Investing in a changing climate

30 June 2021

8 minute read

Global warming shows no signs of slowing; the seven warmest years on record have all occurred since 20141. It’s these soaring temperatures that spell trouble for the world’s coral reefs and Amazon rainforest, as well as low-lying coastal cities – threatened by rising sea levels caused by melting ice caps and glaciers.

A global response is therefore required to prevent this climate emergency becoming a dangerous tipping point of no return.

It’s why more businesses and individuals are following the lead taken by governments across the world with pledges to cut carbon emissions and reach destination ‘net zero’ by 2050 or sooner. Net zero is the point in time when humans stop adding more climate-heating gases into the atmosphere than they take away. Whether that’s cutting emissions as far as possible, or offsetting the ones still being generated by finding ways of absorbing CO₂, such as by planting more trees.

And this year promises to be a ‘make or break’ moment in the fight against climate change. The UK is set to host the UN’s next climate summit, called COP26, in November 2021. The event is seen as one of the last chances to put the world on track to meet the goals of the 2015 Paris climate agreement.

After being postponed a year due to the COVID-19 pandemic, COP26 is expected to establish a new set of climate targets – going further and faster than ever before to tackle climate change. Governments and companies – both big and small – will be pushed to follow suit. The aim is to restrict global warming to no more than 1.5 degrees Celsius above pre-industrial levels, putting the world on a path to achieving net zero carbon emissions by 2050.

The race to develop renewable energy technologies

The earth enjoys 173,000 terawatts of energy from the sun each year – over 10,000 times more power than we use as a planet2.

It’s no surprise, therefore, that in the last year, the installation of solar cells was the largest contributor to new renewable energy capacity – adding 118 gigawatts of capacity and being the preferred technology in over a third of nations worldwide3.

Nevertheless, coal still accounts for the largest component of global electricity generation. But advances in technology and manufacturing processes have pulled down the cost curves of renewable energy dramatically over the past decade, making it possible to plan for a future without coal-powered energy.

The global weighted average cost of electricity from onshore and offshore wind has also fallen by 39% and 29% respectively between 2010 and 20194. Over the same period, the global weighted average cost of electricity from utility-scale photovoltaic solar plants fell by 82%. This was largely driven by an 87% reduction in the cost of photovoltaic cells – the main component of solar panels5.

How COVID curbed carbon emissions

In 2020, the impact of the COVID-19 pandemic contributed to a record drop in our consumption of energy as we went in and out of various lockdowns. This reduction was six times greater than the previous record year of 20096.

And it was in 2020 that the UK grid went 67 days without using coal to generate electricity – marking the longest period of being coal-free since the industrial revolution7. The falling demand for fossil fuel primary energy generation has put downward pressure on fossil fuel prices, with the price of oil even briefly falling into negative territory at one point in 20208.

Because of all this, in 2020, Earth Overshoot Day, the day that marks when humanity’s demand for ecological resources and services in a given year exceeds what the Earth can regenerate, fell on 22 August – 24 days later than in 2019, pushing the date back to where it was 15 years ago9. Fossil fuel energy sources saw the largest declines, while renewable sources remained relatively stable10.

Around 67% of new worldwide energy capacity coming online was also renewable between September 2019 and September 202011; representing an investment of over US$300bn globally12.

And as we look forward, continued improvement in our ability to capture renewable energy more cheaply, combined with improvements in batteries and increased demand from electric vehicles should see renewables overtake fossil fuel usage in the not-too-distant future. According to the International Energy Agency13 (IEA), that date could be as soon as 2024 when wind and solar capacity exceeds both coal and gas generation.

Reducing our carbon footprint

While the transition to clean energy generation is critical, the other side of the coin is also important: carbon-energy demand. The IEA estimates that to be on the path to net-zero by 2050, carbon-energy demand needs to drop by 17% by 2030 – back to levels last seen in 200614.

This needs to be achieved through a broad range of marginal gains. For instance, replacing flights under one-hour duration with lower carbon alternatives, walking or cycling for trips under 3km, and reducing road traffic speeds by 7km per hour would collectively reduce emissions from transportation by 20%. Technology is also key in helping to reduce the amount of carbon we use.

What some companies are already doing to save the planet

Increasingly, companies are understanding their role in addressing climate change and are recognising that a lower operational carbon footprint can build in operational resilience – helping to attract customers and drive profitability.

Climate change is the defining challenge of this century and one of the greatest existential challenges that our planet has ever faced. We’re maybe the last generation that’s able to stop climate change. But, fortunately, we’re also the only one so far to have the technological innovation and economic reality to do so.

The carbon footprint of the equities in our sustainable strategy is already materially lower than that of the wider market with 82% less weighted-average carbon intensity versus the MSCI All Country World Index. This is thanks to a mandated divestment from fossil fuels, combined with a focus on knowledge-based businesses that typically derive their value from intellectual property.

Here are what some of the companies held by our Sustainable Total Return Strategy are doing to tackle climate change. All companies referenced were held by our fund as of 31 December 2020. Reference to specific companies is not an opinion as to their present or future value and should not be considered investment advice or a personal recommendation. They’re included below to demonstrate the positive impact companies can have:

  • Orsted15 ranked the most sustainable energy company in the world three years running by the Corporate Knights Global 100 Index16, is one of the companies facilitating this transition. Historically focused on fossil fuel energy generation, the company has successfully pivoted into becoming one of the world’s largest renewable energy companies, and a major developer of new offshore and onshore wind capacity. With 9.3 gigawatts of installed renewable energy capacity, avoiding 13.1 million tonnes of CO₂ emissions annually, they are investing heavily with the aim to more than double this capacity by 2025.
  • Hexagon – a leader in geospatial positioning, industrial metrology, and manufacturing intelligence – has made it a key priority to improve the efficiencies of renewable energy sources. Their solutions are today used throughout the energy generation industry, from giant turbines right through to the photovoltaic panels of solar farms.
  • Roper Technologies17, a diversified industrial technology company, is providing intelligent transport systems to cities that help to reduce idle time, congestion, fuel consumption and emissions. This includes the management of 12,400 traffic light systems in New York, for which they won an award for excellence in optimising traffic flow. They also operate digital freight matching networks, which help to ensure that trucks are not driven empty.
  • The Taiwan Semiconductor Manufacturing Company (TSMC) and ASML facilitate the manufacture of the world’s most advanced semiconductors. TSMC’s imminent 3 nanometre (nm) node, enabled through ASML’s extreme ultra-violet photolithography systems, aims to use 65% less power than their 10nm node launched in 201718. Leading-edge semiconductors are also critical in enabling advanced technologies, such as artificial intelligence, cloud and the ‘internet of things’, that should help enable our transition to a low-carbon economy.
  • Through their ‘Move to Zero’ programme, Nike powers 100% of its US offices and stores with renewable energy19. It is also a leader in promoting a circular economy and provides sustainability scores for 57,000 materials – which helps designers lower the carbon footprint of products20.
  • Likewise, Unilever now uses 100% renewable grid electricity globally, across all facilities, and has reduced CO₂ energy emissions from manufacturing by 65% since 200821.
  • Amazon has 127 renewable energy projects across the globe, including 59 utility-scale solar and wind projects, generating more than 18 million megawatts hours of energy annually – enough to power more than 1.7 million US homes22. While Visa is 100% powered by renewable energy across its global facilities23.
  • Companies the size of Google can have a similar impact on the environment as a country. For that reason, when Alphabet, Google’s parent company, became the first major company to become carbon neutral in 200724 it became an example to many. It was the first global enterprise to match its energy use with 100% renewable energy in 2017. It also operates the cleanest cloud in the industry and is the world’s largest purchaser of renewable energy24. It’s important to recognise that there is no perfect company. However, Alphabet’s commitment to becoming carbon neutral is admirable. Last year, the company eliminated its entire carbon legacy – bringing its lifetime net carbon footprint to zero24. It has also become the first major company to commit to being carbon-free, everywhere, all of the time, by 203025.

As you can see, there are great opportunities for organisations to join the climate fight through their operations and products. And as more companies follow the same path, meeting climate goals will become far easier to achieve.

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