The environment is officially top-of-mind if the biggest global risks are anything to go by.
A look at the 16th edition of the World Economic Forum’s “Global Risks Report 2021” pinpoints extreme weather, climate action failure and human environmental damage as the top three risks by likelihood. Climate change is also the second biggest risk by impact[1].
On one hand, this shows the heightened awareness of the issues. This was reflected in significant progress during the second half of 2020 – in terms of widespread country-level commitments across Asia and globally to net-zero emissions, as well as via record-setting fund flows into sustainable assets.
At the other end of the spectrum, however, the problem is getting urgent and hard to control. In short, the pace of the response around the world is falling short of meeting the climate goal set out in the Paris Agreement.
Plugging the green gap
An earlier forecast by the UN Intergovernmental Panel on Climate Change said that to limit temperature rises to 1.5 degrees Celsius will cost around $2.4trn per year from now until 2035.
To bridge such a vast funding gap, any climate initiative will require a blend of private and public capital.
This is especially true in China, whose green transformation as per the country’s 14th Five Year Plan sets out a clear objective: being net zero by 2060. The situation is similar in the US, where President Joe Biden’s “American Jobs Plan” includes a much-anticipated $2trn climate and infrastructure stimulus bill.
Support from the investment community is building rapidly. Data from Morningstar for the first quarter of 2021, for example, saw the surge in demand to access sustainable investment strategies result in the sector’s total assets rising 19% to nearly $2trn. In fact, this was the fourth quarter in a row that a new high was hit.
Three pathways to a low carbon future
While tackling climate change is a long-term process, investors can see the potential for a low-carbon global economy to be a multi-year growth opportunity – both for businesses that enable it and the capital that backs it.
”We see increasing demand for green funds from investors in the region, as well as encouragement from governments to support robust green and sustainable focused fund strategies,” says John Cappetta, head of private banking, Asia Advisor at Ninety One.
More specifically, the three main pathways to a low-carbon future are renewable energy, electrification and resource efficiency – mirroring the focus of the Ninety One GSF Global Environment Fund[2].
In particular, boosting renewable power capacity reflects awareness of the need for a complete change in how we generate electricity. This involves moving away from fossil fuels towards renewable sources of energy such as wind and solar. This is being spurred by innovation and falling production costs; new technology is increasingly making solar and wind energy cheaper than fossil-fuel sources.
At the same time, greater electrification is essential, including an overhaul of ground transportation, to create more autonomous and efficient options that, ultimately, reduce the need for internal combustion engines in favour of self-driving electric vehicles (EVs) powered by renewable energy.
In terms of better ways to use resources, meanwhile, since around 30% of greenhouse gas emissions come from buildings, greater efficiency in this area is critical to decarbonisation. This is boosting demand for insulation among many other domestic and industrial products and processes.
Three themes to a low-carbon economy
A focused approach to driving growth and impact
To capture investment opportunities in line with these broad themes requires a highly selective approach to identify businesses with structural growth, sustainable returns on capital and competitive advantages in decarbonisation.
Meeting these objectives, Ninety One GSF Global Environment Fund is a focused global equity strategy that targets those companies driving the low carbon transition.
This relies on an experienced, dedicated team that understands environmental change and how to drive it. In conjunction with fundamental bottom-up analysis of the decarbonisation investment universe, the upshot is a highly differentiated and diversified portfolio.
In short, the Fund aims to ensure any holding in the portfolio will tick the boxes of doing good plus generating long-term returns, explains Cappetta.
“We believe the decarbonisation trend will continue to grow” he adds. “As we move along the transition, more companies will be introduced in the market, providing attractive opportunities and growth potential to this long-term trend over time.”
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[1] Source: World Economic Forum, January 2021.
[2] The Fund is a sub-fund of the Ninety One Global Strategy Fund.
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