Carbon Reduction Focus Aids in Mitigating Wider Market's Climate Hazard
In the global push towards a more sustainable future, a significant number of companies are leading the charge by investing in and deploying low-carbon technologies and sustainable infrastructure. According to Ninety One, around 700 companies, valued at approximately $6 trillion by market cap, form their "carbon-avoided" universe.
The first stage of this process involves screening global equities for companies that derive at least 50% of their revenues from environmental solutions. These companies primarily contribute to decarbonisation efforts by innovating in areas such as renewable energy, energy efficiency, green industrial heat, carbon capture and storage, and circular economy practices.
The UK government is considering banning combustion engines within the next decade, and other nations are following suit. For instance, the US is considering similar measures as part of its pandemic stimulus, while the EU has already boosted green investment in its stimulus package. In fact, the European Green Deal, launched in May, has allocated approximately 38% of its €750bn stimulus towards climate-related initiatives.
Investors can support and benefit from these companies by focusing on sectors with high decarbonization potential, such as infrastructure, and by integrating Environmental, Social, and Governance (ESG) criteria into their investment decisions. Significant capital investment is required for the energy transition, estimated between USD 150 trillion and 275 trillion by 2050. This presents opportunities for institutional investors to participate in both decarbonization and value creation.
Private markets offer various avenues for investment in clean energy, energy efficiency, and sustainable infrastructure that drive carbon avoidance while delivering returns. To navigate political and regulatory uncertainties, investors should monitor the development and implementation of climate commitments, engage proactively with governments and companies, employ diversified strategies across sectors and geographies, and evaluate investments in emerging technologies with high impact potential.
The US has already built more renewable power capacity in the last four years than ever before, despite the White House administration's stated goal of reviving the coal industry. This trend is likely to continue as the market tends to underestimate the opportunity within the energy transition. For example, companies with products and services that facilitate carbon avoidance can serve a market of around $500bn to $600bn.
One such company is Croda International, a firm that makes bio-based chemicals used in lower carbon shampoos and cosmetics. The cost curve shows that wind and solar is the cheaper form of electricity, with approximately 18% annual cost efficiency improvement seen in Lithium-ion batteries. Regulatory change, technological change, and changing consumer behavior are the drivers that will bring about the required speed of change.
However, the world remains far off track in terms of the transition required to meet the climate goals agreed in Paris in 2016. The UN Intergovernmental Panel on Climate Change suggests $2.4 trillion will be required every year to meet 1.5° of warming. China has announced a target for a zero-carbon economy by 2060, and other nations are expected to follow suit. By combining ESG integration with thorough analysis of policy environments and leveraging private market infrastructure opportunities, investors can effectively contribute to and benefit from companies facilitating carbon avoidance, while managing uncertainty inherent in political and regulatory shifts.
Technology plays a crucial role in the decarbonization efforts of companies, with sectors like renewable energy, energy efficiency, and circular economy practices being primary contributors. Investors can capitalize on technology advancements by focusing on sectors with high decarbonization potential, such as infrastructure, and integrating Environmental, Social, and Governance (ESG) criteria into their investment decisions.
