The recent and monumental climate change report from the IPCC gave a stark code red warning to humanity and detailed the impact it is making on the environment. The first major scientific study on climate since 2013, it gave a sombre message on the urgency that is necessary to tackle climate change.
The report shows that emissions of greenhouse gases from human activities are responsible for approximately 1.1 degrees of warming since 1850-1900, and finds that averaged over the next 20 years, global temperature is expected to reach or exceed 1.5 degrees of warming. This assessment is based on improved observational datasets to assess historical warming, as well as progress in scientific understanding of the response of the climate system to human-caused greenhouse gas emissions.
If we are to win the race against climate change, the message is clear – the world needs to change, and it needs to do so fast. To have a chance of limiting global warming to a necessary 1.5 degrees, we need to radically cut our emissions and move the global energy sector away from fossil-based fuel reliance, towards greener, renewable alternatives.
Policymakers, businesses and asset managers like us are already taking steps to ensure we eradicate the threat of climate change. Governments worldwide have announced net zero targets and new policies to help them meet these goals – in fact, countries with net zero targets together now represent 61 per cent of global emissions, 68 per cent of global GDP and 52 per cent of the global population.
And as of March 2021, more than a fifth of the world’s 2,000 largest public companies had made net zero commitments, representing annual sales of nearly $14 trillion. While these figures are encouraging, they show there is still some way to go.
Quite simply, if we do not decarbonise, there will be significant damage to the global economy. But equally, by transitioning to a low carbon world, we can deliver significant additional absolute economic growth; it will help create new technologies, industries and jobs, as well as a deluge of possible investment opportunities.
New sectors, from hydrogen, carbon capture and storage, to sustainable agriculture and food production will all generate growth for the future. The energy transition can be as transformative as the digital revolution has been for the past three decades.
The innovation challenge
The success of wind and solar energy generation is well documented but so are the challenges in terms of storing this power. Fossil fuels have enormous efficiency when it comes to storing energy and releasing it when we need it – we need the stockpiling of renewable energy to be as convenient.
Hydrogen is a potential mass-market fuel source and there are impressive developments happening in this space, but there are issues that still need to be resolved before hydrogen could be rolled out to homes and businesses. But can you imagine a world where integrated oil companies will use their vast network of distribution capabilities through gas stations to supply hydrogen? If they can make that switch, we will have a very exciting future ahead of us.
Moving to a low carbon world will naturally see some sectors flourish and others falter. The laggards to date include integrated oil firms, as while they are making the right statements, in many cases the percentage of their revenues being put into clean energy is still minimal. But it is far from easy for an oil company to evolve into a clean energy firm, and there are huge obstacles and intricacies facing other sectors too – air travel and long-haul shipping for instance cannot easily make the switch; better technology is crucially needed.
However, we are witnessing great strides in areas such as electric vehicles, clean energy, waste processing, healthcare, and sustainable food production sectors. But again, speed is of the essence in the race to zero and it is not enough that a few companies are driving the transition – we need to use our voices as investors to urge those that are not yet as far down this path to look at their strategies and future plans and ensure they are contributing.
The momentum is here
Investors understand the urgency too, and undoubtedly the abundance of potential investment opportunities on offer. They are looking for more opportunities to invest responsibly and the global pandemic has only accelerated this trend. Last year, US sustainability-focused portfolios attracted record amounts in net new money, while European investors put in nearly double the amount of the previous year.
This is not a fad. This is undoubtedly a marked transformation – investors would rather invest in strategies which have a positive societal or environmental impact; they are no longer solely focused on short-term investment returns. This long-term structural trend will ultimately encourage and help companies to become better corporate citizens because if there is demand for products with strong environmental, social or governance (ESG) credentials, then in turn the share price of companies with high ESG scores should rise.
Focusing on climate, the availability of data on carbon emissions and the growing number of companies pledging to align their own operating models with a net zero carbon future means we can build equity, bond and multi-asset portfolios that can contribute to restricting the rise in global temperatures and to financing the energy transition. These techniques can both lower risk and boost return, especially when asset allocation is influenced by being at the technological frontier.
It is vital we all think long term. Capitalism is too focused on short-term profits, but we need to be focusing on longer-term sustainable profitability and a financial community that rewards good behaviour rather than short-term gains.
The bottom line is nobody can be successful in a world that fails. Policymakers, businesses and individuals worldwide need to focus on making the energy transition a reality. We need to ensure that the world has a long-term future and an economic environment which can deliver on that future – and quickly. As UN Secretary General António Guterres made clear in the wake of the IPCC report, “there is no time for delay and no room for excuses”.
Hans Stoter, global head of AXA IM Core, AXA Investment Managers
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