Many of us have witnessed climate change first-hand. Just this year alone, extreme rainfall and heat have caused floods and bushfires in different parts of the world. Climate change is now a scientific fact with the UN's climate change authority (the Intergovernmental Panel on Climate Change or IPCC) giving scientific confirmation on what many people have been assuming: the climate has indeed changed and the human race is responsible.
According to the IPCC report, temperatures will rise by 1.5 degrees by 2040 regardless of what we do now. Reaching and surpassing the 1.5-degree threshold means even more frequent and severe extreme weather compared to what we are experiencing today. Areas that are already wet will become even wetter, while arid areas will be prone to greater drought.
This means adaptation is critical at this juncture. We need to live with climate change and adapt to manage the physical risks that come with it. For example, we need better flood and fire management measures, more resilient crops and better home insulation to adapt to extreme rainfall or heat.
The question is whether we can mitigate the temperature rises. The human race has emitted about 2390bn tonnes of carbon dioxide since 1850 and that has led us to this point. The study suggests further emissions of just 500bn tonnes imply a 50/50 chance of pushing us to the 1.5-degree brink. We emit about 40bn tonnes of CO2 every year, and hence, we may hit the critical threshold in just 12 years if we don't bring CO2 emissions down.
But there is still hope on the horizon. The damage caused by going beyond 1.5 degrees can be managed if we achieve net zero emissions by 2050. We thus need to be as clean as possible in our daily lives and utilise new technologies to minimise emissions. This is where technologies being pushed by governments around the world, including renewable energy, infrastructure and sustainable transport play a key role. In addition, we need to capture any excess emissions through modern storage or natural methods like planting trees.
The UN Climate Change Conference (COP 26) taking place in Glasgow, UK at the end of October is expected to play a key role driving further international commitments. 2015’s Paris meeting resulted in a landmark climate agreement to limit temperature increases to 1.5 degrees. However, following the alarming conclusions of the IPCC report, nations participating in the conference will be under pressure to take even more ambitious measures to reduce emissions and achieve net zero.
But achieving net zero is not only about nations and governments. Investors also play a role in driving a more sustainable future. Our strong view is there are clear opportunities in aligning one's investment strategy with this transition. From an investment perspective, we know that investing sustainably has not harmed investment returns historically. Hence, investors should take comfort they can adopt a sustainable approach without compromising medium- or long-term returns.
There will be push and pull factors. Companies will be pushed by government policy to become more sustainable. We believe that financial markets will reward companies that are better adapted to the sustainability revolution. For example, corporate valuations of less sustainable companies may be hit as investors factor in greater regulatory risks and changing consumer behaviours.
But there are also strong pull factors. There’s a lot of money being committed by governments to the net zero endeavour. The US government has proposed a $1tn infrastructure bill that includes $73bn explicitly on clean energy, while the European Green Deal may invest as much as €1tn over the coming decade. These investments are by no means certain and subject to the workings of politics. But the commitments show how seriously authorities are taking the climate challenge. These initiatives will throw up investment opportunities, particularly in clean infrastructure and renewable energy.
Consumers and investors, through their behaviours and decisions, also play a significant role in influencing businesses to become more sustainable. Demand for products and services that contribute to mitigating and adapting to the climate crisis is expected to increase. Broader investor and consumer appeal in sustainable companies may enhance earnings, lower costs of capital and reward them with higher valuation multiples.
The thematic investment opportunities are manifold, as the magnitude of the challenge hits almost all aspects of our lives. For example, the shift to electric vehicles requires batteries, investment in charging points, a smart electric grid and clean energy generation through wind and solar power. Adaptation to adverse weather conditions requires investment to make our transport, electricity, water infrastructure, food production and healthcare more resilient.
The time for change has to be now and the sustainable investment opportunities are ripe. The IPCC report and the upcoming COP 26 conference should accelerate the transition to net zero even further.
As investors and capital allocators, what are we waiting for?
Willem Sels is chief investment officer, private banking and wealth management, at HSBC
