Climate change, net zero and your investments

In November’s Skipton Insight we take a look at what combatting climate change could mean for markets and investors in the future – including how it could impact the decisions fund managers make.

From 31 October to 12 November around 200 countries gathered in Glasgow to attend the COP26 climate summit. The event was labelled as the make or break moment in the world’s fight against global warming.

COP summits – short for Conference of Parties – have been held annually since 1995. Put simply, they are gatherings of delegates from all over the world who meet up to agree measures for tackling the climate crisis.

Whilst all COP events are vital in the fight against global warming, this year’s was seen as a defining moment, as the main agenda was based around the landmark Paris agreement – a treaty signed in 2015 at COP21, held in Paris.

The Paris agreement is a pledge to limit average global temperatures to less than two degrees – a factor that’s seen as key to avoiding shattering climate change consequences.

This year’s COP26 saw a range of measures agreed, with experts providing mixed views on the effectiveness of the agreements. Although not legally binding, the measures will set the global agenda on climate change for the next decade.

Some of the highlights included: pledges to further cut emissions of carbon dioxide, an explicit plan to reduce the use of coal, and a significant increase in the amount of money available to help poorer countries deal with the effects of climate change.

One thing’s for sure, climate change – and the fight against it – has become increasingly present in our lives over the last decade. And this year in particular, awareness and interest in environmental matters are bigger than ever.

Running out of time to act

Finally, it feels like governments around the world are starting to feel the heat. They’re beginning to take climate change seriously. The UK, Europe and USA have all committed to net zero emissions by 2050.

Ultimately, they’ve had little choice but to act. Wildfires, floods, storms, and a whole host of other extreme weather conditions are all becoming increasing signs of the path of destruction we’re on. Without action, these events will only get worse.

  • In June, the temperature in Portland in the US hit 46.7 degrees. That’s the highest ever recorded there by a whole five degrees. Power cables melted, wildfires surged, and – terrifyingly – people died.
  • Global sea levels have risen nearly eight inches since 1880 – a process that’s rapidly accelerating and threatening the existence of many locations around the world.
  • The last five years have been the hottest on record since 1850.

These are sobering facts. But we have the opportunity to reverse some of the damage being done.

The United Nations believe a 45% reduction in emissions by 2030 is needed, along with a further pledge for the world to hit net zero carbon emissions by 2050 in order to stabilise temperatures at the necessary level.

It’s not our job to predict how the world intends to solve climate change. There are plenty of experts out there for that. But it is our job to discuss how all this might impact you as an investor.

Winners and losers

Fighting climate change – and reaching net zero – involves a complete overhaul of how we power the world and even go about our daily lives. Electric modes of transport, less packaging, dietary considerations, how you power your home: just a selection of factors that will create new challenges, but also new opportunities for investors.

There will be sectors that experience greater levels of growth than ever experienced before, and others that will decline – some may even cease to exist.

The transition from fossil fuels to renewable energy sources is one of the greatest challenges we face. It calls for a whole new infrastructure to be developed. A need for a coordinated strategy that progressively balances the cost of green technologies with fossil fuels. And this needs to be done on a global basis.

Here’s where we could start to see declines in certain sectors. Oil and gas extraction would obviously become significantly restricted. Employment in the UK oil and gas sector fell by over 40% between 2014 and 2019. That’s not to say these sectors can’t adapt – there’s a large-scale transition taking place which, if all goes well, will see the North Sea energy industry turn to the production of low carbon energy, including wind and renewables.

Many oil and gas businesses are highly aware of the importance of transition, and some have been key players towards investing in renewable energy.

New opportunities

We’ll need to see a complete overhaul of public infrastructure on an unprecedented level. This will call for heavy investment, and whilst it will present challenges, it should only be a good thing for investors as it creates jobs, furthers investment and raises productivity.

Fighting climate change is a risk, but it’s also a necessity. Here in the UK, more than half of the companies belonging to the FTSE 100 have committed to reaching net zero by 2050. There’s no doubt it will be a challenge for businesses across the globe. Every area of how a company operates will be impacted by efforts made to reduce its emissions. Some may make the transition smoothly, whereas other may struggle to find the capital to do so.

We saw something similar take place during the Covid pandemic on a smaller scale. Some businesses were able to overcome the challenges faced and adapt how they operated in order to continue to make profits. Others failed to do so and suffered the consequences.

A green revolution

As this global journey develops, fund managers will increasingly begin to monitor how companies choose to act in the fight against climate change – the path these businesses take will become a key factor on whether a fund manager decides to invest in a company or not.

There’s no doubt managers will be looking for opportunities in those sectors and businesses that have great opportunity to find growth and also look to avoid those that don’t. And here at Skipton we’re continuing to monitor the situation, as well as the impact on your investments – we will provide further updates in due course.

One way of viewing the transition to net zero is comparing it to industrial revolutions of the past. The Industrial Revolution (1750-1830) saw the inventions of the steam engine, cotton spinning and railways. Around a century later came the era of mass industrialisation (1870-1910) which saw an increase in the use of electricity and indoor water supplies.

These periods are known for new technologies that transformed business processes and how we live our lives, leading to sweeping changes to the structure of economies and sustained growth. So why could we not see a third industrial revolution – but one that’s founded on clean energy?

Economic and market conditions experienced in the past may not be repeated in the future. The opinions and analysis provided are for information only and do not constitute financial advice.

Version Info: