Last month, I began this new thread of columns on the risks and opportunities of climate change by thinking about how investors can break down climate risk into manageable components, and how improved disclosure requirements and model enhancements will help with tracking those risks. This time, I want to talk in more detail about the opportunities and portfolio shifts resulting from decarbonisation.
Meeting global warming targets will require a capital-intensive transformation in the way energy is produced, transported and used. The latest estimates from the Energy Transitions Commission, a global coalition of energy producers, industrial businesses and financial institutions, suggest that investment of between $1trn and $2trn – or around 1% to 1.5% of global GDP – will be required each year. Starting now.
According to a recent report from the International Energy Agency (IEA), most of the global reductions in CO2 emissions required by the net-zero pathway between now and 2030 will come from technologies readily available today.
By 2050, however, almost half the reductions will come from technologies that are currently only at the demonstration or prototype phase. That means governments will need to increase and reprioritise their spending on research and development and the deployment of clean energy technologies at the core of energy and climate policy.
Read more from Ben Goss: Beyond the horizon
The IEA forecasts almost 90% of electricity generation will come from renewable sources by 2050, with wind and solar together accounting for almost 70% and most of the remainder generated by nuclear power. Fossil-fuel dependency will fall from almost four-fifths of total energy supply today to a little more than one-fifth.
Remaining fossil-fuel usage will be limited to specific-use cases – for example, in goods where the carbon is embodied in the product, such as in plastics; in facilities fitted with carbon-capture capability; and in sectors where low-emissions technology options are scarce.
Far-reaching implications
For investors, the transition will have far-reaching implications for both traditional and sustainable portfolios. In the large cap equity space, industries such as construction and mining are already undergoing widespread disruption, with some companies rising to the challenge while others fall behind. Asset managers are responding by rapidly adapting their processes to ensure they are capturing transition risks.
In the small-cap equity space and through green bonds, investors with the risk appetite to do so can tap into cross-sector innovation while enabling the transition to a greener economy. The opportunities can be grouped into several key areas:
* Hydrogen technology: By 2030, hydrogen could play an important role in decarbonising polluting, energy-intensive industries such as chemicals, oil refining, power and heavy transport. Hydrogen fuel cell technology is still developing, and production and storage remain energy intensive and expensive, despite recent advances. Recent UK government analysis suggests, however, that 20% to 35% of the country’s energy consumption could be hydrogen-based by 2050.
* Carbon-capture and storage: Up to 90% of CO2 released by burning fossil fuels in electricity generation and industrial processes such as cement production can potentially be captured and stored underground before it is released into the atmosphere. A new technological advance called direct air carbon-capture can also remove CO2 from the atmosphere. These processes remain expensive, but research and development efforts are already driving down costs.
* Electric vehicles: The move from fossil-fuel combustion engines to electric vehicles (EVs) is a vital part of the carbon transition. To accelerate the shift while conserving energy and resources, innovation is needed in many areas – from circular manufacturing to extending the life of EVs to facilitating the recycling of the rare metal components of batteries
* Bioenergy: Bioenergy is a form of renewable energy derived from recently living organic materials known as biomass. Bioenergy technologies can convert renewable biomass fuels into heat and electricity using processes that involve burning, bacterial decay, or conversion to a gas or liquid fuel. Biomass also serves as a renewable alternative to fossil fuels in the manufacturing of certain plastics, lubricants, industrial chemicals and many other products.
* Alternative proteins: Global food systems account for around one-third of greenhouse gas emissions, when pre and post-production activities are included, according to the Intergovernmental Panel on Climate Change. The biggest area of potential impact on those emissions is decreasing the role of animal-derived protein in our diets, in favour of alternative protein sources. Increasing consumer awareness and rising demand for both meat and dairy substitutes have supported innovation in plant-based and cell-based technologies offering better taste and texture, but this evolving technology still needs to be scaled up for mass production at a competitive price.
* Green building: By using less water and improving energy efficiency, green building techniques can reduce or eliminate negative impacts on the environment. Areas of innovation range from geothermal heating to the use of energy-efficient insulation and appliances.
Importantly, these are new technologies, meaning there will be winners, losers and significant volatility along the way. Keeping retail investors advised and informed about the risks they are taking on – and ensuring they have the ability to take those risks – will be vital.
Ben Goss is CEO of Dynamic Planner
