How to invest in a world being clobbered by climate-related disasters.
The United States has seen devastating wildfires ravage the Pacific Northwest ( and Colorado more recently) as well as a record- breaking hurricane season in the Gulf of Mexico since we published our special report ESG Investing is Here to Stay on July 21. Climate change is responsible for the growing frequency of natural disasters, not to mention their increased power in terms of the damage and destruction they leave in their wake.
The International Monetary Fund’s latest World Economic Outlook states that the losses from unmitigated climate change on global GDP will average 15 per cent by 2100 (with a range of three per cent to 30 per cent). Likewise, the Network for Greening the Financial System (established by eight central banks following the signing of the Paris Agreement) indicates a reduction of 1.5 per cent to 23 per cent in global GDP per capita.
Yet, at a time of record- high government debt levels, the ability of fiscal policy to adequately respond to climate change impacts will be constrained. All of this is to say that private capital will play an enormous role in the world’s attempt to solve the problem. The good news is that scientists still say there is time to avoid the worst- case projections, meaning that investors can stand to benefit from the global shift to a low- carbon economy.
The biggest opportunity will come in the form of renewable energy. This is not a new idea for investors, but the scope of investment required for the world to meet its climate goals is massive. Total spending will have to reach an annual average of US$ 2 trillion by 2030 in order to reach the Paris Agreement targets ( for reference, spending in 2018 was US$ 900 billion), according to the International Energy Agency (IEA). This shift is already happening, as market forces have taken over.
The economics behind building new fossil fuel power generation stations are not as attractive as they once were, especially for coal. Companies and utility providers specializing in solar, hydro, wind and geothermal technology will stand to benefit as a result (nuclear, though able to produce clean energy, appears to lack the political appetite at the moment). Solar power, in particular, is in line to be the big winner: IMF research gives it the largest jobs multiplier, making it a logical first choice for politicians looking for bipartisan support regarding infrastructure spending.
The biggest concern surrounding renewables is the lack of “baseload” ability — for example, peak energy demands are not always when the sun is shining the most. For that reason, technologies surrounding storage capacity are also set to grow.
Overall, the cost of renewable energy has come down dramatically and is now in line, or cheaper, than fossil fuel alternatives. And that is before factoring in the externality costs ( pollution, carbon dioxide) of fossil fuels. Analysis done in 2015 revealed the global gap between the existing and efficient prices ( once factoring in these externalities) to be US$ 4.7 trillion in aggregate, or 6.3 per cent of GDP. The transition to renewables would accelerate even faster if fossil fuels weren’t currently benefiting from such massive direct and indirect subsidies from government.
Nonetheless, the world is moving toward a tipping point when it comes to renewable energy sources, and once we get there (if it has not arrived already), investors will want to have exposure to this secular bull market.
Besides clean energy, the next opportunity comes in the form of electric vehicles. Tesla Inc.’s story is well known among investors and is the biggest “pure- play” company on this theme, but all auto manufacturers are moving in this direction. Globally, the IEA estimates there are only eight million electric vehicles on the road, but predicts that number will be 120 million by 2030 ( potentially as high as 250 million depending on the scenario).
The COVID-19 pandemic shock may have revealed that the shift in consumer preferences is already underway. From January to April 2020, it is estimated that traditional car sales plunged 15 per cent compared to 2019, yet sales of electric vehicles remained stable. A market that is forecasted to be nearly 20 times larger in the next 10 years, and has relatively more inelastic demand, certainly warrants a further look from investors.
These are just two of the largest opportunities that come to mind when thinking about investing around the climate change theme. Others worth mentioning include rare earth metals (both the commodities directly and through mining companies), since demand will grow alongside the need for battery technology; environmental consulting, engineering and construction services companies, which will benefit from the changing infrastructure needs of a low- carbon economy; and carbon capture and storage technologies.
Finally, a potential investment idea that is often overlooked is geothermal energy. This is not the first source that typically comes to mind when thinking of “green” alternatives, but it solves two key problems.
First, it addresses the issue of peak production versus peak demand. Power generation can be scaled to match any demand curve since the flow of heat from underground can be increased or decreased with relative ease.
Second, and perhaps more importantly from a political perspective, the expertise and resources that oil and gas companies have in drilling and maintaining oil wells can be put to use in the construction of these power plants (which require creating a network of reservoirs to cycle the heat above ground). This is a natural solution for transitioning the workers who feel threatened by a move away from fossil fuels, making it an easier political decision for governments.
We should mention that betting on any one technology or solution may not be a prudent investment decision as it is too early to call a winner in many cases. Furthermore, given the early- stage nature for some technologies, investors with the ability and risk tolerance may consider looking at private companies — though there is no shortage of public company options, either.
Bottom line: as governments attempt to make up for lost time as the climate approaches the critical 2C warming threshold that scientists have warned about, these trends will continue to grow. Private capital will play a critical role in this global transformation, as electorates demand more and more action on climate change. The economic recovery from the COVID-19 pandemic is an important opportunity for governments to accelerate investments, through green infrastructure spending and the like, wherever there is political appetite for stimulus. Much like the industrial revolution, the coming decades will open up a number of opportunities for investors to take advantage of shifts in global priorities and technological breakthroughs.