While there is still much to be resolved in terms of implementation, the Paris Agreement signaled a clear global desire to move toward renewable energy and energy efficiency. We expect that the Paris Agreement will translate into country-level policy changes aimed at addressing carbon emissions and encouraging mitigation strategies, and we expect an increase in policies and market environments that favor more carbon-friendly businesses. While timing and scope of efforts may be uneven, we anticipate policymakers will produce clearer road maps and emission-trading schemes in the future that we believe will have investment implications for carbon-intensive industries. Moreover, despite the absence of universal policies, more companies are seeing the low-carbon transition as a competitive opportunity. Businesses that invest in resource efficiency across the supply chain will likely gain competitive advantages as more local and regional governments introduce various penalties and incentives, including carbon pricing. A proactive strategy should benefit a company's bottom line and reduce the cost of adhering to future regulation.
Climate change implications are not just long-term considerations. There are also many questions regarding current and near-term effects that need to be addressed, such as: Which coastal real estate is exposed to fat-tail climate change risks? Is disaster insurance mispriced? Which municipal bonds hold climate change-related risks? What is the impact of extreme temperatures and weather volatility on various commodities and supply chains?
Our portfolio managers and the ESG Research team see a range of potential investment opportunities emerging as efforts to address climate change continue to advance.
- Renewables: With renewable energy becoming mainstream, the day is quickly approaching when wind and solar may no longer be thought of as "alternative" power sources. Industry watchers expect that more than 50% of incremental electricity capacity will come from renewable sources over the next five years. While the shift presents potential opportunities for renewable energy providers, it may pose challenges for incumbent power generators.
- Energy storage: The current inability to store electricity causes significant inefficiency on power grids and heating and cooling systems. Large-scale energy storage has the potential to fundamentally alter the energy sector and generate value. Utility-scale batteries could enable wind farms and solar arrays to store electricity when demand and costs are low, and dispatch it when demand and costs rise.
- Electrification: Across the transportation spectrum, vehicles and their supporting infrastructure are transitioning from fossil-fuel combustion to electric power. The worldwide shift of personal and commercial vehicles, railways, and cargo ships to electric presents a significant climate-risk mitigation opportunity, as mobile sources produce 14% of global emissions. In anticipation of rising demand, vehicle manufacturers have committed significant capital to the research and development of electric vehicles. Ultimately, however, the overall mitigation effect of low-carbon transport depends as well on changes in the global fuel mix and improved battery capacity.
- Energy efficiency: Companies in every sector are seeking ways to reduce energy usage and the associated operational costs. Energy efficiency solutions such as light-emitting diode (LED) lighting and advanced heating and cooling systems have gained commercial traction as a result. The manufacturers of these technologies that help lower customers' carbon footprint along with their energy bills should be well positioned.
- Infrastructure: Even if the guidelines set out in the Paris Agreement are met, the world will still need to make additional investments in infrastructure design to adapt to a changing climate. Local governments will likely require flood-management installations including floodwalls, bioswales, and permeable pavements to help minimize the effects of flooding following extreme precipitation events. A warmer planet is already increasing water-scarcity concerns. By 2030 global water demand is set to surpass supply by 40%, yet countries have underinvested in water management for decades. New infrastructure, including pipelines, plumbing, meters, and sanitization facilities, should become critically important in many areas of the world. Innovative water management solutions can also help reduce water consumption, ultimately lessening the strain on existing water infrastructure.
- Real estate: How and where structures are built are two key considerations for climate-aware investors. Commercial and residential real estate constitutes approximately 40% of energy consumption. New methods and technologies used in building construction and system design are lowering the carbon footprint. Some studies have shown that "green" buildings that offer better air and light quality help boost worker productivity. Climate change will also impact the cost of real estate in places that are susceptible to volatile weather patterns. We expect that higher insurance premiums and infrastructure improvements needed to protect communities from climate change will alter the building-cost paradigm and may lead to new population migration patterns.
- Green bonds: Finally, the rise of green bonds has the potential to serve as an opportunity for investors to finance the transition to a lower-carbon economy. The proceeds from the green bond market are earmarked for environmentally friendly projects, such as renewable energy, climate adaptation infrastructure, and energy efficiency. Experts have estimated that it will take US$93 trillion worth of investments to meet the targets for addressing climate change. Green bonds are one way for private pools of capital to contribute to the financing of this transition. We believe this is a growing market with potential to serve as a meaningful tool to help reach the goals of the Paris Agreement.
As we assess potential climate risks to our operations, examples of climate-related risks identified include disruption to our power supply due to severe storms and flood risks due to the combination of severe weather events and rising sea levels. Improving the energy efficiency of our facilities, including our data centers, is an example of an opportunity we have identified.
Please refer to SG 13 and SG 13 CC for additional detail.