Investing in a low-carbon economy

While the coronavirus has taken a huge human toll, lockdown seemed at least to have a silver lining for the world: as the pandemic shut down countries around the globe, Mother Earth began to once again thrive without humans.

Without the usual gondola traffic, water in Venice became the clearest it has been for decades. So clean, even dolphins were spotted swimming in the canals. Air pollution in China’s big cities – and indeed those in other countries – plunged, as factories were closed, and travel slowed. Sheep and goats explored town centres and lions slept in roads.

These effects were temporary, but the pandemic’s unintended climate impact offers a glimpse into how countries are equipped to handle the climate change crisis.

‘Today more than ever before, life must be characterised by a sense of universal responsibility, not only nation to nation and human to human, but also human to other forms of life.’ — Dalai Lama

What is decarbonisation?

Decarbonisation, or a low-carbon economy, is an economy that is based around low carbon power sources that have a minimal output of CO2. As part of the move towards this, the Paris Agreement (2015) calls for governments to keep the global temperature rise as close to 1.5°C as possible, which means we need to significantly limit the amount of carbon dioxide (CO2) and other greenhouse gases we put into the atmosphere.

From pandemic to low-carbon economy

The coronavirus has created opportunities – and challenges – for investors looking to invest in decarbonisation. The European Union recently released their ‘European Recovery Plan’, a €1.85 trillion post-pandemic stimulus strategy. At the heart of this strategy is accelerating the shift towards a lower-carbon, more sustainable economy. Europe’s announcement recognises that the world still has a massive task ahead to transition from today’s unsustainable economy to one based on cleaner energy and transport, more efficient industrial production and more energy-efficient buildings.

But Deirdre Cooper, manager of Ninety One Global Environment, warns: “The perception that the coronavirus, for all its devastating effects, is helping to tackle the climate crisis is not only bogus but dangerous. Global carbon emissions might fall by 5% this year, but that’s a blip in the trend of recent decades, and they’ll resume their former trajectory when the economy starts to recover.

“Government policy is therefore a key influence on where, how and how fast decarbonisation drives economic growth – so investors seeking the businesses most likely to benefit from this tailwind need to watch it closely. Overall, we have no doubt that policy will continue to support the energy transition, near-term delays notwithstanding. But the pandemic clearly alters national policy priorities, budgets and political climates. And the US, of course, remains a wildcard.”

Investing in a low-carbon economy

When it comes to renewable energy, huge amounts of capital have been invested in wind and solar energy and the business case for renewables has never been stronger. As Will Argent, investment adviser to the VT Gravis UK Infrastructure Income fund, told us, it will play an important role in the post-crisis economic recovery: “I think infrastructure spending will be used in order to help us out of this recession,” he said. “The government’s making all the noises that suggests that will be the case.” We also touch on why the UK has the largest offshore wind industry in the world in our most recent podcast.

Electrification is the second largest part of the demand for sustainable energy. Earlier this year we looked at how electrification is impacting the electric vehicle market and the infrastructure in place. Rebecca Myatt, portfolio manager of First State Global Listed Infrastructure, said: “Electrification is going to be something that we talk about in the years to come, especially when more companies are taking climate action more seriously and looking to go towards net zero carbon emissions by 2050.”

And James Mahon, manager of Church House Tenax Absolute Return Strategies, believes the current grid is inefficient and told us recently about his holding SDCL Energy Efficiency and a few of their current efficiency projects in the video below.

As we try to move towards a more decarbonised economy, companies will be forced to either make changes to the way they operate or be left behind. Long-term investors can therefore be the driving force for meaningful change.

The views of the author and any people interviewed are their own and do not constitute financial advice. However the knowledge that professional analysts have analysed a fund or trust in depth before assigning them a rating can be a valuable additional filter for anyone looking to make their own decisions. Before you make any investment decision make sure you’re comfortable and fully understand the risks. If you invest in fund or trust make sure you know what specific risks they’re exposed to. Past performance is not a reliable guide to future returns. Remember all investments can fall in value as well as rise, so you could make a loss.