Five insights in five minutes
Equities and climate
Peaking around Cop26, the number of times ‘climate risk’ is being typed into Google has tripled in the past 12 months. Meanwhile, this week alone there have been 800 articles in global news publications that include the term ‘climate catastrophe’ – five times more than the average since January. Back in 2018 there were closer to 20. And yet despite ubiquitous warnings of our demise, the S&P500, Dow Jones, Nasdaq 100 and Russell 2000 have all hit record levels for two sessions running as Five in Five went to press – a show of vitality not seen for almost four years. Global equity indices are also making consecutive highs. Given markets discount far into the future, how to interpret the disconnect here? Perhaps investors believe climate change poses little or no threat to returns whatsoever – better to follow the Fed’s tapering announcement on Wednesday, for example. Hypothesis two is that climate change is already priced in. If that’s true, the mother (earth) of rallies awaits if Glasgow is a success. A third and final explanation is that investors have completely underestimated the existential threat to asset prices from climate change. Still, that’s two of three in support of stocks. Not bad odds.
Conversation starter for... global equities, US equities, real asset prices, emerging market equitiesFor illustrative purpose only.
However you measure it, trillions of dollars are needed to fill the infrastructure funding gap around the world. As illustrated below, the shortfall is particularly critical in emerging markets, which don’t yet have the necessary financial and operating expertise. And with infrastructure being the main sector responsible for greenhouse gas emissions from human activities, solutions need to be sustainable. How to ensure this? Part of the answer might have been given at Cop26 this week, with the launch of the FAST-Infra initiative, a global public-private partnership aiming to ensure investment is swiftly channelled towards sustainable projects. The creation of a Sustainable Infrastructure label is the first step towards a deep and liquid asset class, and should give confidence in the environmental credentials and resilience of new projects. Investors who thought that sustainable infrastructure was an oxymoron now have trillions of reasons to change their minds.
Conversation starter for... ESG strategies, infrastructure debt and equity, alternativesFor illustrative purpose only.
India’s net-zero pledge
Although it dissipates from the atmosphere relatively fast, methane traps 85 times more heat than carbon dioxide, hence the Cop26 commitment by a hundred countries to reduce emissions by a third by 2030, compared with 2020, is welcome news. Methane accounts for about 15 per cent of the greenhouse warming effect. So the cut means a five per cent improvement relative to baseline by the end of the decade. Take Prime Minister Modi’s ‘net-zero by 2070’ pledge this week for comparison. Carbon is responsible for three-quarters of warming and India was on trend to produce a tenth of global emissions by 2030. Even if these are halved in nine years, therefore, the benefit would be slightly less than the methane commitment. Longer term, of course, Modi’s pledge is more significant. And despite India’s per-capita emissions being less than half the world average, the nation has taken proactive steps to tilt its energy mix towards clean energy (see chart). Indeed, 40 per cent of power generation capacity installed this year has come from hydro and renewables. With 1.4 billion people, the opportunity for clean-tech investments is massive.
Conversation starter for... India equities, India bondsFor illustrative purpose only.
Deforestation and natural capital
Cop26 made a promising start this week. More than a hundred world leaders vowed to end and reverse deforestation by 2030, backed by almost $20 billion of funding – a third of which is coming from private pockets. According to Greenpeace, deforestation accounts for one-fifth of global greenhouse gas emissions. And even during last year’s economic downturn, the loss of primary tropical forests rose by 12 per cent compared to 2019. Not good considering humanity’s dependence on nature, as shown in the chart below. Cambridge economist, Partha Dasgupta, reckons that degradation continues due to markets failing to assign an appropriate value to the services the natural world provides. Governments haven’t helped either: up to six trillion dollars per year of global subsidies end up damaging nature. Solutions such as biodiversity permits can help, and nature must become integral to economic and financial models. But funding is required immediately. Investors should seek out natural capital solutions, which in theory are underpinned by the biggest asset class on earth.
Conversation starter for… natural capital funds, climate change funds, ESG investingFor illustrative purpose only.
Innovation and climate change
Technological innovation sparked the industrial revolution and ultimately the climate crisis. Technological innovation is needed to avert it. Step in prolific innovator, Bill Gates. At Cop26 this week he formalised a partnership with the European Union that aims to raise $1 billion towards clean tech projects. Unlike the early days of Windows, however, there is no monopoly risk. With annual venture capital funding for climate tech start-ups at $17 billion, more than quadruple five years ago, innovation is set to proliferate. According to McKinsey, five groups of technologies alone could abate 40 per cent of greenhouse gas emissions by 2050. Yet as can be seen below, the annual investment needed remains far beyond these numbers – and certainly out of reach of government budgets. The International Energy Agency estimates that 70 per cent of investment in climate solutions must come from the private sector. That is why the revelation on Wednesday that the Glasgow Financial Alliance for Net-Zero now has 450 members (including HSBC) controlling $130 trillion in assets couldn’t be better timed. Climate-tech couldn’t be, er, cooler right now.
Conversation starter for… Climate tech and climate change fundsFor illustrative purpose only.
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