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#SRI — 19.02.2019

Investing in Technology to Fight Climate Change

Kanol Pal, Senior Investment Advisor, Responsible Investments

The recent Intergovernmental Panel on Climate Change (IPCC) report on Global Warming is a strong warning that much needs to be done to prevent global temperatures from rising above 1.5C. How can investors help in bridging the financing gap?

Fight climate change

Global warming, extreme weather conditions, melting of ice sheets, greenhouse gas, rising ocean levels…These events are no longer exceptional and are highlighted frequently in the media. They are happening today with the current global average temperature at almost 1C above pre-industrial levels.

The recent Intergovernmental Panel on Climate Change (IPCC) report on Global Warming(1) is a strong warning that much needs to be done to prevent global temperatures from rising above 1.5C. We need to deploy all the technologies and policies to fight climate change but this requires massive investments. How can investors help in bridging the financing gap?

The threat of Global Warming

Global warming is the rise in the global average temperature of the Earth’s Surface: from 1880 to 2012, it has increased by 0.85°C. Oceans have warmed and ice has melted, the sea ice surface in the Arctic has lost more than 300 sq. km since 1979[2].

The level of carbon in the atmosphere is twice as high today as in 1800[3], the heavy emissions of Greenhouse Gases, mainly due to the burning of fossil fuels is very likely the main cause of global warming.

Concentration of Greenhouse Gases from 0 to 2005

Concentration of Greenhouse Gases from 0 to 2005 (4)

Global warming is a real threat: if it continues on this trajectory, it will shift weather patterns, threaten food production, cause rising sea levels, create more droughts and heat waves, strengthen hurricanes, and endanger humanity.[5]

But we might have woken up at a good moment. In 2015, 195 countries signed the Paris Agreement (COP 21), committing to maintain this century’s rise of temperature below 2 degrees Celsius above pre-industrial level[6]. This represents the biggest agreement ever signed on an environmental issue. In 2018, COP 24 has finalised a Rule Book to implement the Paris agreement.

How can we reach this objective of limiting global warming?

Investing in technology to fight climate change

According to the International Energy Agency (IEA), renewable energy is set to grow strongly in the next five years, covering 40% of global energy consumption growth[7], driven by the expansion of solar energy in India and China. In 2050, renewable energy will produce 70-85% of electricity.[8]

But investing for climate change is not only about investing in renewable energy like wind or solar manufacturers. Over the last 10 years, it would not have provided you with great returns and would underperform MSCI World.

The cost of renewable energy has come down rapidly, putting pressure on company’s margins. Government subsidies to renewables are also diminishing or have stopped.

Sustainability and Climate change require new business models and will drive innovation. Most funds investing in clean energy or climate change themes are more focused on the technology enabled solutions, from investments in innovative mobility solutions to energy and waste efficiency, smart cities or carbon storage.

Here are some examples of the new technologies, products and services that will enable us to reduce our emissions:

- Smart Mobility

- Energy Efficiency

- Smart Grids

- Carbon Capture and Storage

Smart Mobility: The market for Electric Vehicles keeps on growing thanks to advances in technology (batteries, light materials...) and government support (anti-pollution regulations, subsidies…). In 2020, yearly sales of Electric Vehicles are to represent 3.9 million of new vehicles, or 3% of the global vehicles market[9]. Investment opportunities related to smart mobility will also include specific commodities for car batteries (lithium, nickel, cobalt…), suppliers of electrical equipment and software or other innovative services for consumers such as carpooling.

Energy efficiency: is about reducing the amount of energy required for a specific use. Sensors technologies allow us to process real time data to be more energy efficient. LED lighting technologies reduce electricity consumption and CO2 emissions.

The right efficiency policies could enable the world to achieve more than 40% of the emissions cuts needed to reach its climate goals without requiring new technology (7).

In 2017, the world could have saved more than 2.2 million barrels of oil per day if all countries had adopted the best passenger fuel economy standards, 16% of industry electricity use if all countries had adopted the strongest electric motor standards, $20 billion if everyone had purchased the top 10% most efficient refrigerators.[10]

Smart Grids: consist of controls, computers, automation that will make technologies work together with the electrical grid to respond digitally to changing electric demand and ensure a more efficient use of electricity.

These "smart grid" infrastructure investments are led by large-scale smart metering projects already underway and upcoming investments in distribution automation, battery storage and information technology.

Smarter Electricity systems with the Smart Grid IEA, technology Roadmap – Smart Grids 2011

Smarter Electricity systems with the Smart Grid IEA, technology Roadmap – Smart Grids 2011

Carbon Capture and Storage: the Intergovernmental Panel on Climate Change (IPCC) estimates that we will need to remove massive amount of CO2 to avoid the worst of global warming. New research has shown different ways of capturing carbon from our atmosphere. New technology allows the capturing of CO2 in power plants and even the use of CO2 to grow plants[11].

Policymakers, convinced of the benefits of these new technologies are pushing hard to extend their use: France, India, Britain and Norway are to ban the sale of petrol and diesel cars by at least 2040. India wants to achieve 100 GW of installed solar capacity by 2022[12], (25 times the level of 2015).

China is taking the lead on investments in renewable energy and has recently decided to develop fuel cell technologies, a cleaner form of energy.

Encouraging financing for climate change

The momentum is good for investors as they now have more choices to invest for climate change. Companies are innovating and adapting their business models to capture the growth of these new markets.

To encourage more investments to fight climate change, different initiatives are also in place: the Task Force on Climate related Financial Disclosure (TCFD) has developed a framework to help companies disclose on a voluntary basis climate related information.

Various institutional investors, grouped under the Global Investor Coalition on Climate Change, representing about 300 investors and $26 trillion of assets continue to make significant investments into the low carbon economies and are engaging governments and companies to have policies in place to cut emissions.

Technological solutions are many and diverse, but technology alone will not be enough. Political and financial commitments are urgently needed to fight climate change.

We also need to change our lifestyle, move towards more responsible production and consumption and promote a more circular economy.

[1] IPCC Special Report: Global Warning of 1.5ºC, October 2018

[2] IPCC Report: The Physical Science Basis, September 2013

[3] IPCC Report: The Physical Science Basis, June 2007

[4] IPCC Report: The Physical Science Basis, June 2007

[5] NASA, Effects of global warming

[6] UNFCC Paris Agreement

[7] IEA, Energy efficiency is the cornerstone for building a secure and sustainable energy system www.iea.org/newsroom/news/2018/october/energy-efficiency-is-the-answer-for-building-a-secure-and-sustainable-energy-syst.html

[8] BNP Paribas CIB, cib.bnpparibas.com/sustain/pathways-to-contain-global-warming_a-3-2508.html

[9] IEA, Global Electric Vehicles Outlook 2018

[10] IEA, Missed Opportunities - www.iea.org/efficiency2018/

[11] The Linde Group, Clean Energy – A Global Megatrend, www.the-linde-group.com/en/clean_technology/clean_energy/index.html

[12] Scaling up of Grid Connected Solar Power Projects, Ministry of New and Renewable Energy, 2015