Companies expect carbon pricing
Over a third of companies will adapt their business models in anticipation of a future carbon price over the next three years, according to a survey of Fidelity International sector analysts. In high-emitting industries such as energy and materials, our analysts believe the proportion is closer to two-thirds (see chart 1). This suggests many companies are acting to get ahead of the financial and regulatory effects of carbon pricing, especially in those sectors where a carbon price will make new technologies more viable.
Some form of carbon pricing is likely to be on the table at next week’s UN climate conference in Glasgow. A global regime would push companies to adapt, but could be inflationary if implemented too aggressively (see this recent white paper from our Macro team). Keeping the carbon price too low, however, would slow the transition and make companies more vulnerable to sharper price hikes in the future.
Analysts have put hard numbers on the effect a carbon price could have. “A carbon tax or carbon cost above $100 a tonne [from $3 today] would have a dramatic impact. Capex plans would be adjusted quickly,” argues an analyst covering European and North American chemicals companies.
Companies are beginning to adapt
The good news is that our analysts believe over half of companies globally have begun to adapt their business models for a pathway to net zero by 2030 - far sooner than the Paris Agreement deadline of 2050. However, only seven per cent are taking far-reaching action, fewer than may need to in order to achieve that target (see chart 2). Government policy may be required to fill the gap. Fidelity analysts have identified incentives and regulation as the most effective measures to help firms get to net zero, with carbon pricing being the top policy choice for the energy sector.
The transition will fuel ‘greenflation’
Policy interventions will, however, have consequences. Fidelity analysts expect that around a quarter of their companies will incur higher costs due to carbon pricing over the next three years, with the energy, materials, and industrials sectors most exposed. “European airlines are required to purchase carbon credits under the EU cap and trade system. Prices are rising as allowances reduce,” reports one analyst covering European industrials.
Many companies will face other types of costs from going green. Just over half our analysts expect the low-carbon transition to increase operating costs for their companies over the next three years, while 60 per cent believe it will push up capital expenditure (see chart 3).
But that investment could pay off. Firms that increase transition-related capex today could lower their operating costs sooner. The utilities industry is one example. “Utility companies are moving towards renewable generation,” reports one analyst covering utilities in Emerging Europe, the Middle East, and Latin America. “This requires significant upfront capex, but the marginal cost of production then falls to zero. This is compared to traditional generation methods which require a commodity input.”
Paying for it all
Nonetheless, the transition is likely to increase upfront costs for most companies. Our analysts expect companies will predominantly fund these costs from internal resources such as cash (see chart 4). But a growing proportion of analysts expect companies to raise prices for consumers, which could further fuel greenflation.
Not all companies have the pricing power to do this, however. Some will need government subsidies, while others will rely on debt. “As my companies are price takers, they can't pass prices onto consumers, so they will need fiscal incentives to continue investment,” says an analyst covering European materials companies.
Conclusion
We are carbon-based organisms in a carbon-fuelled economy. Transitioning to a lower carbon world will require new policies to break energy-usage habits that have become entrenched over centuries. Even if new technologies ultimately lower costs, the policies needed to get there could pour greenflation fuel on the post-pandemic price fire already underway. But Fidelity’s analysts suggest that, for some companies, the costs of delaying policy action, even by a few years, will be many times higher.
Important Information
This document is for Investment Professionals only and should not be relied on by private investors.
This document is provided for information purposes only and is intended only for the person or entity to which it is sent. It must not be reproduced or circulated to any other party without prior permission of Fidelity.
This document does not constitute a distribution, an offer or solicitation to engage the investment management services of Fidelity, or an offer to buy or sell or the solicitation of any offer to buy or sell any securities in any jurisdiction or country where such distribution or offer is not authorised or would be contrary to local laws or regulations. Fidelity makes no representations that the contents are appropriate for use in all locations or that the transactions or services discussed are available or appropriate for sale or use in all jurisdictions or countries or by all investors or counterparties.
This communication is not directed at, and must not be acted on by persons inside the United States and is otherwise only directed at persons residing in jurisdictions where the relevant funds are authorised for distribution or where no such authorisation is required. Fidelity is not authorised to manage or distribute investment funds or products in, or to provide investment management or advisory services to persons resident in, mainland China. All persons and entities accessing the information do so on their own initiative and are responsible for compliance with applicable local laws and regulations and should consult their professional advisers.
Reference in this document to specific securities should not be interpreted as a recommendation to buy or sell these securities, but is included for the purposes of illustration only. Investors should also note that the views expressed may no longer be current and may have already been acted upon by Fidelity. The research and analysis used in this documentation is gathered by Fidelity for its use as an investment manager and may have already been acted upon for its own purposes. This material was created by Fidelity International.
Past performance is not a reliable indicator of future results.
This document may contain materials from third-parties which are supplied by companies that are not affiliated with any Fidelity entity (Third-Party Content). Fidelity has not been involved in the preparation, adoption or editing of such third-party materials and does not explicitly or implicitly endorse or approve such content.
Fidelity International refers to the group of companies which form the global investment management organization that provides products and services in designated jurisdictions outside of North America Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. Fidelity only offers information on products and services and does not provide investment advice based on individual circumstances.
Issued in Europe: Issued by FIL Investments International (FCA registered number 122170) a firm authorised and regulated by the Financial Conduct Authority, FIL (Luxembourg) S.A., authorised and supervised by the CSSF (Commission de Surveillance du Secteur Financier) and FIL Investment Switzerland AG. For German wholesale clients issued by FIL Investment Services GmbH, Kastanienhöhe 1, 61476 Kronberg im Taunus. For German Institutional clients issued by FIL (Luxembourg) S.A., 2a, rue Albert Borschette BP 2174 L-1021 Luxembourg.
In Hong Kong, this document is issued by FIL Investment Management (Hong Kong) Limited and it has not been reviewed by the Securities and Future Commission. FIL Investment Management (Singapore) Limited (Co. Reg. No: 199006300E) is the legal representative of Fidelity International in Singapore. FIL Asset Management (Korea) Limited is the legal representative of Fidelity International in Korea. In Taiwan, Independently operated by FIL Securities (Taiwan ) Limited, 11F, 68 Zhongxiao East Road., Section 5, Xinyi Dist., Taipei City, Taiwan 11065, R.O.C Customer Service Number: 0800-00-9911#2 .
Issued in Australia by Fidelity Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL No. 409340 (“Fidelity Australia”). This material has not been prepared specifically for Australian investors and may contain information which is not prepared in accordance with Australian law.
ED21 - 130 Learn more : Latest thinking (fidelity.be)
