Three years to save Earth according to a group of United Nations scientists. Can 150 years of planetary abuse undo over four billion years of evolution? As the Earth breathes even climate neutralists concede probability may be at least a 51/49 percent proposition.
Global consensus reached during Paris climate accord talks demonstrates as much despite political challenges since the recent US election. Apolitically, senior military personnel attest to the prospect of climate change remaining a significant national security risk for the foreseeable future. Today contention persists due in large part to wariness of Western apologists seeking to redistribute wealth and reengineer cultures at perceived disadvantages. Equally significant issues such as equity in absolute carbon emission volume measures and fairness in competition act to temper political arguments, offering economic transparency during environmental debates.
Observations in the International Energy Agency 2017 World Energy Investment whitepaper note flat levels of spending in alternative and conventional energy technology in recent years, the former driven by public spending and latter by private investment in research and development although current statuses are characterized by overcapacity and oversupply. Given the range in governing energy equations, not surprisingly natural resource allocations (coal, natural gas, oil) coexist with renewables (wind, solar, hydropower) and science (nuclear). Innovation in technology continuously reduces the levelized cost of energy and resets the supply/demand dynamics of conventional and renewables composition in energy equations, driving competitive marginal unit cost translations and renewables scale within the overall balance of equation weights.
Survey of government policies and corporate strategies reinforce the premise of a one energy equation not a series of separate or nascent policies. Realistically (and importantly) fossil fuels remain a stalwart of energy generation capacity and consumption, acting as vital bridge fuel sources in evolving national policies (US, Germany, Japan, China) ceding its allocations only by renewables referendum but increasingly on a kilowatt basis. Implications for investment strategies reveal populist and unpopular themes spanning the breadth and depth of composite energy portfolios. In relevant macro- and sector-based momentum trend (CAPE) and thematic (Cleantech) Beta portfolio strategies, sentiment captures varying degrees of directional equity price movement. However, with limited or indiscriminate attribution, a more deliberate approach to portfolio construction is required.
Data sets derived from publicly-sourced ETFs work well across the energy equation as benchmarks, managing the performance drivers of its investment universe. For instance, energy policy portfolio allocations (Oil&Gas – XLE, Coal – KOL, Nuclear – NLR, Renewables – PBW) serve as a basis for industry vertical dropdowns on the equation’s two ends from Oil&Gas (Sector – XLE, Exploration & Production – XOP, Oilfield Services – OIH, Refiners – CRAK, Shale – FRAK) to Renewables (Sector – PBW and PZD, Wind – FAN, Solar – TAN, Smart Grid – GRID, Lithium – LIT, Water – FIW) and advances the utilization of sector/industry/subindustry/vertical/thematic ETF proxies as fundamental indexes for derivative applications. Illustrating sovereign energy posture in this manner begins to support management of its tenets and assessment of data and policy trends on capital markets including corporate catalysts and balance sheet transactions. To advance analysis, needed still is a reconciliation of specific business segment operations among representative component members apart from the general sector designations presented in standard fund reporting.