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Three investment themes to support climate protection

October 31, 2022

reading time: 5 minutes

by Thomas Hassl (LGT)

In the spirit of COP 27: Three investment themes to support climate protection

No matter what the outcome of this year’s COP 27 climate change conference, thematic investments are one way that investors can help counteract climate change.

High-ranking politicians, diplomats and representatives from the private sector and various NGOs will soon be gathering at COP 27 in Sharm el-Sheikh, Egypt, to discuss concrete measures to fight climate change. However, the mixed results achieved in the past have not exactly boosted confidence in the ability of the participating nations to come up with solutions. Not only that, but there are concerns that this year’s conference could be overshadowed by geopolitical tensions.

Time is running out

According to the Mercator Research Institute on Global Commons and Climate Change CO2 clock, humankind has just over two decades to become climate neutral. After that, the institute’s experts say it will no longer be possible to prevent a temperature increase of more than 1.5° Celsius compared to pre-industrial levels.

Beim Übergang hin zu einer klimaneutralen Gesellschaft eröffnen sich Anlegerinnen und Anlegern neue Chancen (Photo: .
Beim Übergang hin zu einer klimaneutralen Gesellschaft eröffnen sich Anlegerinnen und Anlegern neue Chancen (Photo © Keystone / Christian Beutler).

While governments struggle to make further progress, private sector initiatives can make an additional and substantial contribution to the fight against climate change. At the same time, the transition to a climate-neutral society also offers new opportunities for investors, particularly in the areas of renewable energy, mobility and energy efficiency.

Countering mountains of waste: circular economy as an example of sustainable thematic investing.

Thematic investing with a focus on sustainability

One way that investors can address environmental and social challenges is by investing thematically. How exactly a thematic investment strategy is implemented differs from investor to investor. However, the general approach is the same: specialists use their expertise and experience to identify attractive investment opportunities in areas where the private sector plays an important role in addressing social and environmental challenges. Possible themes include climate protection, the circular economy, or health and well-being

Learn more on thematic investing

Renewable energy instead of fossil fuels

To reach net zero emissions by 2050, we must succeed in reliably meeting the demand for energy with renewable energy in the coming decades. This means making changes to how we generate electricity, because according to the International Energy Agency (IEA), electricity generation still accounts for around 40 percent of energy-related greenhouse gas emissions.

In areas where electrification is unattractive for technological or economic reasons, low-emission fuels can be used to ensure that fewer harmful greenhouse gases are emitted. Let’s take a closer look at these two trends:

Electrification – using electricity from renewable sources

If progress is to be made on decarbonizing carbon-intensive industries, there must be a shift away from fossil energy and towards electricity from renewable sources.
Decarbonizing carbon-intensive industries: a shift away from fossil energy and towards electricity from renewable sources (© Keystone / DPA / Federico Gambarini).

If progress is to be made on decarbonizing carbon-intensive industries, there must be a shift away from fossil energy and towards electricity from renewable sources. According to calculations by the IEA, in order to achieve net-zero emissions by 2050, the renewable share of total energy generation must reach 60 percent by 2030 and by 2050, it must reach just under 90 percent.

Investors who are looking to benefit from this trend can invest in developers and producers of wind power or solar energy plants. Also not to be overlooked are the energy companies that operate these plants and that are manufacturing smart grid networks, as they are also likely to experience strong growth.

Low-emission fuels – an alternative for improving the carbon footprint?

In certain sectors, electricity is not an option (Photo © Keystone / DPA / Ennio Leanza).
In certain sectors, electricity is not an option (Photo © Keystone / DPA / Ennio Leanza).

In certain sectors, electricity is not an option due to technological and economic factors. For example, it is difficult to electrify the commercial aircrafts commonly used today because the batteries are too heavy, and their capacity is too low. In this case, low-emission fuels can be used as an alternative to reduce CO2 emissions.

Ammonia is one such fuel, and, according to experts, it could be especially well-suited for ships. The advantage of this still rather little-known fuel is that, compared to hydrogen, ammonia is relatively easy to handle. And it does not release carbon dioxide when it burns.

However, hydrogen currently gets much more attention than ammonia as the fuel of the future. It is considered a very promising alternative for transport, industrial production processes and energy storage. And its potential is impressive: according to the IEA, hydrogen, which accounts for almost zero percent of the world’s energy supply today, could account for 13 percent of that supply by 2050. According to some calculations, this ascent could generate annual sales of 2.5 trillion US dollars.

But the shift towards the widespread use of hydrogen is progressing gradually. This is because until so-called “green hydrogen”, which is hydrogen produced using only water and renewable energy, is sufficiently available, hydrogen will continue to be produced using fossil fuels. This so-called “blue hydrogen” is produced from natural gas. To make it as climate friendly as possible, part of the carbon released during its production is captured and then used or stored. According to some experts, blue hydrogen will play an important role in the energy transition.

Hydrogen truck: the shift towards the widespread use of hydrogen is progressing gradually (Photo © Keystone / DPA / Patrick Pleul).
Hydrogen truck: the shift towards the widespread use of hydrogen is progressing gradually (Photo © Keystone / DPA / Patrick Pleul).

Depending on a person’s investment objectives, they might consider investments in companies that make electrolyzers for green hydrogen, or in carbon sequestration technologies. The IEA also believes that biofuels will play an important role on the road to net zero. By 2050, they could account for 17 percent of the global energy supply. Investors with a focus on climate protection could therefore also consider investing in that segment.

Mobility must become climate neutral

Transportbereich: wichtiger Hebel zur Reduktion der CO2-Emissionen.
Transportation sector: important lever for reducing CO2 emissions (Photo © laif  / Jochen Eckel / SZ Photo).

Transportation is another area where CO2 emissions can still be substantially reduced. It currently accounts for 24 percent of anthropogenic CO2 emissions; and the need for mobility will increase in the coming decades as the world’s population grows and flourishes.

Here, like in the energy sector, efforts to electrify and use low-emission fuels must go hand in hand in order to achieve the net-zero targets by 2050. According to the IEA, two and three-wheelers should be electrified first, followed by the end of the 2040s by cars, delivery trucks and trains. This scenario would benefit certain automakers as well as semiconductor and battery manufacturers.

Unlike for the above-mentioned vehicles, electric vehicle batteries are rarely a viable option for heavy commercial vehicles, ships or aircraft. Decarbonization efforts for such modes of transport therefore focus on low-emission fuels such as biofuel and hydrogen, and on increasing efficiency through technical improvements and by optimizing operations.

But there are a number of other possibilities for fighting mobility-related climate change, for example, by helping people to be mobile without a car. An increase in the number of people using public transport, bicycles and e-bikes would make a very tangible contribution to achieving climate targets. Service providers in the shared mobility sector would stand to benefit from this trend, as would bicycle and railway vehicle manufacturers.

Fighting climate change by increasing energy efficiency

Reduzierung von Treibhausgasemissionen: Gebäude haben oft grosses Potential.
Thermal insulation to reduce greenhouse gas emissions: Buildings often have great potential (Photo © laif / Heiko Specht).

With climate change looming large on the horizon, it is now more important than ever that we find smart solutions to reduce energy demand and decouple economic growth from rising energy demand. In one of its scenarios, the IEA estimates that the global economy will grow by around 40 percent by 2030 compared to today, while at the same time consuming seven percent less energy. Experts are convinced that this ambitious goal can be achieved through a combination of energy-saving behavior and improved energy efficiency. They see strong potential for greater energy efficiency in the areas of manufacturing, buildings and machinery.

Accounting for 33 percent of total greenhouse gas emissions, buildings are indeed an area that can have a significant impact in the fight against climate change. Their energy consumption can be reduced substantially through renovations and the use of smart technologies. However, rising prosperity poses challenges for building-related climate protection measures, as it gives rise to larger living spaces and greater use of air conditioning as well as electrical household appliances. Solutions from building and lighting technology companies are therefore just as important in addressing the potential in this area as products made with specialty chemicals that reduce the energy consumption of buildings during their lifecycle.

Energieeffizienz: Die Industrie ist hier bereits einen Schritt weiter.
Energy efficiency: Manufacturing is already one step ahead (Photo © Keystone / Gaetan Bally).

Manufacturing is already one step ahead here and thus has less potential to further improve energy efficiency. However, with smart energy management, further electrification and by integrating and automating processes, even this sector can further reduce its energy consumption. For example, if the eight billion electric motors in the EU all operated according to modern efficiency standards, the energy savings would be enormous.

Conclusion

This article explores just some of the many ways that investors can help in the fight against climate change. However, before making an investment decision, they should ensure they have all the relevant information: today’s investment environment is challenging, and with the war in Ukraine, high inflation and disruptions to global supply chains, investors must also be selective when making thematic investments that support the environment or society.

Header Visual © laif /Gordon Welters. Photo in Textbox © laif / Photo Escapes / Robert Harding.

Would you like to learn more about thematic investments?

We regularly provide our clients with detailed information and specific investment proposals as part of our Investment Ideas. Please contact your relationship manager to learn more.

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