investing for a greener future

Green investment: Investing for a greener future

15 November 2021

By Damian Payiatakis, London UK, Head of Sustainable & Impact Investing; Olivia Nyikos, London UK, Responsible Investment Strategist

You’ll find a short briefing below. To read the full article, please select the ‘full article’ tab.

  • Summary
    • Every investor can play their part in addressing global warming, by starting on their own journey to a climate-ready portfolio – and generating positive outcomes for the planet and your portfolio
    • Unfortunately, we can’t rely on governments alone to transition to a carbon-free world; it also needs the help of private capital, such as from families, family offices, charities and foundations
    • At a sector level, opportunities exist across three themes – addressing energy needs and climate change, reducing environmental footprints, and conserving biodiversity and the natural environment
    • There are many environmental-themed opportunities to pick from – from the familiar wind and solar projects to emerging alternatives such as wave, geothermal and hydrogen power
  • Full article

    As societies and economies emerge from the COVID-19 pandemic, preventing a climate breakdown is receiving renewed focus. Investors have a critical role, and opportunity, in this effort through how they deploy their capital in 2022 and beyond.

    We have been given “a code red for humanity”1. This was how the UN’s Secretary General explained the final Intergovernmental Panel on Climate Change (IPCC) report before COP26.

    The longer we wait to act, the more damage and more likely a climate breakdown will be; and the more difficult it will be to address (see figure 1).

    From decarbonising portfolios to decarbonising the economy

    As investors, a central part of a climate-ready portfolio is to understand the risks – both physical and transition risks – to the current and potential holdings. We can protect value in the portfolio through a variety of approaches: more detailed analysis of environmental factors via ESG analysis, measuring and cutting the carbon footprint, or reducing exposure to assets at risk from climate change.

    However, protecting your portfolio does not protect the planet. Fundamentally, the global call to arms is to decarbonise our economies and human activity. While there will be winners and losers, this does not require an end to progress or prosperity. In fact, often the opposite. It does, however, require a realignment of economic activity.

    For this we need more capital to catalyse the changes required. New innovations to be developed. Existing ones to scale. Novel solutions to be invented.

    Private capital is essential

    Arguably, the UN’s COP26 summit should inspire a step-change in the level of global commitment and action around climate.

    But we can’t rely solely on governments, nor charities or corporations, to address climate change. As emphasised in our 2021 Investing for Global Impact survey, the vast majority (86%) of respondents, including individual investors, family offices and foundations, agreed that private capital, along with these others, will be essential2.

    Private capital will be vital to funding the solutions spanning three challenges - addressing climate change and energy needs, reducing our environmental footprint, and conserving biodiversity and ecological systems.

    But investors should also seek to deploy capital into these themes, because the underlying companies solving them are also building businesses that are among the fastest-growing areas in the global economy. As such, we review these three environmental themes, and explore the opportunities and entry points for 2022 and beyond.

    Addressing climate change and energy needs

    Energy and climate change are intertwined. The total consumption of energy, across sectors, accounts for about three-quarters of all greenhouse gas emissions

    Energy and climate change are intertwined. The total consumption of energy, across sectors3, accounts for about three-quarters of all greenhouse gas emissions4. These, human-caused greenhouse gas (GHG) emissions are central to causing climate change.

    However, this relationship is not inextricable. Shifting to cleaner renewable sources of energy, at the same time as increasing electrification and improving its usage, will be key to addressing climate change.

    In 2019, renewables reached almost 27% of global electricity generation5. While noteworthy progress, this percentage needs to increase rapidly to ensure that half of all energy generation comes from renewables by the end of the decade. More capital, therefore, will be required to fund this additional capacity.

    Alternative forms of renewables

    Beyond improvements in familiar renewables (onshore and offshore wind, solar photovoltaics and hydropower), alternative forms of renewables are emerging. Wave, geothermal and hydrogen power are shifting from prototype phases to commercialisation. Government support is accelerating for this. For example, support for hydrogen in primary energy consumers (for instance, China, the EU, UK and US) has driven project investment to an estimated $500 billion, through to 20306.

    Beyond producing greener energy, a successful energy transition requires better access, reliability and use of energy. Renewables have varying degrees of intermittence, so energy storage is critical to ensure full decarbonisation of the energy system. Already, capacity is being added. In fact, compared to 2020, the capacity of new energy storage installations is forecast to more than double by the end of 2021 (reaching 12 gigawatts (GW) from 4.5 gigawatts)7.

    Thereafter, annual installations are expected to exceed 20 GW by 2024 and 30 GW by 20307.

    Reducing our environmental footprint

    With growing populations and expanding economic development and consumption, the natural environment and its limited resources are under increasing strain. Should the global population reach 9.7 billion by 2050, as some predict, sustaining current lifestyles would require the natural resources of the equivalent of almost three planets.

    As the world becomes increasingly urbanised, with 70% of the world’s population expected to live in cities by 2050, environmental pressures are likely to increase. Cities and metropolitan areas are hubs of economic growth, occupying just 3% of the Earth’s land. That said, they account for 60-80% of energy consumption, 70% of carbon emissions and over 60% of resource use8.

    Beyond that, ageing infrastructure in the developed world and incomplete infrastructure in developing nations, necessitate construction – often needing cement and steel. Emissions from the production of these materials make up 44% of emissions coming from industrial sources9. To meet climate goals, cement emissions intensity will need to drop 85-91% globally and steel emissions intensity 93-100% by 205010.

    Similarly, though often overlooked, buildings will be central to achieving climate goals. Together, buildings and building construction sectors produce over one-third of global final energy consumption, and nearly 40% of total direct and indirect CO2 emissions11. Existing buildings need renovation, and construction of new buildings must achieve higher energy efficiency and health standards through new materials, techniques and technologies.

    We can also look for challenges and opportunities in responsible production and consumption. The dominant linear model of “take-make-waste” is ineffective in economic, environmental and climate terms.

    Companies increasingly apply circular thinking and a “Cradle-to-Cradle” concept of Five Goods™ (good materials, economy, energy, lives and water)12 to build sustainability into the products and production processes. This aligns with consumer expectations of more transparent, ethical and sustainable goods and services – across a range of industries, notably fashion, plastics, food and the sharing economy.

    Today, our world is only 8.6% circular, leaving a massive potential, and need, to increase the global operating models13. At the same time, a more circular economy could generate $4.5 trillion in new economic output by 203014.

    Conserve biodiversity and ecological systems

    Following a year of increased focus on climate change, culminating with the COP26 summit, we would flag biodiversity and ecological systems as other key systemic challenges.

    In the 2021 World Economic Forum’s Global Risks Report, biodiversity loss and ecosystem collapse were named as one of the top five risks in terms of likelihood and impact in the coming 10 years15. According to the UN, human activity has significantly altered 75% of the Earth’s surface; there is a cumulative deterioration across 66% of the oceans; and over 85% of wetlands have been lost16.

    Thus far, these primarily have been considerations for risk management, but opportunities for private capital are emerging. Most obviously, there are direct links and value associated with sustainable agriculture.

    Agriculture and oceans

    According to the UN’s Food and Agricultural Organisation, food production will have to increase by 70% by 2050 to keep up with expected population growth. Therefore, pioneering farmers and agri-food companies, whose innovative and scalable approaches reduce the negative impacts of food production on the environment and society, are expected to benefit from this trend. Similarly, agricultural products that have been harvested organically and/or sustainably should profit from increasing consumer demand.

    At the same time, there is a rising tide for the opportunities related to the oceans. Goods and services from the ”blue economy” amount to about $2.5 trillion each year – meaning the ocean might be considered the seventh-largest economy in the world17.

    Moreover, new research suggests that every $1 invested in sustainable ocean solutions, will yield a return of at least $518. Much of this growth will be driven by ocean-based policy interventions, as well as ocean-related industries such as energy generation, fishing/aquaculture, shipping, plastics and tourism.

    Strong connection to climate change

    In both of these cases, the connection to climate change is strong. Nearly a quarter of global emissions come from agriculture, forestry and other land uses19. At the same time, land is a carbon sink, absorbing emissions through the natural cycles. Annually, from 2007 to 2016, this was equivalent to the annual greenhouse gas emissions of the United States19, or about 10% of total global emissions20.

    Similarly, oceans have the potential to absorb around a third of global CO2 emissions21. They also absorb over 90% of excess heat generated, keeping the Earth cool.

    Augmenting these natural processes, are emerging “nature- based” carbon capture and storage solutions that can help to sequester more carbon. New opportunities are emerging to protect or increase the capacity of these existing natural carbon sinks which, as carbon prices continue to be established, and increase, will be increasingly attractive.

    Deploying capital to catalyse solutions

    Uncertainty remains about the shape and nature of economic recovery for 2022. What remains certain is that as the global economy emerges from the pandemic, greenhouse gas emissions will rise again, and continue to increase. At the same time, climate change, driven by human activity, remains a certainty.

    If we find a corollary from the pandemic, climate change is global, respects no borders and needs a united response to tackle it. Part of that response will be by private investors, financially astute and/or personally moved, looking to deploy their capital into solutions to this challenge.

    With several themes and entry points, in 2022 investors can explore potential investment opportunities, and more importantly allocate, in this area, for the benefit of portfolio and planet alike.

Outlook 2022

Our investment experts look at why active management looks key for equity investors, what elevated inflation and promised rate hikes mean for bonds, our five-year capital market assumptions and the potential opportunities created by climate change that investors need to consider.

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