09 September 2019
The Opportunities of Climate Change
As Climate Change Accelerates, How Can Investors Adapt?
Awareness of the effects of climate change has grown considerably in the last two years worldwide as different countries have grappled with severe natural disasters, rising temperatures, melting glaciers and dwindling natural resources. Investors are looking for more sustainable methods to invest their capital beyond fossil fuel.
With oceans that are warming at a faster rate than expected and melting glaciers, and activists bringing attention to events at the national and international level, it is no wonder that investors are now increasingly asking about sustainable ways to invest and how to mitigate climate change.
While exact impact of the extent of global warming is unclear, climate change is now a reality that investment firms, financial institatuions and governments are beginning to address through policy changes.
Environmental, Social and Governance (ESG) Drivers of Investment
Today as high as 80 percent of all global energy demand comes from fossil fuels. This includes primarily oil, natural gas and coal. Investors are increasingly looking for options that integrate environmental, social and governance (ESG) factors, thus providing sustainable investment avenues.
Last year, financial managers invested over $3 trillion in sustainable assets that factored in climate change and carbon effects, according to the US SIF: the Forum for Sustainable and Responsible Investment.
In fact, the total value of funds that have integrated ESG factors into their investment process has quadrupled since 2014 to $485 billion as of April 2019, according to data provider EPFR Global and the Wall Street Journal.
All across the board from hedge funds and sovereign wealth to private equity, exchange traded funds (ETFs) and mutual funds, investors and financial asset managers are beginning to plan for both profit and loss affected by climate change over the long term. Interestingly enough, a drive to earn the highest returns while minimizing risk has become the impetus for investing sustainably, more than any conscientious objections to fossil fuels. Large funds such as BlackRock Inc., that manages over $6 trilllion in assets, have launched their own sustainable equity ETFs and are actively identifying clean energy investment funds that are potential winners in the future.
Investing in Clean Energy
While investment based on new models for clean energy and mitigating climate change poses risks, it is increasingly being adopted by funds worldwide that are eager to adapt and to also benefit from the shifting tide towards clean energy.
Investments in clean energy fuels have surged in the last three years, particularly in the Asia-Pacific region, but also worldwide.
Investments in clean energy fuels have surged in the last three years, particularly in the Asia-Pacific region, but also worldwide.
Global Energy Consumption
Energy consumption has grown considerably due to both economic and population growth in the Asia-Pacific region. Today China is the world’s largest energy consumer, followed by the United States and then large emerging economies such as India and Indonesia, according to data compiled by Bloomberg over the last forty years. Almost all this energy is fueled by fossil fuels that release carbon dioxide into the earth’s climate.
Demand for Oil in Emerging Economies
Oil demand worldwide has surged to meet growing population demands in Asia, rising by 1.2 million barrels per day (mbd) every year for the last 28 years, according to data from International Energy Agency’s New Policies Scenario (IEA NPS). There are roughly 1.1 billion cars around the world today that are all powered by oil. The number of cars on the road in the future is expected to rise by as much as 80 percent by 2040. Oil as an asset class will continue to provide positive returns in these regions. While geopolitical factors such as OPEC control over oil pricing and distribution and lobbyists continue to exert strong influences over oil consumption, other polluting fossil fuels such as coal may be on the way out in the next two decades as harnessing natural gas and renewable energy sources continue to expand.
As electric vehicles (EV) become more mainstream, technology becomes more efficient leading to less energy waste and clean energy options become more viable, the demand for oil and gas is expected to go down in the next 20 years. The demand for electricity for transportation is expected to increase at 7.2% compound annual growth rate (CAGR) from 2017 to 2040 as compared to oil at a 0.6% CAGR over the same period of time.
Reining in Carbon Emissions
Carbon pricing as a market approach to rein in carbon emissions from greenhouse gases is a proposed policy method to limit the spread of hydrocarbons from greenhouse gases through a “carbon tax.” A carbon tax is a cost paid by a consumer for using energy derived from fossil fuels such as oil, coal and gas. Using a carbon tax is meant to account for the “real” cost of energy consumption.
It is also meant to discourage consumers from using products that emit a lot of pollution. Emission cap and trade programs consist of a fixed number of “carbon units” that are paid for by firms and can be traded among firms while setting a cap or limit on the quantity of total emissions allowed in a region or country.
According to the World Bank, 46 nations and local governments are pricing carbon, raising $20 billion last year. 1,400 companies that include more than 100 Fortune 500 companies with returns of over $7 trillion, are also factoring in an internal carbon price to their business plans.
Implementing carbon taxes has faced strong opposition worldwide, resulting in many governments adopting the less effective cap and trade method. Carbon taxes have been adopted in several Western European countries, Canadian provinces and South Africa while cap and trade programs have grown in popularity in Australia, China and New Zealand.
Global Plastic Consumption
In 2017, BBC aired the TV episode "Blue Planet II” narrated by Sir Richard Attenborough that brought awareness to plastic pollution particularly in the oceans. 12 millions tons of plastic litter the oceans annually, accounting for 80 percent of all marine pollution. Awareness in Europe rose exponentially after this documentary, leading to institutional and government changes that included more recycling options and banning single-use plastics such as straws, cotton buds and cutlery by 2021. Companies like P&G, Unilever and Pepsico with large global footprints have committed to waste recycling. Consumer awareness is driving the change as consumer preference has shifted towards reusable and sustainable plastic product choices.
Plastics Recycling and Packaging
Using plastic products responsibly requires an understanding of the product lifecycle from how the plastics are produced, distributed and then managed after consumer use. As consumers step away from using non-recyclable plastic common in Fast-Moving Consumer Goods (FMCG) sold by supermarkets and chain stores, investors are taking note. This has resulted in increased investment in biodegradable plastics.
Companies and investors are also looking for alternative packaging options that are easier to recycle such as corrugated cardboard, which has grown in popularity due to e-commerce. Demand for corrugated cardboard is expected to reach $700 million between 2018 and 2022, according to DS Smith, the UK global packaging company.
Government at both the national and regional level have been influencing changes in the packaging industry by demanding the use of recycled material. The EU is considering implementing a “producer pays” regulation where companies that use plastic packaging, pay for its recycling and also to clean up affected beaches littered with plastic.
China, a major importer of global plastic waste, decided to no longer purchase plastic waste in 2018, disrupting the global recyling industry. This move and government pressures by nations is pushing many companies to improve their recycling efforts. Offering incentives to recycle can also accelerate a shift to using more sustainable packaging options.
Making Capital Work for the Benefit of All
At Bear Stearns, we are committed to providing sustainable investment solutions for our clients and within our own firm, reducing plastic use, eliminating single-use plastic consumption, offering recycling solutions and encouraging energy efficiency at our offices. We work with our client’s investment banking and asset management services. Get in touch.
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Links:
- https://www.reuters.com/video/2019/01/11/oceans-warming-faster-than-expected-scie?videoId=501914491&feedType=VideoRSS&feedName=LatestVideosUS&videoChannel=118169
- https://www.nytimes.com/2019/01/21/climate/greenland-ice.html
- https://www.ussif.org/blog_home.asp?display=118
- https://www.wsj.com/articles/funds-say-climate-change-is-now-part-of-their-investing-equation-11560218940
- https://www.bloomberg.com/graphics/2019-international-energy-use-renewables-coal-oil/
- https://www.carbontax.org/whats-a-carbon-tax/
- https://www.worldbank.org/en/results/2017/12/01/carbon-pricing
- https://www.bbcearth.com/blueplanet2
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