Climate-related themes investors are watching – Eva Cairns, abrdn

by | Oct 27, 2022

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Ahead of COP27 next month, Eva Cairns Head of Sustainability Insights & Climate Strategy at abrdn, shares her views on some of the climate-related themes investors are watching closely.

The climate change and net zero theme is here to stay – with a particular focus on the energy transition and investing in climate solutions and credible transition leaders. But we are also seeing increased potential for identifying solutions that address the broader environmental crisis and those include biodiversity, water and deforestation themes. We absolutely see climate change and biodiversity as an interdependent twin crisis that offers diverse investment opportunities.

We believe there will also be a growing focus on the social aspects of the energy transition – the so called ‘just’ transition – and how it impacts workers and communities. As we see the physical impacts of climate change hitting many regions across the globe today, we need to see an increased focus on investing in adaptation to be better prepared and protected. It might take a while for this to become a more dominant investment theme however, as climate finance is currently more focused on mitigation of climate change, in other words reducing emissions.

Impact of recent legislation in the USA

In our view, it is critical that policy makers provide the right incentives to channel capital into solutions that help address the climate crisis. While nearly 90% of emissions globally have a net zero pledge associated with them, what matters is translating this into tangible policy action and we are far behind on that front to support the goals of the Paris agreement as current 2030 commitments would still take us to a 2.4C warming world. 

One positive example of policy action is the Inflation Reduction Act recently passed in the US, which has committed to finance of $400bn over 10 years, most of this into energy and climate. It has projected to lower US emissions by 32-42% below 2005 levels by 2030, mainly through tax credits and incentives as well as subsidies, for example into carbon capture and storage. These may not be the most efficient way for incentivising decarbonisation but are designed to catalyse up to 10 times as much private sector spending and investment. The Act has sent a clear message for providing certainty and incentivising investment in climate change solutions and potentially opening new opportunities for investors. These include clean fuel technologies, building efficiency as well as carbon capture and storage. We have certainly seen an increase in the share price of some of the climate solution companies we hold in response to the IRA announcement.

Weather warnings

We are experiencing the disastrous physical impacts of climate change across the globe today, whether that is record temperatures, heat waves, droughts, extreme rain or tragic flooding. This should in theory help accelerate investment in two things: climate mitigation to limit global warming as much as possible; and climate adaptation to help protect from the physical risks of climate change that are now unavoidable. I don’t think the response to global climate events is urgent and strong enough, however. Emissions were still increasing by 6% in 2021 despite all the net zero pledges and in 2022, energy security and affordability are on top of the priority list in the current energy and cost of living crisis. Indeed, we may see a reduction in emission growth in 2022 due to the economic downturn, which is something we have seen in China this year, but the overall impact remains to be seen.

We are now looking towards the global climate conference COP27 in Egypt where countries are expected to present updated climate commitments that take us closer to the 1.5C goal and demonstrate how action is implemented. Another critical topic will be to provide finance for adaptation and pay for loss and damage that has already resulted from physical climate change – particularly supporting the Global South.

As an investor, given the wide-ranging impact of climate change on businesses, we also need to understand the risks this poses for companies – for example those heavily reliant on water – and how well prepared they are for a future where physical impacts will be more frequent and severe.

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