Climate change poses a real and present danger to the well-being of people and the planet.
The next decade presents a critical window in which we can still shape its trajectory. It is crucial that we act on this opportunity now to change course.
If we set greenhouse gas emissions on a downward path by 2030, we can hopefully control the increase in global temperatures to levels that would limit challenging impacts on natural ecosystems and human health.
Achieving this not only demands that we change our behaviour, but that we also invest heavily – and urgently – in the transition to a low-carbon economy.
I believe that where companies can provide solutions to the greatest challenge faced by the planet, they can present compelling opportunities for long-term investors. In turn, investors can play a part in addressing the climate emergency.
What the science tells us
The Covid-19 pandemic brought much of global society to a standstill in 2020. Meanwhile, the dramatic effects of climate change continued unabated, posing their own threat to natural habitats, human populations and the economy.
In a year when record wildfires raged along the US west coast and as far north as the Arctic Circle in Siberia, the Atlantic hurricane season was so active that it ran through the alphabet of storm names by early September. The five-year period 2016 to 2020 is set to be the warmest in history.
Despite the economic downturn of 2020, concentrations of greenhouse gases like carbon dioxide (CO2) in the atmosphere are at record highs and continue to rise. These emissions from human activity are driving climate change. Without sustained action to reduce them, the UN estimates that the world’s average surface temperature will surpass 3°C degrees above pre-industrial levels by the end of the 21st century.
The 2015 Paris Agreement on climate change committed countries to keep the increase to well below 2°C and pursue efforts to limit the increase to 1.5°C – a level at which the risks and impacts of climate change are much lower. According to the Intergovernmental Panel on Climate Change (IPCC), a 2°C temperature increase would exacerbate extreme weather, rising sea levels, diminishing Arctic sea ice, coral bleaching, and the loss of ecosystems.
A time for ambition – and action
Transformational action can no longer be postponed. The UN estimated in 2019 that global emissions must fall by 7% a year on average from 2020 to 2030 to get on track to achieve the 1.5°C goal. By 2050, we must achieve net zero greenhouse gas emissions worldwide.
Meeting this challenge demands deep and far-reaching reductions in emissions across all aspects of the economy. Looking at the primary sources of greenhouse gases, we can see where solutions can have the greatest impact.
Source: Project Drawdown
There are some elements of the climate equation – reducing food waste and flying less often, for instance – that we can address individually through decisions in our daily lives. Lifestyle choices can only cut emissions so far, though.
Altering the course of climate change demands that we find and embrace alternative energy sources and more efficient ways of producing goods and services. This will require vast investment. The International Energy Agency estimates that around US$1.3 trillion a year needs to be invested if UN Sustainable Development Goal 7 – affordable and clean energy for all – is to be achieved by 2030.
Investing in the solutions
With growing recognition of the urgency of the challenge, we believe there are compelling long-term opportunities for companies that are actively accelerating the shift to a low carbon economy.
I perceive three key areas where companies can have a positive impact in the fight against climate change. The first is where activities or innovations directly cut greenhouse gas emissions.
Alternative energy is an obvious sector for investment. Replacing carbon-intensive fossil fuels with green electricity, harnessed from the wind and sun, would make the single biggest contribution to meeting global climate goals. Less obvious investment candidates, perhaps, are components and systems that improve energy efficiency, thereby reducing emissions.
The second group of impactful companies are those whose solutions make industry and transportation – which account for 35% of emissions combined – less polluting. This may include companies whose technologies underpin the future of mobility or energy storage.
Thirdly, companies that contribute to a more circular economy – by designing out waste, keeping materials in use for as long as possible, and regenerating natural systems – can also play a major role in the transition to a resource-efficient, low-carbon economy.
Addressing the climate emergency
The risks of climate inaction are present and mounting. The cost of extreme weather events is rising: three of the costliest Atlantic hurricanes on record have occurred since 2017.
We need to understand how investments are not only exposed to the risks associated with climate change, but also how they can seize the opportunities it represents. Where companies do not act, they will miss the opportunities for success that lie in tackling this challenge.
There does not need to be a trade-off between profits and the planet. Where companies can successfully deliver solutions that mitigate climate change, their shareholders can aspire to achieve sustainable financial returns and contribute to a demonstrably positive impact for the planet and its people.
The views expressed in this document should not be taken as a recommendation, advice or forecast.
When you're deciding how to invest, it's important to remember that the value of investments goes up and down. So how much your investments are worth will fluctuate over time, and you may get back less than the original amount you invested.