The big disruptor – climate change

By Morningstar |  26-08-21 | 

Angus Parker is the Head of Global Equities and Head of the Developed Markets Equity team within HSBC Global Asset Management in London. He manages the HSBC Global Equity Climate Change Fund. He writes on climate change and how investing in the right opportunities can support the coming change. 

We are now regularly reminded of the effects of climate change through a bombardment of extreme weather events occurring around the globe. Bold steps will be needed to limit increasing temperatures and irreversible damage. Accordingly, we’ve seen governments and corporations stepping up commitments to reduce carbon emissions and more quickly arrive at net-zero targets.

The European Union’s recently proposed plans to more aggressively reduce carbon emissions are an example of momentum gathering. The proposal includes an acceleration in the reduction of carbon allowances under its Emissions Trading Scheme, through which companies must either reduce emissions or pay for them, and coverage of more industries in the scheme. This direction of travel was a reason our strategists previously highlighted the potential for carbon offsets as portfolio diversifiers, particularly given their independent set of price drivers. As emissions regulations tighten, carbon prices are set to continue their steady ascent – up over 60 per cent this year alone in the EU.

Perhaps more consequential than changes to EU carbon allowances, at least from a global perspective, was the proposal of a levy on carbon-intensive imports. As if to magnify the potential impact, US politicians also proposed a carbon tax on imports entering their shores. Should these plans become policy, it means carbon-intensive exporters such as China and India would be incentivised to speed up their energy transition plans, which have lagged developed markets. Opportunity is ripe for innovation to fast-track the needed transition. Indian exports, for instance, are more than four times as carbon intensive as the US, and ten times more so than the EU based on 2015 OECD data.

There are arguments to be made that developed nations have largely outsourced carbon-intensive segments of the economy, contributing to the above dynamic. While these arguments have merit, the fact remains that the pressing nature of the climate change challenge requires all to now pull in the same direction. This means wholesale changes to how we live, consume and power our economies.

Addressing the targets set out in the Paris Agreement and achieving a more benign increase in temperature necessitates a much broader response than simply removing fossil fuels from our energy supply. Innovation is required across all sectors to address the necessary decarbonisation and energy transition. This is happening across a wide range of industries in both developed and emerging countries, and is generating exciting investment opportunities.

As opposed to pursuing opportunities through the lens of traditional stock market sectors, we think it is more helpful to consider opportunities by sub themes that address the energy transition, such as energy efficiency, clean transport, or green buildings. Whether it be biodiesel from Finland, solar panels from China, or power semiconductors for electric vehicles from Germany contributing to energy efficiency, or insulation manufacturers from Ireland and electrification products from France helping to green our buildings, the opportunities are widespread.

While opportunities for transformation of the global economy offer appealing return potential from companies leading the change, we must be diligent in evaluating opportunities. A proper understanding of how they fit into the societal transition ahead is essential, along with an appropriate evaluation of how the risk and return potential is currently being priced. Investing in the right opportunities can support the coming change and make a world of difference to returns.

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