I am not normally someone who pays much attention to hedge funds, but it was fascinating to see what happened to GameStop and what has happened to hedge funds since. Investment markets are still trying to recover from the retail trading frenzy that forced the industry to slash its overall exposure to stocks, leading to underperformance in 2021. More specifically, a large number of retail investors who coordinated on social media managed to push GameStop shares up 400% in just one week, with Hedge funds getting burned on their short positions. That lead me to think about how we can encourage more long term investment that delivers both financial and climate returns.
There is some good news for potential investors. 2020 was a tipping point in the green transition, with renewables avoiding the 40% slump in global foreign direct investment (FDI) and low oil prices. Green–field foreign investment in renewables exceeded flows into fossil fuels for the first time on record, signalling a turning point in the energy transition and its resilience to the pandemic as well as other parameters.
This resilience is explained partly by its partial independence on fuel prices, which collapsed in 2020 as lockdowns slowed down demand. Another driver is clean energy’s growing cost-competitiveness, making investments in renewables more and more efficient. 2020 was a pivotal year in the green transition for other reasons, too. The EU, China, South Korea, and Japan all announced net-zero emissions targets, along with oil majors such as Total, BP and Shell. Meanwhile, renewables overtook fossil fuels as the EU’s main source of electricity. I would therefore argue that the resilience of the sector comes from the long-term commitment to transitioning towards a lower carbon economy from both investors and governments alike. Because renewable generation is, for the most part, predictable or can safely be forecasted with minor margins for error, this makes it a consistent, reliable and most of all, long-term attractive investment option.
One lesson we learned from COVID-19 is that systemic problems – such as a global pandemic or climate change, require drastic and holistic solutions. This is where the role of governments becomes very important as they are the ones that have the power, resources, and responsibilities to facilitate and help. If we take a look at the way we are tackling COVID, for instance, it is not left up to the individual or solely to the private sector to fence off the pandemic. Governments imposed restrictions and lockdowns and took other mandatory measures like wearing masks etc., to do so.
The challenges are the same with climate change. We have to change our daily behaviour to reduce greenhouse gas emissions quickly. Unfortunately, governments have not introduced sufficient powerful measures to address this climate change crisis. This is probably because climate change is a more complex and expensive crisis to tackle.
So how do we encourage the private sector, and in particular the likes of hedge funds, to get involved? Setting the rules correctly is essential. Through taxes and regulation, governments can create incentives for businesses to pursue activities with positive side effects for society and discourage activities that harm us – such as emitting carbon. It is now time for Governments to lead the way in building a more sustainable future. Meeting the climate challenge is an opportunity to create new sources of growth by placing the climate imperative at the core of both national growth and development strategies and the investment strategies of the global finance industry.
Therefore, with the right direction from Governments and with a change of the profile and outlook of investors who do not want to leave the fate of their investments on unpredictable events such as GameStop spree, investing in the green economy and climate change looks like the right long-term alternative! Let us call it the alternative green hedge!