Global warming is one of the defining challenges of the 21st century. Unaddressed, modelling demonstrates it will have a potentially catastrophic impact on our planet and the lives of future generations. Many would argue the catastrophe is already unfolding.
Given the dimensions of the challenge and the size of the response required, the amount of money needed to be spent on it is correspondingly large. As such there is a compelling investment case for investing in companies whose activities seek to tackle today’s climate and environmental challenges.
What is the scale of the climate change challenge?
The United Nations Intergovernmental Panel on Climate Change (IPCC) estimates that to contain the rise in global temperatures to 1.5 to 2 degrees Celsius above pre-industrial levels by 2100 would require a halving in the level of greenhouse gas emissions (GGE) currently projected by 2050 under the current 2016 Paris Climate Agreement.
Energy currently accounts for around two-thirds of global GGE. Global energy producer BP estimates that to achieve the extra GGE cuts suggested by the IPCC would require a 10-fold increase by 2050 in the share of energy derived from renewables – or from around 5 per cent in 2018 to 40-60 per cent.
Meanwhile, the Energy Transitions Commission (ETC), a global organisation of energy producers, financial institutions and environmental groups, believes it is possible to create a prosperous net-zero-emissions economy by mid-century, in which case global warming would be limited to the lower bounds of the Paris Agreement’s target range.
The ETC estimates that the additional investment required to achieve a net-zero carbon-emissions economy by 2050 will be US$1-2 trillion p.a.
Will a move to clean energy be enough?
The scale of the challenge the world faces means that innovation is called for in a range of climate and environmentally friendly activities. A focus on renewable energy is essential, but the deep cuts to carbon emissions that will be required to limit global warming cannot be achieved by clean energy alone.
A broad range of solutions that directly enable the reduction or avoidance of carbon emissions is needed, including clean energy, electric vehicles, energy efficiency technologies, sustainable food, water efficiency and pollution control.
For example, renewable energy cannot entirely replace fossil fuel emissions from carbon-intensive activities such as steel production, but improving the efficiency of such activities can have a meaningful impact on reducing carbon emissions.
From an investment perspective, exposure across a comprehensive range of sectors that may benefit from a net-zero carbon trajectory should provide greater diversification benefits than a portfolio concentrated in fewer stocks focused solely on a single sector, such as clean energy.
Five climate change innovation pathways
1. Green energy
Renewable energy assets, renewable energy developers, renewable energy equipment, and green utilities
2. Green transportation
Electric transportation, electric vehicles and bikes, ride-sharing and efficiency
3. Sustainable products
Food solutions, telepresence, sustainable materials, efficient materials and processes, sustainable buildings, sustainable forestry
4. Water and water improvements
Pollution control, recycling and materials, waste management, water and waste efficiency
5. Other ‘enabling solutions’
Fuel cells, alternative fuels, battery supply chain, electric systems, energy efficiency, energy storage, green finance, semiconductor devices, electrical components
Potential winners and losers
In addition to renewable energy generators, companies that can reduce carbon emissions, create energy efficiency, or make our energy grids smarter, appear poised to benefit from the increased demand for products and services to deal with the emerging climate and environmental threats.
As the world’s population, and its need to be fed, continues to grow, companies that focus on food solutions that reduce carbon emissions have the potential to make a significant difference.
On the other side of the ledger, there is likely to be an increasing emphasis on being fossil fuel-free.
Not only is the avoidance of fossil fuel generators consistent with the transition to a net-zero carbon emissions economy, it also makes investment sense.
There is a significant risk that companies deriving significant revenue from generating, processing or distributing fossil fuels will have to write off current and future assets before the end of their economically useful life. In addition to this stranded asset risk, there are other risks, including that companies are potentially exposed to future litigation from their fossil fuel activities (relating to pollution or health).
Richard Montgomery, investment communications manager at BetaShares
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