The inflation of the 2020s will have a distinctly green tint to it with sustainability and the ESG (environmental, social, governance) movement taking center stage in the narrative. ESG leaders - those firms that score highly on non-financial metrics - have already seen their share prices rise precipitously in recent years. It could be that the driver of further momentum in these stocks comes from their potential to provide some hedge against this green inflation.
New government-led spending is driving demand for materials needed to build a cleaner economy. At the same time, stricter regulation is limiting supply by discouraging investment in mines, smelters, or any source that burps carbon. The unwanted result is “green inflation” – rising prices for metals and minerals like copper, aluminum, and lithium, which are essential for solar and wind power, electric cars, and other renewable technologies.
Renewable technologies require more wiring than the fossil fuel variety. Solar or wind power plants use up to six times more copper than conventional power generation. Over the past 18 months, as governments announced new green spending plans and commitments, analysts steadily increased their estimates of copper demand growth. Therefore, green regulation is stimulating demand as it reduces supply, which fuels green inflation. From the lowest point at the beginning of last year, the price of copper has risen more than 100 percent, while aluminum is up 75 percent. Unusually, its climb to the upside has barely weakened with recent signs of a waning momentum in global growth.
Solving this conundrum, how to supply enough old and dirty material to build a new green economy, will require balance. Blocking new mines and oil rigs will not always be an environmentally and socially responsible measure. Governments, and greens in particular, must recognize that trying to shut down the old economy too quickly threatens to push the price of building a cleaner one out of reach.