This article is from the latest Good Investment Review, which you can download free here.
The science is telling us that we need to accelerate the pace of decarbonisation. Current progress and ambition both fall considerably short of meeting internationally agreed goals to limit average global temperature rises to less than two degrees centigrade – and ideally to 1.5C in line with the Paris Accord.
But significant sums of money are being allocated towards carbon reduction schemes, by both governments and financial institutions. Through the effective deployment of capital in companies and technologies that make our world cleaner, healthier and safer, we remain optimistic that much can be done to mitigate and adapt to the climate crisis facing society. And COP 28 (Conference of the Parties to the UN Framework Convention on Climate Change) begins at the end of November.
US Inflation Reduction Act
Last year, the US made headlines with the introduction of the US Inflation Reduction Act, which earmarked $370 billion (£305 billion) to fight climate change by reducing carbon emissions. The EU ‘Fit for 55’ target of reducing net greenhouse gas emissions by at least 55 per cent by 2030 will double the share of renewables. Even China has stated its target of being carbon neutral before 2060 and to phase down coal post-2025.
Although the US is noted in certain areas for general scepticism around ESG investing – with the debate becoming undoubtedly politicised in some areas – when there is an economic rationale, such as saving money following the rising costs of energy, the US can and often does move big and fast.
As an example, Texas generates more renewable energy than any other US state – despite opposition in many parts of Texas to climate change initiatives. In 2022 alone, Texas generated 136,118 gigawatt-hours of energy from wind and utility-scale solar. A staggering 40 per cent of its energy came from carbon-free sources – 22 per cent from renewables (predominantly wind) and 18 per cent from nuclear (source: US Energy Information Administration).
To put this into perspective, if 1MW of renewables is roughly £1 million, then this amount could fund 3000GW, which is equivalent to the entire capacity of US electric generation.
Investing in companies that help to reduce emissions will, we believe, also benefit investors as these are the businesses likely to see significant growth. The drivers of the energy transition continue to strengthen and support long-term economic growth.
Also, new regulations governing the disclosure of climate-related risks and opportunities, and sustainability-related information, are expected to be adopted this year by the US Securities and Exchange Commission (SEC). These should ensure that investors have far more data and information about companies’ ESG standards and performance than is currently the case.
Looking at the private sector, large amounts of capital are being committed to financing the renewable energy growth. In 2022, there was extremely strong progress in this area, with key banks committing £3 trillion of finance to clean energy projects.
This gives an idea of the quantum of capital that is being targeted towards renewables, and the critical importance of banks being prepared to finance these projects.
Focusing on renewables
The displacement of carbon-intensive electricity generated from burning fossil fuels by ultra-low carbon renewables is a vital ingredient, but it is by no means the whole picture. We believe there will be profound impacts across the whole economy and look for companies whose products and services can accelerate decarbonisation.
The areas we have identified as playing an important role are:
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Infrastructure needed to decarbonise – this includes upgrading our antiquated electricity grid systems, as well as providing infrastructure needed in many areas of the economy that will be decarbonised by using electricity.
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Energy efficiency is a great way to reduce the amount of energy wasted and has the benefit of cutting users’ energy bills and emissions. This is applicable to the whole economy and includes buildings, transport, industry as well as fast growing areas such as computing power used in digitisation.
- Business strategy to ensure businesses are set up to thrive in the ultra-low carbon economy. We discuss this and challenge businesses we are invested in to innovate and use this as a differentiator to gain a competitive advantage over their less proactive peers.
Investing in companies that help to reduce emissions will, we believe, also benefit investors as these are the businesses likely to see significant growth. The drivers of the energy transition continue to strengthen and support long-term economic growth.
Risk warning: Past performance is not a guide to future performance. The value of an investment and the income generated from it can fall as well as rise and is not guaranteed. You may get back less than you originally invested.
