Lucian Peppelenbos

Investors are now preparing to adapt to the consequences of global warming that may be irreversible, alongside trying to stop it getting any worse. A new temperature record of 1.55 °C ± 0.13 °C above 1850’s levels was set in 2024, according to the World Meteorological Organisation. Underlying global warming, which is measured over decades, is thought to be about 1.3 °C.

As emissions continue to rise, and as disillusionment grows with governments’ commitment to net- zero initiatives, the fifth annual Robeco Global Climate Investing survey showed a growing proportion of investors think the Paris Agreement is no longer achievable. The Paris Agreement signed in 2015 seeks to limit global warming to 2 °C above pre-industrial levels by 2100, and ideally to contain it to 1.5 °C.

The number of investors who believe that 2 °C is not achievable rose to 44%, up from 41% last year and from 30% in 2023, while those thinking it can still be done rose slightly to 31% from 30%. A quarter of all investors remain unsure.

Meanwhile, only 16% of investors think an orderly transition toward net zero is the most likely outcome in the next decade, while almost half (49%) expect it to be ‘too little, too late’. Some 11% now expect to see a ‘hot house world’ outcome, with very little action taken to meet climate goals and avert physical risks, slightly up from 8% last year.

Accepting the inevitable?

Is it therefore time to recognise that it would be beneficial to invest in measures that can deal with the consequences of climate change, alongside the existing solutions for mitigating it? Almost half of all investors believe that it is.

Some 49% said climate adaptation will become an increasingly attractive growth theme for equity investments over the next three to five years, rising to 62% for European investors. One-third said they are actively seeking to increase exposure to companies providing these kinds of solutions.

Climate adaptation methods range from rebuilding sea defences and making air purification equipment and refrigerants, to new drugs that combat the spread of known and emerging diseases that warming temperatures and extreme weather events may exacerbate. Climate mitigation investment is mainly focused on decarbonization solutions, led by renewable energy and electrification.

But there remain headwinds, as 58% said there was uncertainty about whether adaptation solutions would generate competitive returns, while almost half blamed a lack of suitable investment products from asset managers (47%), or that it was hard to identify credible climate adaptation companies (42%).

Pursuing returns

In contrast, climate mitigation solutions are already well established, with proven returns from electric vehicles and renewable energy infrastructure such as wind turbines, solar panels and hydro-electric dams. Nascent technologies such as battery power and carbon capture and storage are rapidly showing they can provide revenue streams as well.

The pursuit of such returns in climate mitigation is a strong motivator for 77% of global investors, and this is even higher among North American investors (86%). Other motivating factors include achieving a real-world impact in tackling climate change (43%) and mitigating climate risk in portfolios (42%). Subsequently, over a quarter (27%) said they have been more focused on climate mitigation solutions than on adaptation.

Almost one-third (31%) expect to increase tech investments in new/emerging batteries, carbon capture and storage in the next two years, among other types of climate mitigation solutions such as waste reduction (27%), low-emission cement (18%) and green steel (17%). The latter two involve increasing use of electric-arc furnaces rather than coal-powered blast furnaces.

Priorities over the next two years show that electricity grid modernation is the most favoured investment (39%), followed by renewable energy (34%), with lower interest in battery technology (31%) and electric vehicles (28%). Interest in currently nascent technologies like low-emission concrete (18%) and green steel (17%) remain fairly low over the two-year horizon.

“Investors are already active in established areas such as renewable energy and clean power, electric vehicles and electricity grid modernisation,” says Lucian Peppelenbos, Climate and Biodiversity strategist at Robeco. “The next stage of the transition is about scaling investments in climate adaptation and the next-generation mitigation solutions such as hydrogen and low-carbon steel and cement.”

“Investors are on the lookout for these opportunities, but are cautious given the policy uncertainties. These type of investments require clear and consistent long-term policy frameworks. Rolling back the Green Deal or the US Inflation Reduction Act (IRA) does not help in that respect.”

Investment vehicles

In terms of how to invest in climate mitigation solutions, 44% of global investors said they used public market funds, 30% preferred private market funds, and 20% were making direct investments in nascent climate technology.

Robeco manages a range of investment strategies focused mainly on climate mitigation, smart energy solutions, and the pathways to net zero. All of our capabilities can be seen here:

By Lucian Peppelenbos, Climate and Biodiversity Strategist

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Lucian Peppelenbos

A majority (56%) of global investors believe that President Donald Trump’s pro-fossil fuels and anti-clean energy agenda will hamper the net-zero transition, but that momentum will recover once US leadership changes. This is one of the key findings of Robeco’s 5th Global Climate Investing Survey of 300 investors.

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Lucian Peppelenbos

The COP27 climate summit delivered a few wins, but was disappointing overall. How do we keep on course for net zero in the absence of global cooperation? In our view, the net-zero transition will continue to gain traction, because paradoxically it appears that the lack of global cooperation is helping accelerate the energy transition.

The COP27 climate summit took place as countries around the world face crises involving energy and food, inflation, war, and debt stress. With two of the critical parties to successful negotiations – the US and China –not on good speaking terms, the EU’s leadership has also lost credibility due to its return to coal and massively expanded subsidies to fossil fuels. All this in a year in which climate change continues to have a deep impact across the globe, triggering famine in East Africa, industry lockdowns in China and Europe, and making half a million people homeless from floods in Pakistan.

Two key issues

In this context, COP27 focused on two key issues. The first is climate finance. For years already, industrialised countries have broken their promises to support the Global South in carrying the costs of adaptation and mitigation. This year’s summit also addressed loss and damage: rich economies are called upon to take responsibility over the damage that their historical emissions are causing in vulnerable countries. Here, the summit delivered a historic result – the creation of a loss and damage fund – though we believe it will still take much negotiation before it is operational. In the short term, more climate finance may become available from the multilateral financial institutions that are to be reformed as per agreement in Sharm el-Sheikh.

The summit’s second focus was to advance the implementation of the Paris Agreement. Here, it seems we should be grateful that the lack of progress wasn’t an explicit step backwards. The goal of 1.5 °C barely survived the negotiations, and no agreement was reached on the phasing-down of unabated fossil fuels. In sum, a painful standstill.

A glass half full

So, after this COP, where are we now on the road to net zero by 2050? At Robeco, we see the glass as being half full. Certainly, the summit did not yield much in terms of concrete solutions, while global emissions are still on the rise and climate policies still fall short. The summit leaves us heading for 2.5 °C of global warming.

But five years ago, we were heading for 4 °C of global warming. So, there has been progress: a change of course. In this sense, the ratcheting mechanism of the Paris Agreement, in which climate ambitions are periodically beefed up, is doing its job. The proof of the pudding will be next year’s summit in Dubai, when countries will submit new plans based on the global stock-taking of progress so far. As climate policy expands, such as in the US this year, exponential change could be unleashed, as market forces and human ingenuity seek to create value from the transition to net zero.

Take the transition away from unabated fossil fuels. It advanced this year in the midst of the energy crisis. Despite the massive return to coal-fired power in Europe, the International Energy Agency (IEA) is forecasting a mere 1% increase in emissions from energy this year – much less than the increase in 2021. This is because the deployment of renewable energy and electric vehicles has strongly expanded globally. Hence, hidden in the usual statistics on increased global emissions, we can see an accelerated switch to cleaner energy.

Fast-forwarding fossil fuel use

In its latest World Energy Outlook, the IEA concludes that peak fossil fuel usage has been fast-forwarded to before 2030, as countries seek energy security through investments in renewables and energy efficiency. Such policies have been adopted this year across top emitters including the US, EU, India, Australia, South Korea, Japan and China. In particular, the US’s Inflation Reduction Act, with its USD 369 billion support package, will accelerate technological innovation as it enables US-based companies to better compete with Chinese suppliers of renewable technologies.

We see these milestones adding up to a tipping point, where the net-zero transition gains so much traction that it will continue to unfold and gain pace. While keeping global warming limited to 1.5 °C would be an achievement beyond any historical benchmark, innovation and market forces tend to be exponential, not linear, so who knows?

Investing in the transition

What does this mean for investors like Robeco? We are keeping course on net zero by 2050 and continuing to invest in the transition. Our portfolio decarbonisation currently stands at -43% against our baseline year-end in 2019. We started the year at -35%, which means that during 2022 we continued to decarbonise, despite the re-carbonisation of the market triggered by the increased benchmark weight of the Energy sector.

We should note, however, that such figures provide only a partial picture. Portfolio decarbonisation can be the result of one or a few individual issuers entering or exiting our portfolios. It is equally important to look at the companies themselves and how well they are managing their transition. This is measured by our climate traffic light. It assesses how well the top 250 emitters in our investment universe are aligning with the goals of the Paris Agreement.

In our analysis from this year, we see robust transition strategies amongst 27% of companies, while 21% are clearly working on it, and 52% are not doing enough. The latter group is where we focus our engagement and where we may vote against management.

Transition in the real economy

So far, our decarbonisation performance has largely been the result of the investment strategy of our funds. Our investment teams have picked stocks that they assess as creating value, and while doing so have remained comfortably within their carbon targets. This can only continue if the real economy transitions to net zero. This requires climate action across all sectors of the economy, spearheaded by ambitious policy and regulation.

Our role as investors is to engage with investee companies and policy makers, and to direct capital towards companies that are developing climate solutions and away from assets which are at risk of becoming stranded.

The good news is that, in the middle of rising global emissions, political antagonism and yet another disappointing climate summit, we see strong signals that the transition in the market is clearly underway.

By Lucian Peppelenbos, climate strategist

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