car.  But You’re Paying for One,” Bloomberg Opinion, February 9, 2022.

² Julie Steinberg, “Inflation Adds to Cost of Clean Energy Transition,” Wall Street Journal, December 19, 2021.

³ US Energy Information Administration, “Fossil fuels account for the largest share of US energy production and consumption,” Today in Energy, September 14, 2020.

⁴ Fred Lambert, “White House releases plan to grow US’s EV charging network to 500,000 stations,” Electrek, December 13, 2021.