CPD: Climate – the $50 trillion investment opportunity

Decarbonisation and the investment opportunity it presents will enable corporates and governments achieve net zero targets over the coming years.

As the world continues to grapple with the urgent need to combat climate change, the transition to a low-carbon economy has never been more critical. Governments, corporations and individuals are increasingly recognising the importance of achieving net zero emissions to mitigate the adverse impacts of global warming.

Central to this transition are the companies that specialise in decarbonisation technologies and solutions. Investing in these companies not only aligns with the global imperative to reduce carbon footprints but also presents a compelling investment opportunity.

The case for climate investing

One way to contribute to net zero goals is to invest in those companies at the forefront of decarbonising the planet. These are companies that actively contribute to the reduction of greenhouse gas emissions and support the transition to cleaner, more sustainable and efficient energy sources, the circular economy and clean transport. Investing in them not only helps to combat climate change but also offers potential financial returns. It is estimated that the cost to decarbonise the planet by 2050 presents a US$50-100 trillion investment opportunity. Figure one illustrates how that money is likely to be allocated and the sectors and sub-sectors in which investment opportunities will arise.

This translates to $50-100 trillion of revenues to those companies that are the enablers of decarbonisation and, as illustrated in figure one, it’s a diverse opportunity. While most people think of electric vehicles or solar energy, it’s so much more: energy efficiency, renewable energy, upgrades to transmission and the grid, battery technology, waste management and the circular economy.

In our previous article we discussed the S-curve, which tracks how a company or industry grows over its lifecycle. There comes a point in every lifecycle when growth inflects, driven by a structural change. It is the tailwind created by the structural change that allows a company to deliver and create wealth. Climate is at the beginning of its S-curve and there are three tailwinds converging to drive the change (figure two).

The tailwinds converging to support the move to net zero 2050 are: country targets, corporate targets and investor targets. As a global problem, climate requires a global solution. Among those countries that have committed to net zero, global GDP with net zero commitments rose from 16 percent in 2019 to over 92 percent in 2024. Every large global economy has made the commitment to decarbonise.

The second tailwind comes from corporates making the move to net zero. In some cases, independent of government, corporates are setting their own science based targets for decarbonisation, which are aligned with warming capped at 1.5 degrees. The number of companies putting out targets aligned to the science-based targets initiative is growing exponentially. That is supported by regulators that require disclosure of these targets.

Microsoft is a good example of a corporate with its own science backed targets; the company is aiming for net zero by 2030 and, once achieved, it intends to ‘give the carbon back’ that the company generated over the last 50 years. Given that Microsoft is aggressively building energy intensive data centres, this is an enormous undertaking. Microsoft has a contract with nuclear power generator Constellation Energy. The firm pays a premium for this renewable energy to power their data centres so it can advertise that fact to customers.

The third tailwind comes from investors. These include fund managers, pension and superannuation funds, asset consultants and investment groups, each which engage in stewardship. As they meet with companies, questions are asked about climate change and what each company is doing to mitigate their impact and attain net zero targets.

In addition, investment groups such as Climate Action 100 – the largest collaborative investor initiative – are specifically targeting the largest emitters and speaking to them on a regular basis about climate change and actions to mitigate it. Investment managers around the globe are positioning their portfolios to net zero and then collaboratively engaging with the companies they invest in around net zero and other related issues. This also feeds into meeting ESG requirements for portfolios.

The convergence of these tailwinds will continue to drive the S-curve of numerous companies that support the decarbonisation targets to achieve net zero emissions by 2050.

The demand for clean energy

The global push to decarbonise the planet and achieve net zero emission targets by 2050 is significantly increasing demand for clean energy solutions. As countries and corporations commit to reducing their carbon footprints, renewable energy sources such as solar, wind, nuclear and hydropower are becoming crucial. This transition not only addresses the pressing issue of climate change but also opens substantial investment opportunities.

The clean energy sector is poised for robust growth, attracting investments in innovative technologies, infrastructure development and sustainable practices. Investors are increasingly viewing renewable energy projects as not only environmentally responsible but also financially lucrative, driven by supportive government policies, technological advancements and growing public awareness of environmental sustainability. This confluence of factors creates a dynamic and promising landscape for investment in the clean energy market.

As demand for power rises, traditional baseload coal and gas-fired power sources are being decommissioned and the grid is transitioning to renewable energy sources. This transition is leading to growth in the order backlog for utilities and grid equipment, and increased demand from the industrial companies that provide these solutions.

There are three main drivers supporting the global demand for clean energy: data centre growth, electrification (including electric vehicles and electric heat pumps) and reshoring (to US from China) (figure three).

While clean energy is important, so is energy efficiency. Taking the example of data centres, growth in the number and complexity of these centres demands both clean energy and energy efficiency (figure four).

Data centres have substantial energy requirements due to their continuous operation and the need to maintain optimal performance. These facilities house servers, storage devices and networking equipment that run 24 hours a day, seven days a week, and consumes substantial volumes of electricity. The primary energy demands come from powering the IT equipment, which includes CPUs, memory and storage systems that process and store vast amounts of data. Additionally, cooling systems are essential to dissipate the heat generated by this equipment and this requires significant energy to maintain temperatures within safe operating limits.

The energy intensity of data centres is significant; data centres’ share of emissions is greater than aviation at 2.5 percent versus 2.1 percent. This is driving innovation in energy-efficient technologies, including advanced cooling methods, more efficient server designs and the integration of renewable energy sources. As data usage and digital services continue to grow, the challenge of managing energy consumption while minimising environmental impact becomes increasingly critical.

The companies that provide renewable energy, insulation and cooling systems, as well as power architecture are those that can provide opportunities for investors to benefit from this transition.

Potential impact of a Trump presidency on climate

It is an election year in the United States and it’s no secret that Presidential Nominee Donald Trump is a climate sceptic. The biggest risk in respect to climate is that he rolls back aspects of the Inflation Reduction Act, which was introduced in 2022. It is wide-ranging legislation focused on lowering carbon emissions and it was established to provide new US$400 billion plus of policy support over at least the next 10 years.

The combined investments put the US on a path to an approximate 40 percent reduction in emissions by 2030 and represents the single biggest climate investment in US history^[1]. Some key items included in the Act include:

• a methane penalty per metric ton of methane emissions
• carbon capture and storage tax credit
• $30bn for solar panels, wind turbines, batteries, geothermal plants and advanced nuclear reactors, including tax credits over 10 years
• $27bn for ‘green bank’ to support clean energy projects particularly in disadvantaged communities
• $20bn to cut emissions in the agriculture sector
• $9bn in rebates for Americans buying and retrofitting homes with energy-efficient and electric appliances
• $60bn to support low-income communities
• $10bn in investment tax credits to build manufacturing facilities that make electric vehicles and renewable energy technologies
• tax credits for the purchase of new clean vehicles.

The Act provides a decade of regulatory certainty in the world’s largest economy and significantly supports those enablers, the companies that will help the decarbonisation of the planet. It has also spurred action from the EU, which had been the leader in this space for decades, which also creates investment opportunities.

On the positive side, Trump is talking up the prospect of corporate tax cuts, which would be positive for these (and all) companies. His narrative also suggests the likelihood of his government ramping up the trade war with China, which would make it easier for US companies to compete against Chinese imports. This would potentially benefit some of the US climate companies.

On the downside, he’s mentioned reducing the power of the Environmental Protection Agency, which could impact parts of the circular economy, such as waste management, and the companies that operate in this sector. He is not a supporter of electric vehicles or subsidising consumers to purchase them. Finally, Trump is an active supporter of fossil fuels, which may see him remove or reduce support for renewable energy sources.

However, a considerable number of renewable energy projects have been established in rural areas, which are generally Republican voting zones. As it would not be in the interests of the relevant Republican senators in those areas to back out of these projects, it’s expected that they will be supported. Ultimately, decarbonisation will happen regardless of a Trump presidency.

The role of active management in climate investing

While a $50-100 trillion investment in decarbonisation will benefit many companies, investing in climate requires discerning managers to select those companies most likely to benefit, those that will have the most significant S-curve and deliver solid earnings growth over time.

A passive approach to climate investment will often invest in those companies that comprise a specific index, such as the S&P 500® ESG Index, the Russell 1000 Climate Index or the FTSE All Word ex CW Climate Index. As is the case with any passive fund managed to an index, investors will get exposure to all companies in that index – the winners, the losers and the indifferent performers.

It also sees investor money in sectors that may come in and out of favour with the market because of a range of exogenous factors. An example of this is the electric vehicle sector at the moment – as widely reported in the media, Chinese EV producers are flooding world markets with cheap EVs, causing Telsa to cut prices in its major markets (figure five).

The dynamic and evolving nature of the climate sector and sub-sectors underpins the importance of active management. Unlike passive investment strategies, active management allows investment managers to make informed decisions based on real time data, emerging trends and regulatory changes that impact the sector.

Active managers can also navigate the risks associated with climate investments: policy shifts, technological advancements and volatile markets. By actively monitoring and adjusting portfolios, investment managers can capitalise on growth opportunities and mitigate potential risks. In a sector where change is constant, active management provides the agility and insight necessary to drive successful and impactful climate investments.

By investing in the enablers of decarbonisation, active managers can position funds to take advantage of the growth opportunities and the myriad of tailwinds over the coming years.

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Notes:
[1] https://www.munropartners.com.au/news/a-letter-on-the-inflation-reduction-act

The information included in this article is provided for informational purposes only and is general advice only. It does not take into account an investor’s own objectives. The information contained in this article reflects, as of the date of publication, the current opinion of Munro Partners and is subject to change without notice. Sources for the material contained in this article are deemed reliable but cannot be guaranteed. We do not represent that this information is accurate and complete, and it should not be relied upon as such. Any opinions expressed in this material reflect our judgment at this date, are subject to change and should not be relied upon as the basis of your investment decisions. All reasonable care has been taken in producing the information set out in this article however subsequent changes in circumstances may occur at any time and may impact on the accuracy of the information. Neither Munro Partners, GSFM Pty Ltd, their related bodies nor associates gives any warranty nor makes any representation nor accepts responsibility for the accuracy or completeness of the information contained in this article.