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Market outlook: what does climate change mean for investors?

Richard Dunbar | October 13, 2020

Time to read: 5 minutes

Richard Dunbar,

We’re all aware of the real and potential future impacts of climate change. But do we realise how it’s affecting our investments? Richard Dunbar, Head of Multi-Asset Research at Aberdeen Standard Investments, gives us his view on  what this huge issue could mean for investors.

There are two sides to every story. Covid-19 has brought suffering to many people, companies and economies. Meanwhile, in lockdown, the environment has been able to breathe. Traffic has reduced, planes been grounded and offices emptied. It’s shown us that we can cut pollution and emissions to levels thought to be impossible.

As more of us return to work and travel, some of these levels will of course increase. But the pictures of pollution-free cities from Venice to Delhi and Beijing, and views unseen for decades, are a startling lesson in the potential for progress. It’s a milestone opportunity to commit to climate-friendly policies.

Governments which are doing so are helping to tackle climate change while also helping their domestic companies gain competitive advantage. In some cases, billions are going to support green solutions. Companies and industries have to respond. And it means investment opportunities are appearing that can help both people and the planet.

To mark this year’s Good Money Week, this month I’m looking at what climate change means for investments – and how investors can help to make a difference.

The grass is greener in Europe

Europe, aiming to be the first climate-neutral continent (and end greenhouse gases by 2050), is leading the way. The European Commission has agreed that 30% of its €750 billion recovery fund is for climate investment. This includes investing major sums in home energy efficiency and green heating, renewable energy, zero-emissions trains and clean cars.

On top of that, they plan to produce one million tonnes of clean hydrogen to replace existing CO₂ emissions, plus install two million electric vehicle charging points. It’s a ‘sit up and take notice’ deal and comes alongside European Union proposals for a border tax on carbon-intensive industrial imports.

How does this affect companies and create investment opportunities? Firstly, it will create significant employment. And European companies leading the way to a greener future may have a competitive advantage over other countries dragging their feet on climate change.

Europe’s green utilities and infrastructure companies performed relatively well during the market falls caused by the pandemic. And while this wasn’t all to do with climate, it’s worthy of note. Their future looks bright as the public, politicians and regulation demand a move to cleaner energy. Forecasts show renewable energy capacity will rise 50% by 2024 versus 2019 levels1. If Europe is to make its carbon neutral target by 2050, over 80% of its electricity will have to come from renewable sources2.

Electrifying change

Europe’s transport sector could also benefit from government financial support. The French government has announced a large support package for automotive development, including over €1 billion to electric vehicles.

The move to electricity is a big deal and one that governments can see makes sense. Electric heat pumps can reduce electricity use for heating by approximately 50%3. And while reports vary on how much electric vehicles (depending on the production processes used) help to cut CO2 emissions, recent4 German studies report significant numbers. One found that electric vehicles have emissions up to 43% lower than diesel vehicles. Another showed that, in all cases examined, electric cars have lower lifetime climate impacts than those with internal combustion engines. Financial initiatives to support the move to electric transport, heating and industry could benefit many companies.

Of course, as they say, “there’s many a slip twixt cup and lip”. Hitting targets may not be straightforward or happen within government timescales. And technology doesn’t always deliver as planned, or within affordable means. Europe’s best-selling electric car currently has prices starting at £21,000. Encouragingly though, there’s real political will to make progress and opportunities for investors to be at the heart of it.

Is it over for oil and gas?

Many analysts are considering what the move to renewables will mean for oil and gas production over the coming years. But the familiar household names aren’t sitting still. The big six oil and gas companies have invested billions of dollars over the past decade in clean energy projects. Not enough, some would say, but more than most – and it’s an investment rate that’s likely to increase.

This was shown most recently with the unveiling of BP’s new ambition and detailed plan to become a net-zero company by 2050. Investors welcomed the news. We expect BP is the first of many that will change their operations to use a cleaner, greener approach, which is critical to all our futures.

Will the US commit to clean energy?

Climate change is also a hot topic in the current US presidential campaign. Joe Biden, the Democratic candidate, heralded plans to link the green agenda to jobs and economic recovery. He has pledged that if elected he’ll take irreversible steps to cut emissions. His plan would include the US re-joining the Paris climate accord, decarbonising US power generation by 2035, electrifying large portions of the country’s transport network and cracking down on pollution.

This would be a painful transition for some companies. But it would provide opportunity for others and spur innovation in green solutions.

The environmental downside to data

I’ve talked a lot about how our lives online during the pandemic have boosted the technology sector and the investment opportunities this has presented. But technology can also affect the environment. One issue attracting attention is the environmental downside of data centres.

Demand for data is nothing short of staggering. Our ways of working, consuming and socialising add to the momentum. Faster, smarter, safer solutions are developing for many things: company data storage on the cloud (instead of costly onsite hardware), video streaming, adoption of smartphones worldwide and even artificial intelligence.

But this digital binge can have serious consequences. According to many observers, data centres’ carbon dioxide emissions will soon overtake those of the airline industry5. More than ever, investors care about how responsible companies are, and how they manage their environmental, social and governance (ESG) impacts. So, will the environmental toll of data centres overshadow their growth prospects?

There are many trade-offs and complexities involved in investing for growth while protecting and supporting the planet. But investors are more focused than ever on this critical goal.

Investing in a new climate

Whether it’s technology, the old stalwarts of oil and gas, or the many new green solutions, climate change is affecting investments. It’s a big, emotive and practical driver as to where investors choose to put their money – and where they don’t.

How a company manages its transition to more climate-friendly operations can affect its value and performance. Those companies acting irresponsibly towards people or the planet risk damaging their reputation and share price. It’s crucial that investors look in detail at how a company manages its ESG behaviours and impacts, and whether it’s exposed to risks.

On the flipside, the move to clean energy will bring many investment opportunities. These are just some areas:

  • new energy-efficient technologies and products
  • electric transport
  • technologies to capture and store carbon
  • infrastructure improvements such as coastal cities protecting rising sea levels
  • water efficiency to restore the supply-demand balance for homes, business and agriculture
  • cooling equipment for homes and offices as temperatures rise

What you may want to consider as an investor

Climate change is just one of many huge sustainability issues the world faces. The United Nations’ (UN) 17 Sustainable Development Goals also cover clean water and sanitation, zero hunger, reduced inequalities and responsible consumption and production.

As investors, we can play a vital role by directing capital to responsible companies and those tackling the sustainability issues we all face.

You may consider whether to:

  • avoid investing in companies that cause harm to people or the environment
  • invest in companies that show good ESG behaviours – from how they treat their employees and local communities to their environmental impacts
  • invest in companies that contribute sustainable solutions to social and environmental problems
  • use investor voting rights to encourage good management of ESG issues such as governance, tax practices and climate change

Find out more

To understand more about the approaches used to invest responsibly, visit standardlife.co.uk. Or download Standard Life’s two-page summary guide Responsible investment: the basics.

Discover the latest insight on the themes driving responsible investing on the Aberdeen Standard Investments website – where you’ll also find a dedicated section on climate change.

 

The information in this article should not be regarded as financial advice. Please remember that the value of investments can go down as well as up and may be worth less than was paid in. Information is based on Aberdeen Standard Investments’ understanding in September 2020.

Sources:

1The International Energy Agency: Renewables 2019, Market analysis and forecast from 2019 to 2024, fuel report – October 2019. You can find out more on iea.org

2 Solar Power Europe: Solar: powering Europe’s carbon-neutral economy, December 2019. Read the full article here.

3US Federal Government Department of Energy: Heat pump systems report; Today’s heat pump can reduce your electricity use for heating by approximately 50% compared to electric resistance heating such as furnaces and baseboard heaters, September 2020. Find the report on energy.gov

4CarbonBrief Clear on Climate report: Factcheck: how electric vehicles help to tackle climate change, May 2019. Read the full report here.

5Total Consumer Power Consumption Forecast, Dr. Anders S.G. Andrae (Huawei) at Nordic Digital Business Summit, Helsinki, Finland, October 5, 2017

 

The links provided to external sites are for general information purposes only. Standard Life accepts no responsibility for information contained in these sites or for these sites  being available at all times.

Richard Dunbar

Head of Multi-Asset Research, Aberdeen Standard Investments

Richard heads up multi-asset research at Aberdeen Standard Investments. In this role, he manages the cross-asset research which is used when building and managing multi-asset portfolios. He and his team also produce the Global Outlook seri […]

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Richard Dunbar

Head of Multi-Asset Research, Aberdeen Standard Investments

Richard heads up multi-asset research at Aberdeen Standard Investments. In this role, he manages the cross-asset research which is used when building and managing multi-asset portfolios. He and his team also produce the Global Outlook seri […]

Read Richard's blogs
Richard Dunbar,

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