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The last few months have seen much of the world contend with a succession of devastating heatwaves, floods and wildfires. July 2023 has formally been confirmed as the hottest month on record globally1 — confirmation that our weather is becoming warmer, as well as less predictable.
As climate risk has become a reality, the need for mitigation and adaptation solutions has become more urgent. Climate investors can play a crucial role in accelerating the development of those solutions and benefit from significant return potential, provided they can navigate the associated risks. But finding investable opportunities requires a deep understanding of the climate investing landscape. Below we set out a potential framework based on our climate investment team’s decade-plus experience.
Climate investing benefits from a growing legislative underpinning – Countries around the world are increasingly taking action to reduce their reliance on fossil fuels. For at least the rest of this decade, the International Energy Agency (IEA) estimates that approximately US$2 trillion will be invested every year on clean energy alone. It's no coincidence that much of this legislation was passed following Russia's invasion of Ukraine, which shone a light on the precariousness of energy security and access to resources. The climate transition is increasingly becoming a way for countries to not only decarbonise, but crucially, achieve energy security and independence.
Climate investing isn't just about energy – While energy is an enormous part of the opportunity, we think it is part of the larger climate transition underway. Yes, energy is arguably the single most important total addressable market within that, but climate touches the entirety of the world's physical infrastructure: a collection of different systems, each comprised of interconnected assets. Every one of these systems, whether energy, electricity, food and agriculture or transport, has been underinvested in for the past several decades. What we think is so powerful about climate investing is that now all these systems are being renovated and reconfigured — but with a strong emphasis on sustainability and efficiency.
The intersection of energy and technology is increasingly relevant for climate investors – One thing Alan learnt from his background in technology is that software has a unique ability to enhance productivity, but it hasn't necessarily been deployed systematically throughout the economy. Until recently, the energy sector had not seen much in the way of innovation, but we are now seeing a proliferation of technologies to enable and speed up the climate transition.
One of the most challenging aspects of climate investing is perhaps the fact that we need to look towards the future but we cannot accurately extrapolate climate change from the past. To do this, we use climate science as our North Star. In our experience, systematically incorporating climate science insights from our research collaborations — Woodwell Climate Research Center (Woodwell Climate) and the MIT Joint Program on the Science and Policy of Global Change — can help extend time horizons and identify underappreciated long-term opportunities.
For example, through our work with Woodwell Climate, we recognised that agricultural technology was going to become an important theme within a climate portfolio — many of the foods we consume are grown near the equator, in areas that are particularly susceptible to extreme weather. This led us to focus on companies helping agricultural production become more efficient, productive, and resilient.
This framework helps guide us to five key areas we look to invest in within our climate investment portfolios, across both climate mitigation and adaptation.
We think technology will continue to be a focus, and while we are all hoping for a single breakthrough technology like nuclear fusion or large-scale carbon capture, the reality is that solving for climate change is likely to come from a collection of solutions that stretch across many sectors and regions and that even incremental improvements can help move the dial. We expect AI to play a significant role within the climate transition, but we will need to monitor opportunities and risks. That said, we believe AI will help enable the analysis and management of systems such as energy, electricity, agriculture, manufacturing, etc. to be more fully optimised from an efficiency and sustainability perspective.
Adapting to climate change will happen at an uneven pace, creating winners and losers. We think markets will increasingly penalise the laggards but investors who are at the forefront of that “natural selection” process have, in our view, an additional opportunity for generating returns and accelerating the essential transition towards net zero and adapting to climate change.
In summary, we think climate investing is truly exciting from both a financial and sustainability perspective. For this reason, we believe successfully navigating the transition demands a bottom-up, research-driven approach, with robust metrics to ensure that investments are stacking up financially, while making a measurable, material difference.
1 Source: Copernicus Climate Change Service, August 2023 https://climate.copernicus.eu/july-2023-warmest-month-earths-recent-history.
Climate mapping in action: Investment case studiesContinue reading
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Why climate change matters in private marketsContinue reading
Why sustainable food systems matter to investorsContinue reading
WellSaid: The economic significance of biodiversityContinue reading
Green horizons: How the shift toward sustainable finance may reshape fixed income marketsContinue reading
Climate mapping in action: Investment case studies
We describe our Climate Exposure Risk Application (CERA), which can help our investment teams visualize and quantify physical climate risks.
Private investing portfolio company interview with AMP Robotics CEO
Dr. Matanya Horowitz, CEO of AMP Robotics, highlights how the company integrates AI and robotics into the recycling industry and explores the “actionable guidance” Wellington provides on ESG and other strategic issues.
Why climate change matters in private markets
Why sustainable food systems matter to investors
Our climate research expert explores insights from our joint work with Woodwell Climate Research Center on the pivotal relationship between food systems and biodiversity and highlights potential investment opportunities.
WellSaid: The economic significance of biodiversity
In this short clip from his WellSaid podcast interview, Dr. Zach Zobel of Woodwell Climate Research Center discusses the economic importance of coral reefs — lynchpins of marine biodiversity and vital to fishing, tourism, and other industries.
2022 Climate Report
Financial materiality: The cornerstone of the ISSB’s global baseline for sustainability disclosure
The new standards may help provide market participants with data necessary to price sustainability-related risks and opportunities, which can feed directly into the assessment of enterprise value.
Is your asset allocation ready for the realities of climate change?
Our Investment Strategy Team shares key findings from the research behind their climate-aware strategic asset allocation (SAA) approach, including challenges and trade-offs that asset owners should understand.
Climate resiliency factor: Helping asset owners go “long” climate change
We aim to offer asset owners an intuitive way to integrate climate risks into their portfolios and shift their expected return profile for better potential outcomes.
Will emerging Asia leapfrog the energy transition?
Decarbonizing while maintaining economic growth presents tremendous challenges for developing countries in Asia. Is technological innovation the solution?
2022 Sustainability Report
We appreciate the opportunity to share our approach to advancing sustainable practices across our investment, client, and infrastructure platforms.