David Attenborough’s recent series, Seven Worlds, One Planet was hard to miss. The opening episode alone attracted some 7 million views. The series focuses on the natural world and frequently references climate change. Its message is clear: the impact of climate change effects all of us, and those impacts are set to intensify.
In 2015, 197 counties came together to form The ‘Paris Agreement’ – a commitment from each country to limit global warming to 2 degrees in a bid to avoid catastrophic damage to the world’s climate. To achieve this the world economy has to decarbonise and the amount of greenhouse gases emitted, particularly carbon dioxide (CO2), needs to fall sharply. To enable this to happen two things are required; Government legislation/commitment and business involvement. Governments need to set targets, invest and legislate, and businesses need to be there to provide products and services that make it happen.
The good news, of which there is precious little of these days, is that there already is government action and legislation globally – much more is needed, but the direction of travel suggests that more is to come. There are now many businesses that through products and services are delivering solutions to help address climate change. This is not restricted to sectors such as pollution control, public transportation, water infrastructure, sustainable agriculture, renewable energy, power efficiency and buildings energy efficiency. Decarbonisation can be achieved by all.
Some companies have been aware of climate change and its potential impact on the market for many years, but it is only recently that the investment industry has woken up as a whole. By and large investment groups can be split by how they consider it – there are two basic approaches. Those who see the risks climate change brings and simply include it in their risk assessment, and those who see the risks, but chose to invest to bring about positive change. Underlying this is the opportunity decarbonising the economy brings, and with it a myriad of other environmental and social challenges that business can help to address and change.
A major contributor to CO2 emissions in the last half century has been fossil fuel companies. Some are state owned, some publicly owned.
There is a simple fact worth considering; if all the known fossil fuel reserves were extracted and used, it’s predicted that global temperatures would rise by 9.5 degrees (Source: Phys.org, Science X Network). If the rise is to be limited to 2 degrees then this implies that those reserves will never be extracted and there will be a major devaluation of fossil fuel companies. Increasingly investors are divesting from fossil fuel businesses, driven firstly by a wish to reduce CO2 emissions and their impact on the climate, but also in the knowledge that fossil fuels are rapidly becoming yesterday’s fuel, they don’t want to be left holding stranded assets. Fossil Free estimates investment institutions have already divested £8.75 trillion.
But as one industry declines others replace them. A high-profile example is electric vehicles (EVs). For investors the opportunity is not so much the vehicle manufacturers, but the many suppliers of parts, technology and software. Another visible sector is renewable energy; the International Renewable Energy Agency (IRENA) says that one third of all global power capacity is now renewable energy. It has become first choice when installing new capacity – aside from its environmental credentials it’s easy and quick to install, and in countries like Africa it can be supplied on a small scale without the need for national grids.
The list of sectors available to those who want to invest for a decarbonising economy has expanded considerably in recent years, and perhaps covers some unexpected areas – a fund manager we invest with holds a company that provides ‘global positioning systems’ which enable greater precision when applying fertilisers. This cuts down fertiliser use and increases productivity, and in the process avoids millions of tonnes of CO2 emissions.
The need to tackle climate change is increasingly urgent and will be a major economic driver in the next decade. By 2029 it seems likely some of the most successful businesses will be in environmental sectors, and perhaps some of the poorest will be those who fail to adapt. As investors we need to look at trends and make decisions on where we think the best opportunities lie. A financial return coupled with a positive impact is a powerful combination.
