As we have outlined in our previous paper (Climate change – an inevitable risk), the impacts of climate change and the transition to a lower-carbon economy present significant social, economic and investment challenges. In this short paper we look at the other side of the coin, exploring some of the potential opportunities which are now being presented across a wide range of industries. These include: the recasting of the energy system; the increasing focus on efficiency; new products and technologies; and infrastructure and real estate. We investigate the need for companies to build resilience, but also highlight the barriers that are standing in the way of these opportunities being embraced.
Achieving this transformation will require a significant increase in low-carbon investment...
Recasting the energy system
A move towards electrification and an increasing reliance on low-carbon energy is clearly going to require significant capital expenditure on both the energy-generation assets (renewables in particular) and the infrastructure that will need to support this, including transmission, distribution and storage.
The most obvious investment plays are therefore those focused on solar and wind generation and the beneficiaries of these technologies along the supply chain. From an investment perspective, though, we have been more interested in some of the storage solutions. In particular, the battery value chain, which will play a key role in this new energy distribution process.
Demand for lithium-ion (Li-ion) batteries for example, is expected to grow substantially over the next 10 years as demand for use in transport (electric cars, trucks, and buses) and for power storage rises sharply. This will require both investment in large-scale factories to produce battery cells but also will sharply increase demand for the required raw materials.
Alongside this there will be an increasing focus on building circularity into the system with a recycling refurbishment infrastructure necessary to support this demand. In the power sector, batteries could play a key role in balancing the power grid as it becomes more dependent on intermittent (wind and solar) power. It will also increase the grid’s resilience, allowing power to be generated, stored, and distributed locally.
A sufficiently high and stable carbon price is critical to addressing the cost disadvantage of new low-carbon technologies...
Infrastructure, real estate and smart cities
Increasing physical risks from climate change are now inevitable whichever pathway is taken, given the latency of global warming.
As such, there will be a huge requirement for expenditure to protect existing infrastructure while planning carefully to ensure that future infrastructure is resilient to the effects of the inevitable higher frequency of extreme weather events. In different regions of the world, authorities are already focused on projects to defend against rising sea levels and extreme weather events. With notable examples including Singapore, Shanghai, New York and Boston.
Cities are the lifeblood of the global economy with an estimated 4.2 billion people living in urban centres across the world. This is set to rise to 5.2 billion by 2030 and 6.7 billion by 2050 according to the UN3. Planning for smarter cities which involve less congestion, less pollution and more technology presents another opportunity set. Related to this are buildings which, together with construction, account for 36% of global energy use and 39% of energy-related carbon dioxide (CO2) emissions when upstream power generation is included.
The energy intensity per square meter (m2) of the global buildings sector needs to improve on average by 30% by 2030 (compared with 2015)4 to be on track to meet the global climate ambitions set out in the Paris Agreement. As such, the greening of buildings through retrofitting existing building stock as well as setting green requirements for new builds presents huge opportunities and it has been interesting to see elements of this surface in the COVID-19 recovery plans that have been announced, specifically in Europe.
Building corporate resilience
An increasing number of companies are looking to build climate resilience into their strategy, leading the way as they build their understanding of the potential role they can play in the transition to a lower-carbon economy.
The ambitions of the Paris Agreement mean that globally we need to get to net zero emissions by 2050 in order to limit temperature rises to no more than 1.5oC. Non-state actors including cities and companies across a broad range of sectors, including some of the European oil majors, are setting out how they are aligning themselves to this ambition. The new European Commission’s Green Deal is a recent example of a policy framework that sets out an agenda to place the European Union (EU) on track for ‘climate neutrality’ – net-zero greenhouse gas emissions – by 2050. This includes legislation to set this is into law.
The current barriers
Many low-carbon investment opportunities may be technologically proven but not (yet) economically viable. Immature low-carbon solutions may be expensive compared with the existing technology because they lack economies of scale and technological learning processes have yet to drive down production costs.
A sufficiently high and stable carbon price is critical to addressing the cost disadvantage of new low-carbon technologies, for example for CCUS and hydrogen. Transformational technologies may also threaten existing revenue streams for many companies, as is the case for electric drivetrains in heavy duty vehicles, presenting adaptation risk. However, low-carbon standards that tighten over time can help companies transition their business models and manage the disruption from transition. In addition, from an investors’ perspective, many low-carbon technologies have long time horizons, so face considerable uncertainty about the future – for example price or demand uncertainty.
Climate change presents a broad array of risks but the transition to a lower-carbon economy and the adaptation required to address the physical effects of climate change present many opportunities.
Some of these will require policy support and initiatives like the Green Deal in Europe will serve to accelerate some of these investment trends. Undoubtedly the companies investing and preparing to become climate resilient will put themselves in a strong position to embrace the inevitable changes that are to come.
1Source: Intergovernmental Panel on Climate Change (IPCC) ‘Global Warming of 1.5°C: Summary for Policymakers’ (2018) and International Energy Agency (IEA) ‘World Energy Investment 2019’ (2019).
2Source: CDP, Doubling Down Europe’s low-carbon Investment Opportunity. February 2020.
3Source: United Nations. World Urbanization Prospects, 2018 Revision.
4Source: UN Status Report 2017.
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