Britain’s Green Industrial Revolution is a Sign of the Investing Times

By John Banks

“Imagine Britain when a Green Industrial Revolution has helped to level up the country,” wrote U.K. Prime Minister Boris Johnson in a Financial Times opinion piece on Nov. 17.

“You cook breakfast using hydrogen power before getting in your electric car, having charged it overnight from batteries made in the Midlands,” Johnson went on. “Around you the air is cleaner; trucks, trains, ships, and planes run on hydrogen or synthetic fuel.”

Johnson’s imagery of a Green Industrial Revolution was the lead-in to a “10-point plan” to bring about economic recovery in part through green investment. For governments around the world, going green is now in vogue.

France and Germany have already announced green energy and climate change spending plans worth tens of billions of dollars. Joseph R. Biden, the U.S. President-elect, announced a green energy and climate change plan earlier this year with a price tag of $2 trillion over the course of four years.

Britain’s level of spending will be less than France or Germany’s intended outlays, but the U.K. government insists it is the targeted nature of the spending that counts.

In his Financial Times opinion piece, Johnson argued the U.K. government’s plan to spend 12 billion pounds (about $16 billion) could draw “potentially three times as much from the private sector, to create and support up to 250,000 green jobs.”

Skeptics will argue that Britain is spending far too little relative to its goal of reaching net-zero emissions by 2050, a target that was written into law in 2019. To have a shot at that goal, Britain would potentially have to spend tens of billions of pounds, year in and year out, for the next two decades.

But either way, Johnson’s 10-point-plan is a significant step forward, and some of the planned initiatives have teeth. For example, the plan calls for banning all new gasoline and diesel-powered vehicles, including delivery vans, by 2030.

There are also plans to make the U.K. “the Saudi Arabia of wind,” with enough offshore wind farm capacity to power every home in the country, and to build new charging stations for electric cars all across the country.

There will also be electric battery gigafactories, thousands of “green buses” to reduce public transport emissions, a billion-pound retrofit of homes, schools, and hospitals to make them more energy efficient, plans to plant 30,000 hectares of new trees, and more. 

The cynical take on all this is that the Johnson government, recently beset by scandals and infighting on the way to a potential No Deal Brexit, is eager to change the subject in the media.

Johnson may also be seeking a bridge of friendship between the U.K. and the United States, knowing that an incoming Biden administration will be pro-green and anti-Brexit, and the U.K. will meanwhile be hosting a huge U.N. climate conference, known as COP26, in Glasgow, Scotland, in 2021. 

With all of that said, it is increasingly clear that green energy initiatives are considered smart politics and a smart way to justify new government spending, with Western economies in need of a post-pandemic boost. 

In terms of reenacting the grand plans of Franklin Delano Roosevelt from the 1930s, projects that move the needle on jobs and infrastructure spending, while appealing to the pro-green instincts of younger generations, tend to make the most sense. 

For investors, the opportunity comes down to government investment and friendly regulatory policies. If capital is flowing into an industry even as rules are being adjusted to favor it, that is double the reason to anticipate an acceleration of private investment.

The good news for investors is that these high-profile green initiatives are likely to last for years, and will pump a fair amount of capital into various green technology areas like wind, solar, hydrogen, geothermal, lithium battery production, electric vehicle (EV) ramp-up, and more.

Another good piece of news is that, as various green energy industries grow larger, economies of scale will lower their unit costs and increase their profit margins. When an industry is able to sell components at ever-lower costs as production volume goes up and to the right, a virtuous feedback loop kicks in where more size means a stronger bottom line. 

A challenge for investors will be avoiding green energy stocks when they are overextended, or when they appear vulnerable to a meaningful price correction. Popularity could make this task harder, with bullish trends for many green energy stock names already underway.

Even still, there will be pockets of opportunity when green energy names go into consolidation mode, or after they come out of a corrective price period (a countertrend breathing hiatus within a larger trend) on their way to higher peaks.

In sum, we are skeptical of Boris Johnson’s motive and wonder whether the U.K. “Green Industrial Revolution” budget will be large enough to meet Britain’s goals.

But there is no question the level of investor attention devoted to green energy stocks is rising — however Britain’s green initiatives shake out — and big opportunities, both long and short, will be afoot in 2021.