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COP26: Climate change causes headaches… but presents investment opportunities

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In the past two weeks, the COP26 climate event took place. Although several major players were absent and few ambitious agreements were reached due to endless discussions about who should make what kind of efforts, it was not all doom and gloom. It goes without saying that the coming years will demand great efforts from governments, businesses, and individuals. This creates many challenges, but also offers a lot of investment opportunities.

COP26: Now or never

For anyone following the news in recent days, it was hard to ignore the COP26 climate conference. The COP, or Conference of the Parties, is an annual gathering of nearly 200 countries and regional organizations that meet to discuss global climate challenges. The event saw the light of day in 1992 in Rio de Janeiro and was organised for the 26th time during the past two weeks, this time in Glasgow.
That the event received a tremendous amount of media attention is entirely justified. Today we find ourselves at a crucial inflection point: if we want to halt global warming, major efforts will have to be made. The energy transition is one of the most important parts of this. This change requires massive investments and the cooperation of governments, businesses and individuals globally.

A global shift is needed

If all countries were to deliver on their climate targets by 2030, which by the way is considered unrealistic, our planet would warm with about 2.4 degrees Celsius by 2100. Even in the most optimistic scenario where every country would deliver on all their announced long-term efforts, global warming would be 1.8 degrees Celsius, still significantly more than the ambitious 1.5 degrees Celsius global warming goal of the Paris Agreement.
Source: https://climateactiontracker.org/

Today, only 2 countries are climate-neutral: Suriname and Bhutan. By 2050, 126 countries want to achieve “Net Zero” (climate neutrality). China, which accounts for almost one-third of global CO2 emissions and is the world’s largest producer and consumer of coal, aims for climate neutrality by 2060. This Asian giant is responsible for 64% of all growth in greenhouse gas emissions since the turn of the century. China’s role in the energy transition can therefore not be underestimated.

The absence of important world leaders such as Xi Jinping (China), Jair Bolsonaro (Brazil), Mohammed bin Salman (Saudi Arabia) and Vladimir Putin (Russia) shows that not all countries are willing to make similar efforts regarding the energy transition, and certainly not in a similar timeframe. That once again became abundantly clear during the last day of the COP26 conference when especially China and India demanded more dilutions to the final agreement. India even insisted on watering down the language around reducing the use of coal, changing the text to a phasing “down” of coal as opposed to a phasing “out”.

In the end, as COP26 came to a close, delegates unanimously agreed to the Glasgow Climate Pact -an update of the Paris Agreement that targets coal-fired power and fossil-fuel subsidies- and calls on countries to produce more aggressive climate plans by next year. Although some will claim that this new agreement means a big step forward in international climate discussions, it was very clear that a lot of the negotiators in their closing remarks referred to the final text as a compromise that didn’t go far enough. Or as New Zealand’s climate minister James Shaw put it: “The text represents the least-worst outcome”.

Drawdown offers measurable and game-changing climate solutions

What we missed at COP26, was a focus on actual climate solutions: practices and technologies that can stem and begin to reduce the excess of greenhouse gases in our atmosphere. The world leaders who were present at COP26 could learn a lesson or two from Paul Hawken. In his book “Drawdown”, he presents the 100 most impactful climate solutions. In contrast to the endless political games that took place in Glasgow, Hawken offers an entire range of solutions, real tools of possibility in the face of a seemingly impossible challenge.

Paul Hawken’s solutions cover the entire global economy and are therefore highly suitable as a guide on the road to climate neutrality. All solutions are practices and technologies that can help the world stabilize and then begin to lower greenhouse gas levels in the atmosphere. Together, they comprise the Drawdown Framework for climate solutions which can be classified into 6 main climate clusters: electricity, circular economy, transportation, buildings, carbon capture and finally food, agriculture and land use. Some of the solutions presented are renewable energy generation, green hydrogen, carbon capture and storage (CCS), insulation for housing, lithium batteries, more sustainable food (reducing food waste), and reforestation.

Companies offering climate solutions benefit from a secular growth trend

It is anybody’s guess how much the energy transition will cost in the end. What is certain, however, is that the investments required will be huge. Bloomberg New Energy -an authority on energy studies- calculated that 173 trillion dollars ($173.000 billion) will have to be invested in the energy transition over the next thirty years. On a world population of 7,75 billion, this amounts to a cost of more than $22,000 per person or $744 per person per year for the next 30 years.

But there are two sides to every coin and every challenge also presents opportunities. From an investor’s perspective, publicly listed companies that provide solutions to reverse global warming can offer unique investment opportunities. There will obviously be a lot of losers in this energy transition in the long run, as many of the traditional oil companies or producers of plastic packaging, but there are also many potential winners bringing tangible solutions. Think of companies that are active in the electrification of passenger and freight transport, generation of renewable energy, reduction of energy and water consumption, recycling, more efficient use of raw materials, energy storage, precision agriculture, etc. These types of companies will benefit from a structural growth trend that will continue for years, even decades. That will allow them to grow significantly faster than the broader economy. Knowing that long-term stock market returns are primarily driven by the earnings growth of the companies involved, it seems fair to say that many climate-related stocks could prove to be very interesting investments going forward.

Conclusion: no great achievements, but a step in the right direction

When the Paris agreement was agreed upon at the end of 2015, there was a lot of enthusiasm and optimism that a good climate deal was negotiated. The conclusions of COP26 bring more mixed messages and the feeling is rather one of a missed opportunity. Sure, delegates all agreed that fossil fuels are not the future, but the countries present really struggled to identify how the necessary energy transition will occur.

That being said, we shouldn’t get too carried away with what could have been but should perhaps focus on the direction that was collectively set. At least there was no confusion about that: the energy transition is a necessary and massive challenge but it’s the direction we are heading towards. We may seem far from on track to meet the Paris Agreement goals of limiting global warming to 1.5 degrees Celsius above pre-industrial levels, but that doesn’t mean it’s not within reach. To get there, substantial investments will be needed. For investors, this represents a unique opportunity to identify the future climate winners and invest in those companies that provide real solutions for the many climate challenges.

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