25 Jan 2022
Climate change and its devastating implications are not new. Since the first hard evidence of ozone depletion was presented in the 1970s, the scientific and environmental communities have been at loggerheads with politicians and industrialists about what needs to be done. Over the last four decades, this battle has been fought against a backdrop of relative indifference, if not skepticism, from consumers and the voting public worldwide. Until now.
The latest manifestation of a concerted international attempt to address global warming and reduce carbon dioxide emissions is the Paris Agreement of 2016. Its main objective is to hold the increase in the global average temperature to well below 2°C above pre-industrial levels and to pursue efforts to limit the temperature increase to 1.5°C above pre-industrial levels by 2030, recognising that this would significantly reduce the risks and impacts of climate change.
However, if we rely only on current climate commitments stated at the national level, global warming will most likely overshoot current targets – potentially reaching 3°C by 2100.1 To limit the global temperature rise to 1.5°C , scientific evidence suggests CO2 emissions (CO2e) must be below 25 gigatons (Gt) by 2030. Based on current policies from member nations, emissions will be ~50 Gt CO2e by this date – twice the environmental target.2
EXHIBIT 1: THE EMISSIONS GAP
In order to meet the Paris Agreement goal of keeping global warming to ≤1.5 degrees, GHG emissions need to be reduced by ~50% by 2030
On August 9, 2021, five years after the signing of the Paris Agreement, the United Nations Intergovernmental Panel on Climate Change (IPCC) published an assessment of the current evidence on the physical science of climate change, providing its global audience a brutally honest read on where we are today. The key takeaways reinforce the severity and urgency of the situation.3
The IPCC’s report, written by 234 scientists in more than 60 countries, makes it clear that the policy measures required to deliver the deep emissions cuts in the necessary time frame demand actions from nations across the globe and need to happen immediately. Up to this point, politicians across the world have failed to reach agreement on more stringent measures. Beyond regulation, the corporate sector typically needs a commercial reason to change. And so far, the world’s consumers and voting public has not shown clear, universal tolerance for bearing the cost of climate change mitigation. In short, as the IPCC report alludes, the will of the people, industry and politicians have not yet been aligned to bring about any meaningful change in emission reduction and sustainable practices. With that said, we believe the green revolution has started.
For many years, general climate change indifference and a belief that someone else will solve the issue have largely resulted in inaction. But today’s younger generations, spearheaded by the most powerful demographic on the planet –millennials – are increasingly aware of the potential consequences of inaction and have a different perspective. Having grown up in an age of greater environmental enlightenment, with a technology-facilitated global perspective and greater awareness of the planet’s fate, they are agitating to bring about more urgent change to protect their and their children’s future.
Millennial consumers are beginning to vote with their wallets and they, together with Gen Z, will eventually become dominant at the ballot box.
Crucially, younger generations are not only more concerned about the environment, but their spending has also started to reflect their values. Therefore, we believe that consumer demand for sustainably sourced goods and services will force companies to adapt and find new solutions, because there will be a commercial and competitive imperative to do so. Eventually, it may become a political imperative to do so as well, as more effective legislation will reinforce the momentum of the transition.4,5
EXHIBIT 2: WHAT KEEPS YOU UP AT NIGHT
Millennials worry about the environment
EXHIBIT 3: PUT YOUR MONEY WHERE YOUR MOUTH IS
Millennials are willing to pay more for sustainability
In addition to political and societal inaction, companies have struggled to create the technological innovation needed to successfully fight climate change. Until now.
Technological innovation has a critical part to play in facilitating the industrial transitions needed to move towards a lower emission and sustainable future. Now deep into the digital age, appropriate innovation and the emergence of new solutions are likely to accelerate.
Cost curves often explain how technology, which has previously been only featured in our most detached sci-fi fantasies, makes it into the real life. In the early days, renewable energy sources and electric vehicles (EVs) had to cut corners to get ahead, with governments often playing a willing accomplice. However, over the last decade, both renewables and EV batteries have already reached cost parity and are even incrementally more cost competitive than their old foes like coal and oil as well as the internal combustion engine.6
EXHIBIT 4: CRASHING COST CURVES
Innovation in battery technology drives EVs toward cost parity
EXHIBIT 5: EVS ARE GOING MAINSTREAM
Large economies propel exponential growth in market share
Today, we are observing cost curves dipping lower across all areas of the green economy, including circular economy solutions, carbon capture, and plant-based food. As commercial scalability becomes reality in those areas, billion dollar industries may develop overnight, driving greater sustainability while offering highly attractive potential investment opportunities.
As there is no Planet B, we believe we need to focus our investments into the planet we all live in. Our world needs to arrive at an environmentally sustainable growth model. As part of this transition, we recognise the importance of funding innovative companies actively involved in solving for some of the challenges ahead. This includes, in our view, businesses engaged in the areas of clean energy, resource efficiency, sustainable consumption, the circular economy, and water sustainability.
We believe we have now arrived at an inflection point. Disruptive companies aligned to these five key themes may be poised to spearhead the green revolution and benefit from meaningful demand tailwinds. Even in a world without targeted government stimulus, the green investing space is not going to disappear. As such, investors are in the unique position to buy into a multi-decade growth story that, in our view, can drive greater sustainability as well as returns.