Addressing climate change is not only going to transform the global economy, it’s going to divert trillions of dollars of investment every year. So, what does this mean for investors?
The 2015 Paris Agreement was a milestone in the battle against climate change. It was when most countries in the world pledged to put their economies on a path to restrict the increase in global temperatures to below 2 degrees centigrade this century. This is against a baseline temperature from 1850, before the widespread burning of fossil fuels really got underway.
In 2019, we are already one degree higher than this pre-industrial figure. Mitigating the effects of climate change is not only going to transform all aspects of the global economy, but will divert trillions of dollars of investment each year. Policy implications are already far-reaching and will affect all industries in time. However, this creates a powerful opportunity for investors, as the implications of the changes needed to achieve the target are, at present, poorly understood by the market.
The following five charts explain some of the broader themes around climate change, where the new growth opportunities will be and why investors really need to care.
The Schroders Climate Dashboard analyses a number of different indicators, such as political ambition and fossil fuel production, to gauge the world’s progress in achieving the two degrees target. It is currently indicating that we are on a path to a 3.8 degree increase.
This number highlights that the scale of change required to achieve the two degrees target is much more significant than many people think. And it’s going to have to happen much quicker.
Following the Global Financial Crisis, carbon prices fell as industrial production weakened and there was a massive surplus of carbon credits. The carbon price bounced along at around the €5 level for a number of years, which wasn’t enough to incentivise companies to change their behaviour.
However, following a reform of the system in 2018 the carbon price has more than quadrupled. It is now at an important inflection point where it is reaching a level that is starting to incentivise companies to switch to using clean technology.
To achieve the current targets there will need to be an 80% reduction per capita in greenhouse gases in the next 30 years. Although this will primarily affect industries such as electricity and heat production, areas such as agriculture, forestry, land, buildings, transport and infrastructure will also be affected. Many industries will have to drastically change their emissions profile. This is not just about building a few more solar and wind farms; this is going to be a radical transformation of the structure of the global economy.
We also think that $2 trillion of new investment per year will be needed into business, services and technology. More importantly, 15% of the value of the global equity market is at risk (equivalent to the value of the entire Russian economy). This refers to businesses and services that are not consistent with meeting the climate change target, whose business model has been rendered unviable by rising carbon prices or whose products have been regulated out of existence.
We have now reached an important inflection point where new technologies, such as solar and wind, have now become cheaper than thermal power generation.
Switching to renewable energy is not only essential in the fight against climate change, but now makes sound economic sense too.
Use of internal combustion engines will have to be almost completely phased out in the next 30 years if the target to reduce greenhouse gas emissions by 80% is to be achieved. However, the electric vehicle (EV) market is maturing fast. In the next five to 10 years EVs will not only be the greenest form of transport, but also the cheapest.
This expansion will not only provide new opportunities for companies supplying the vehicles and batteries, but also for those making specialist battery testing equipment. New infrastructure, such as EV charging points, will also be needed, providing further growth opportunities.
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