Meeting global goals for lower carbon emissions and a more sustainable future will require massive economic, environmental, and social changes. Resources will play an important role in transitioning society to this more sustainable, responsible future. Renewable power grids, electric vehicles, and sustainable buildings will require copper, lithium, hydrogen, natural gas, lumber, and many other critical commodities.

Exclusionary investment approaches have been viewed as the way towards a greener economy. This has often led to the under-representation of resources in investment portfolios. However, there is a big difference between decarbonizing a portfolio versus the physical world. Simply divesting from resource-intensive businesses risks steering capital away from companies that are essential to building the infrastructure needed for a sustainable future.

Yet, a better approach is for investors to engage resource companies and ensure they contribute to our societal goals of becoming greener. Broadly, companies that can economically reduce their footprint while at the same time providing essential goods for society offer a rewarding investment opportunity.

An honest plan for an emission free future

An honest plan to reduce emissions needs many things, but above all else, it needs an acknowledgement of the scale and scope of transformation required. The global goal is to reduce annual greenhouse gas emissions by 50% – that’s 20 gigatonnes of carbon dioxide – by 2035.

A credible pathway would focus on greening the electrical grid, electrifying transport, and reducing emissions from major industries, including the resource industry itself.

One of the biggest levers to decarbonization would be greening the world’s electrical supply. This could account for a quarter of the global goal. It would entail phasing out three-quarters of the world’s coal-fired power stations and aggressively building solar and wind farms. The future weather-dependent grid would need stabilizing with natural gas power generation until large-scale energy storage solutions, such as batteries, are feasible and affordable.

Greening the grid will increase the demand for copper and natural gas, along with steel, aluminum, carbon fibre, silicon and silver. In fact, we believe the demand growth for copper could double by 2035, while gas demand would rise 50%.

Yet most resource businesses are priced at such low valuations that management cannot justify making commitments to new projects. This underinvestment in new supply has been underway for a decade and has led to today’s shortages – even before the ramp-up from decarbonization demand.

The scale of global environmental ambitions is so massive that a repricing of essential commodities will be needed to drive production increases. The enormity of the task suggests that this demand cycle will likely be measured not in years, but in decades.

Only recently, governments have begun enacting regulations that highlight the resources required to transition to a sustainable future. In Europe, the European Commission announced the inclusion of certain natural gas and nuclear activities to facilitate the transition to renewables. Meanwhile in Canada, the Federal Budget 2022 prioritized minerals in support of the energy transition, referencing their significant contribution to the development of domestic zero-emissions vehicle manufacturing among other transitional activities.

Given the scale and scope of the transition, a broad portfolio of resource exposure with the most efficient alternatives to lower emissions appears superior to a narrow focus on a few commodities.

Responsible ownership

Today, resource-based investors generally invest in fossil fuels and contributors that are not committed or aligned to a net zero future. However, investors in resource sectors are critical to the sustainable transition that needs to occur. This will not only require a shift in mindset, but also consideration of the societal, regulatory, and environmental risks and opportunities that come with it.

At Mackenzie Investments, this change has already begun. The Mackenzie Resource team has expertise in the energy transition that is occurring and has started to make this shift by integrating ESG (environmental, social and governance) factors into the fundamental research of companies they assess or hold. The team considers impacts ranging from climate change to the social license to operate, citing that responsible management of these factors is crucial to building resource portfolios of the future where sustainability of future cash flows is a key valuation metric.

The team specifically targets companies that are over-contributing to societal efforts, such as those that are decarbonizing faster than policy and their peers. Their view is that these companies should be rewarded by superior returns over time and reduced investment risk thanks to their proactive ESG approaches.

Many investors once considered divestment to be the best approach to ESG concerns. That view has now shifted with the realization that once you have sold a company, you have very little impact on its ESG behaviour. The team actively engages with the companies they invest in, to help them improve their ESG performance.

An opportunity for next generation resources

With a belief that resource companies can lower emissions, while enjoying a repricing in the essential commodities they produce, the Mackenzie Resource team is excited and committed to a path leading to a more sustainable future and is setting out to make this much needed shift for the industry, while educating advisors and investors.

It’s not easy being green. Given the scale of the required changes, it will be a long and winding road, but our ambition is to be a leader in this journey. We believe that active management, engagement to control the risks, and harvesting returns from resource companies that are contributing to society’s goals will be required shifts to make this transition.

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This article may contain forward-looking information which reflect our or third-party current expectations or forecasts of future events. Forward-looking information is inherently subject to, among other things, risks, uncertainties and assumptions that could cause actual results to differ materially from those expressed herein. These risks, uncertainties and assumptions include, without limitation, general economic, political and market factors, interest and foreign exchange rates, the volatility of equity and capital markets, business competition, technological change, changes in government regulations, changes in tax laws, unexpected judicial or regulatory proceedings and catastrophic events. Please consider these and other factors carefully and not place undue reliance on forward-looking information. The forward-looking information contained herein is current only as of May 4, 2022. There should be no expectation that such information will in all circumstances be updated, supplemented, or revised whether as a result of new information, changing circumstances, future events or otherwise.