The threat of climate change has never been greater or more clear. The latest Intergovernmental Panel on Climate Change (IPCC) report laid out in the starkest of terms the monumental challenge that we are facing in overcoming this global issue. Yet we do believe that there are reasons for optimism.
In the past few years we have seen a clear shift among both corporates and consumers in their collective attitude towards greener production and consumption habits. This has fuelled the rise of companies providing innovative solutions that can support the energy transition and reduction of greenhouse gas (GHG) emissions, and play a key role in solving the growing climate challenge.
Against this backdrop, we see three key tailwinds that are driving this transition and make this a multi-decade growth opportunity for investors.
Strong regulatory support
Countries with net zero targets together represent around 61% of global emissions, 68% of global GDP and 52% of the global population. Clearly there is much further to go but COP 26 later this year should help drive further progress.
Moreover, the recent IPCC report should support the drive towards the use of cleaner energy solutions, highlighting the need to transition from fossil-based fuel reliance towards greener, renewable alternatives to limit global warming to 1.5 degrees Celsius by 2030. Their report marked a significant milestone as the first scientific study on climate change since 2013, solidifying the importance of addressing the climate transition.
Policy momentum continues to be positive across all major regions. In Europe, there is a strong commitment towards a green recovery, with the €750bn EU Green Deal setting the ambitious objective of reaching net zero GHG emissions by 2050. In July 2021, the EU released its ‘Fit for 55’ package, a key component of the EU Green Deal, referring to a minimum 55% emission reduction target which the EU has set for 2030. This could mean more stringent environmental targets in existing areas of legislation and covering additional industries such as construction/building operations and aviation falling within the scope of policy.
China has recently committed towards achieving net zero emissions by 2060 as part of its 14th five-year plan. To reach carbon neutrality, China will need to continue its rapid development of clean technologies – already considered world-leading – and shift away from its reliance on fossil fuels.
In the US, following his election and coupled with the Senate win, Joe Biden reaffirmed his plans to build out clean energy infrastructure as part of a broader effort to curb climate change. The $1.2trn framework describes their proposed investment in electric vehicles (EVs) as the largest in history and will include $15bn to be spent across EV infrastructure – such as building 500,000 EV chargers – and electric buses.
This positive momentum from governments around the world is paramount to the energy transition. Crucially, it is estimated that annual investments in renewable energy will need to increase 3-4 fold over the next three decades to fulfil key global decarbonisation and climate goals.
Greener consumption habits
Consumers are swiftly changing their consumption habits and are playing a more active role in reducing GHG emissions – from the provenance of ingredients and raw materials to the environmental impact of finished products and packaging.
One area that has seen considerable pick-up is annual EV sales – in Europe, this figure more than doubled in 2020, with the penetration rate having reached 15% of total European new car sales over the first quarter of 2021. Elsewhere, on a three-month rolling basis to April 2021, around 157,000 units were sold in China, representing a 346% year-on-year increase.
The Tokyo Olympics is another good illustration of the growing greener consumption trend – with Toyota e-palettes and self-driving electric shuttles used to transport athletes and staff around the Olympic site. In addition, the Olympic medals were made using recycled materials from smartphones and laptops donated by the public, while the Olympic Flame was switched on and sustained using hydrogen.
Moreover, consumer interest in clean and sustainable diets is accelerating with a focus on a broad range of issues including food waste, air miles, clean labels, lab-grown meat and organic foods. Flexitarian and vegan diets are also on the rise, illustrated by the 580,000 people in the UK who signed up to the Veganuary challenge in 2021, an increase of 132% since 2019.
Acceleration in climate-driven investment by corporates
Most mainstream companies such as Amazon, Microsoft and Coca-Cola have pledged ambitious targets in order to reach net-zero carbon emissions, which is translating into increased capex towards clean technologies, including energy storage and energy efficiency services. This follows increasingly stringent regulation around environmental standards and rising consumer demand for more environmentally friendly products and services.
For example, Amazon, which has pledged to operate with 100% renewable energy by 2025, became the world’s largest corporate purchaser of renewable energy in 2020, reaching 65% across the business. This has been achieved by investing in wind and solar projects worldwide, which includes a 350MW wind farm off the coast of Scotland. The energy generated from these projects is used to power Amazon’s corporate offices, fulfilment centres and the data centres used to host Amazon Web Services’ (AWS) public cloud platform. Furthermore, AWS runs multiple initiatives to use water more efficiently and use less drinking water to cool their data centres.
Corporates such as Amazon need innovative clean technology companies which provide products and services to support their energy transition.
Nevertheless, there is still a long way to go and more investments in clean technologies will be necessary in order to begin making a difference to the environment. In fact, it is estimated that governments and companies will need to invest at least $92trn by 2050 to reduce emissions fast enough to prevent the worst effects of climate change.
However, the momentum is there to see this happen.
We believe the combination of all the above factors is driving increased innovation for companies operating within the clean economy. This will not just help in providing innovative solutions to the energy transition and the finite amount of natural resources, but should also create compelling investment opportunities to take advantage of.
Amanda O'Toole is a portfolio manager at AXA Investment Managers.The views expressed above are her own and should not be taken as investment advice.