Climate change and the investment case for clean energy
Graeme Cooper is the Co-founder of the HANetf S&P Global Clean Energy Select HANzero UCITS ETF
There is little doubt that the global fight against climate change will be the greatest challenge to face humanity in the coming century. While it will be a difficult fight to win, it will also create opportunity, in particular for those businesses that lead on innovation in clean energy.
With strengthening tailwinds coming from both economics and policy, we believe the long-term investment case for businesses principally engaged in clean energy technologies is strong.
The clean energy sector encompasses energy derived from zero-emission sources that are ‘renewable’, or naturally replenishing. Humans have been harnessing nature’s power for millennia, but as we develop increasingly innovative and efficient ways to do so, renewable clean energy is becoming increasingly viable and displacing the dirtier sources of energy (e.g. fossil fuels) that have dominated economies since the industrial revolution.
Growing renewables’ share of generation capacity is a key pillar in the fight against climate change, and in particular with respect to meeting increasingly ambitious targets to drive national economies toward net zero carbon emissions.
‘The long-term investment case for businesses principally engaged in clean energy technologies is strong
From a policy perspective, the change in US administration following the election of President Biden has re-galvanized global consensus and leadership in pursuing incredibly ambitious greenhouse gas reductions over the coming decades.
The Paris Agreement is at the centre of this movement, committing signatory nation-states to reducing emissions with the goal of limiting global warming to less than 2 degrees Celsius versus pre-industrial levels.
1The mechanism to achieve limited temperature increase is to reach peak greenhouse gas (‘GHG’) emissions as soon as possible and to achieve a carbon neutral world by mid-Century. The Agreement functions by inviting countries to submit nationally determined contributions (‘NDCs’), which communicate the actions each will take toward reaching the goals of the Agreement along with the actions they will take to build resilience against rising temperatures.
Clearly, The Paris Agreement suffered a massive blow to its efficacy when U.S. President Donald Trump withdrew the United States. However, the subsequent election of President Biden has breathed new life into global coordination in the fight against climate change, restoring the US to its position of leadership.
In the infancy of his presidency, Biden made an astonishing array of climate-related commitments across international channels and virtually every department of the government that essentially turned the policy of the prior four years on a dime.
These initiatives included (but are not limited to)2:
- Re-join the Paris Agreement
- Establish a $2 trillion climate-focused infrastructure plan
- Set a target to achieve a net-zero carbon economy by 2050 and a 50% reduction in GHG emissions by 2030
Alongside the US, the European Union has targeted GHG reductions of 55% by 2030, the UK has committed to a 78% decline by 2035 (compared to 1990 levels)3, and China has committed to achieve peak emissions before 2030 and carbon neutrality before 20604.
Meeting these goals will require wholesale change across virtually all industries, calling on innovation to define the businesses that will lead and thrive.
But we believe that this renewed consensus around the imperative of combatting climate change creates a massive tailwind for green energy. Indeed, we have already witnessed a significant uptick in renewables capacity, and this trend will need to continue. The U.S. Energy Information Agency forecast renewables to account for >50% of total power generation by the early 2040s (according to the U.S. EIA – International Energy Outlook 2020)
‘This renewed consensus around the imperative of combatting climate change creates a massive tailwind for green energy’
Looking into the sector on a more granular basis, the main beneficiaries are expected to be solar and wind power, which are seeing installation at scale at an incredible pace.
And whilst policy tailwinds are likely to be instrumental in supporting this extraordinary growth in the green energy space, it is ultimately the economics that will dominate the transition away from fossil fuels. The reality is that the accelerating pace of innovation in wind and solar in particular has made these technologies competitive with or superior to traditional fossil fuels from a cost perspective. The last decade alone (2010-2019) witnessed dramatic cost declines at 82% for solar, 39% for onshore wind and 29% for offshore wind. From a levelized cost of electricity (‘LCOE’) perspective, this puts each squarely in or at the low end of the cost range for fossil fuels.
There are a number of immense challenges that need to be solved for our economies to draw most of their power from renewables (e.g. intermittency and grid design), but that is an incredible area of opportunity and the economics increasingly speak for themselves5.
In conclusion, a renewed ambition to fight climate change is impacting both regulatory and economic pressures to limit carbon emissions. Clean energy is at the beating heart of this monumental shift.
We believe that the requirement to adapt existing technologies and/or developing new ones to facilitate this requirement may present an attractive opportunity for investors.
Investing in Clean Energy
Investors looking to get a slice of themes such as the clean energy sector can consider exchange traded funds (ETFs). ETFs enable investors to invest in a broad basket of securities that represent companies from a specific sector or theme such as cloud computing , the space economy or solar energy.
HANetf is an issuer of a wide variety of megatrend thematic exchange traded funds (ETFs). When you invest in ETFs, your capital is at risk.
Graeme Cooper is the Co-founder of the HANetf S$P Global Clean Energy Select HANzero UCITS ETF
HANetf introduce Europe’s first carbon-offset ETF in London
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