The summer of 2021 — with its record-breaking heatwaves, devastating floods and wildfires — has vividly illustrated the realities of climate change. This season has served as an uncomfortable reminder that the climate crisis has still barely been addressed, and it is clear that much, much more needs to be done as a global economy. This also means that tackling this problem presents us with significant growth opportunities.
The 16th edition of the World Economic Forum’s Global Risks Report is another reminder that failure to take action on climate change is the biggest risk we face as a species. In fact, it is the top risk not just by impact but also by likelihood.
The recently released Sixth Assessment Report of the UN Intergovernmental Panel on Climate Change (IPCC) confirms, with science, what we have all feared to be true — that humanity has had an “unequivocal” influence on global warming and that widespread and rapid changes to the climate system have already begun. Every 0.1 degree of warming matters and unless urgent action is taken to decarbonise the global economy, global warming of 1.5°C and even 2°C (vs preindustrial levels) will be exceeded this century.
The findings of both reports are alarming in themselves, while also underscoring that we need to act, and quickly.
Five years after the Paris Agreement (COP21), in which political leaders pledged nationally determined contributions (NDCs) to curb greenhouse gas emissions, many of those NDCs are up for renewal with leaders needing to pledge ahead of COP26. The UN Interim Synthesis Report released in February 2021 states that many regions’ pledges and NDCs have not been ambitious enough, potentially yielding the equivalent of a mere 0.5% reduction in emissions from 2010 to 2030, when this figure should be closer to 45%. So as we head towards COP26, we hope to see more positive news and announcements from many countries about the world.
Supply chains
Due to the scale of the immense change in how we function as economies we have a rare opportunity to invest to support the step change needed. The latest International Energy Agency (IEA) report highlights that a fourfold increase in wind, solar and renewable energy capacity is required by 2030 from where we are now. It also states that by 2030 the number of electric cars on the road needs to increase by 18 times and the annual battery production for electric vehicles by 41 times.
Significantly more capital must thus be spent in these areas, and the focus should shift to sustainable supply chains. The report further states that more than $4-trillion has to be spent by 2030 to have any hope of getting to net zero — a huge increase from the just less than $1-trillion that has been spent over the last few years.
At Ninety One, we believe this provides an exciting, long-term, potentially once-in-a-lifetime structural growth opportunity for investors. The IEA report focuses only on the energy system, which accounts for about two-thirds of global carbon emissions. There are additional areas that should be prioritised, including the future of food.
The global population is expected to increase to 9-billion by 2050. To meet the demand associated with this number of people, food production will need to increase by 70%. It has to be achieved in a carbon-efficient way, with less land and in increasingly challenging environmental conditions. Almost 20% of global carbon emissions are derived from “growing things” for consumption — whether that is plants or animals — and it is becoming clear that massive change in agriculture, livestock and the supply chain is urgently needed to decarbonise this sector worldwide.
Crop yields
One area in which we have carried out significant research is the decarbonisation of meat. We see significant potential for growth in plant- and cellular-based meat because they have significantly lower carbon emissions relative to what they are replacing in the meat supply chain. We expect this market to potentially grow from tens of billions of dollars currently to more than $300bn by 2035.
Other opportunities include the natural-based products and enzymes used in plant- and cellular-based meat alternatives; and biochemicals and bio surfactants. Producers of these are helping to replace petrochemicals in many different industries, for example the use of natural products to improve crop yields and resource efficiency when growing plants for consumption.
It is no longer responsible or even viable to maintain current forms of agriculture, infrastructure, urban planning, land use and economic development. Global movements on climate change have put pressure on leaders to take action and tackle the climate crisis like never before. What is decided by their pledges before COP26 will be key to how effective countries are at tackling the climate crisis in the next 10 years.
It is our sincere hope that the findings of recent reports will galvanise far quicker political action, and leave the investment industry in no doubt that understanding how the flow of capital can help solve the climate crisis will be the single most important action of our generation. As investors, we are ready and able to provide the finance required to enable the transition to net zero, while creating opportunities for sustainable companies and investors alike.
• Baker is co-portfolio manager for Ninety One Global Environment.
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