The energy supply and infrastructure investment required to reach net zero carbon emissions by the middle of this century has been estimated at up to $5.8 trillion a year1. Investors and governments are now channelling capital into green technologies, and start-ups are multiplying in areas such as battery technology, renewable energy and direct air capture.
As an era of climate technology unicorns begins, we look at how multi-asset investors can tap into net zero opportunities and play a part in tackling global warming. But first, let’s review the climate investing landscape.
Sustainability Disclosure Requirements (SDR)
In the UK, the Financial Conduct Authority (FCA) proposed Sustainability Disclosure Requirements (SDR) to help consumers trust sustainable investment products.
The proposed new rules will put the onus on fund managers to verify that portfolio assets are delivering on their ESG (environmental, social and governance) promises and that the assets have genuine green credentials.
The FCA has proposed three sustainable fund labels:
A fund which invests in assets that may not be sustainable now, with an aim to improve their sustainability over time.
A fund which invests in solutions to problems affecting people or the planet, to achieve real-world impact.
A fund which invests mainly in assets that are sustainable.
Investors who are keen to put their capital into companies whose products and services aim to facilitate the net zero transition may choose a Sustainable Focus vehicle. One option for these investors could be a multi-asset fund with a portfolio of sustainable securities such as green bonds and publicly listed equities.
But what about those unicorns? Of course, it’s not always easy for retail investors to put their capital into innovative climate-related start-ups, because many of these new businesses are financed by venture capital.
A multi-asset fund with the right mandate can enable clients to invest in the potential climate leaders of the future.
However, investors can access the technologies and services they offer via the public markets. Here, listed companies specialising in climate solutions may acquire or partner with these start-ups or have their own competitor technologies. A multi-asset fund with the right mandate can enable clients to invest in the potential climate leaders of the future.
Sustainability-related performance indicators and metrics
The FCA has said it wants to see more sustainability-related disclosure from fund managers, including reports on how firms are managing sustainability-related risks and opportunities.
So, how can funds check that companies in their portfolios are keeping their net zero promises? For multi-asset managers, it’s possible to use ratings agencies to quantify the proportion of target companies’ revenues derived from climate solutions and for managers to make their own evaluation of companies’ prospects for the future.
Diversifying with climate solutions
To prevent or mitigate the damaging effects of climate change we need to replace carbon-intensive technologies with low- or zero-carbon alternatives. These are 'climate solutions' and they include the following themes:
- Renewable-energy generation such as solar or wind
- Transport via electric vehicles (EVs)
- Energy-efficient buildings
- Low-carbon industrial technologies
- Environmental solutions such as sustainable agriculture and circular economies.
By taking a multi-asset approach, you can benefit from a broader spectrum of climate solution investment opportunities and also from diversification, which helps to manage risk.
What are the areas for future investment?
There is significant investment in new technologies to deliver climate solutions. However, it’s difficult to know which ones will prosper and which won’t. Therefore, it’s important for climate investors to spread their risk across many companies.
In the case of EVs, what was once a niche technology is now clearly part of the mainstream. Indeed, 17% of cars sold last year in the UK were BEVs2 (battery electric vehicles) and in Norway that was 79%3.
As traditional internal-combustion engines are phased out over the next 15 years, the shift to EVs, as well as vehicles powered by green hydrogen, will only accelerate. However, in our view, it’s battery technology that’s proving most interesting to investors. Efficiency, cost, energy density and recyclability are all very important. In the not so distant future, it's possible we could see commercially available EVs with a thousand-mile range, and batteries that last for a million miles and that take only 15 minutes to charge.
Carbon capture – compelling for investors?
One area that could attract investment over the next few decades is direct air carbon capture and storage. A leader in the field, Climeworks, has built the Orca plant in Iceland. This captures and permanently stores 4,000 tons of carbon annually as rock in the ground, and the company is building a second plant which will capture 36,000 tons.4
While this is certainly a start, humans generated 52.8 gigatons of equivalent CO2 in 20215, so many more players will need to populate this space in the immediate future.
There are many companies working on ways to remove carbon from the air.
Climeworks has set itself lofty targets and aims to achieve multi-megaton capacity by 2040 and a gigaton capacity by 2050, which is a meaningful reduction.6
As well as Climeworks, there are many other companies, such as Global Thermostat and Carbon Engineering, working on ways to remove carbon from the air.
Hydrogen – no longer a colourless gas
Green hydrogen, which can be produced from renewable sources, is one of the most exciting sectors, but much costlier to produce than hydrogen from natural gas (blue hydrogen).
Cheaper renewable energy, electrolyser improvements and economies of scale, could reduce the price to a level that would allow green hydrogen to be a viable source of energy for steel and concrete production, as well as playing a vital role in transport. While this remains a promising area for research, it’s one of the more speculative sectors at present.
Agriculture and livestock
The livestock sector accounts for 14.5% of greenhouse gas emissions, with cattle contributing the majority of livestock emissions.7
There are ways of reducing our reliance on cattle, such as consuming plant-based alternatives or even genetically modifying the feedstock or the animals themselves, but this is a very difficult area for investors to get excited about.
There are ethical considerations, and many unknowns associated with accidentally introducing genetically modified plants and animals into wild populations. The simplest solutions to tackling the problems associated with livestock and agriculture are to eat less meat and look for environmentally friendly ways to power farm machinery, very few of which currently use batteries.
The nuclear option
It is likely that nuclear energy must play a key role in energy production if the world is to reach net zero by 2050. People are rightly concerned about the safety and environmental impact of nuclear power, but it is increasingly viewed as a clean technology and it will undoubtedly attract investment in the future.
Small Modular Reactor technologies are being developed by companies such as Rolls Royce and are much more flexible in terms of sites, and they have a lower cost than full scale reactors. They will, however, still have to prove themselves in terms of environmental impact and safety.
At the heart of the battle against global warming are the companies whose products and services are helping us get to net zero.
A multi-asset approach can provide access to innovative technologies. It can also enable clients to diversify across regions, sectors and asset classes, providing exposure to a broad range of green opportunities, and smoothing out some of the risks inherent in this comparatively new area of investment.
Companies are selected for illustrative purposes only to demonstrate the investment management style described herein and not as an investment recommendation or indication of future performance. Past performance is not a guide to future results.
A note on units: megaton= million tons, gigaton= billion tons.
- Source: Bloomberg NEF New Energy Outlook 2021
- Source: Automotive News Europe, January 2023
- Source: World Economic Forum January 2023
- Sources Climeworks website and Climeworks June 2022
- Source: The Closing Window UN Environment Programme Emissions Gap Report 2022. (excludes land use, land-use change and forestry) p5.
- Source: Climeworks website
- Source: Tackling Climate Change Through Livestock, Food and Agriculture Organization of the United Nations, 2013 p12