A common misconception of eco-friendly investing is that it offers limited opportunities constrained within a narrow subsection of the economy. Jordan Waldrop, CIO of TrueMark Investments discusses how in reality, a net zero economy is available in every sector and have the potential to reduce risk as investors can enhance their resilience and adaptability to volatile weather, political shifts, and temporary economic swings.
There are very few scenarios for which large-scale, global, macroeconomic trends intentionally lead growth and investment in a clear direction. We think the transition to a net-zero economy is one such scenario that could provide a key investment opportunity for long-term growth across a variety of sectors and with a large-scale global impact.
In the Paris Agreement, more than 70 countries, 1,200 companies, 1,000 cities, 1,000 educational institutions, and 400 financial institutions pledged to halve global emissions by 2030. To achieve a net-zero economy by 2050, the spending trends will need to be reversed from the current 65% of total spending going toward high-emission assets to 70% of total spending going toward low-emission assets.
Over $500 billion is currently being invested in global decarbonisation. Financial pledges at the 2021 United Nations Climate Change Conference aim for $130 trillion to be invested in the net-zero economy over the next three decades.
Growth strategies for a net zero economy
With this kind of public investment in the net-zero economy on the horizon, we believe the following three strategies offer tremendous growth opportunities for a diversified net-zero portfolio:
- decarbonising high-emission products and processes,
- substituting high-emission products with low-emission products, and
- producing low-emission inputs, services, and infrastructure.
Today, the energy sector is responsible for three-fourths of global emissions. In line with the transition to decarbonisation, investing in net-zero does not mean divesting from carbon intensive industries like oil and gas completely. There are companies within those industries who are investing in the future and preparing for disruption from decarbonisation.
1. Low carbon transition is proving cheaper than business as usual
Such investments help diversify an eco-friendly portfolio and make a significant impact toward net zero. Remember, the transition to “green energy” is not happening because we all hope to save the world from environmental collapse. We are transitioning to green energy and decarbonising because fundamentally carbon has become a more expensive way of powering our transportation and economy.
Green energy solutions have passed the point of cost-effectiveness and are still improving. As they continue to improve, this cost incentive in favour of green options will only continue to widen. This is a process that will take time given the size of the infrastructure, but the expansion of green solar and wind will only push prices down over time and make old production methods less and less appealing. Companies recognise this transition, and most are preparing for the future accordingly.
2. Low carbon substitutions are a huge growth opportunity
The second strategy is low-emission substitutions. Reducing emissions can also bring bigger gains as the adoption of sustainable solutions increases across the broader economy. We believe the renewable energy sector has one of the largest growth opportunities of any sector over the next several decades.
Using the Net Zero 2050 scenario from the Network for Greening the Financial System (NGFS), oil and gas production is projected to decrease 55-70% and coal production would virtually cease by 2050. In response, the US Department of Energy aims to significantly expand offshore wind and cut solar energy costs by 60%.
Similarly, electric cars are projected to increase from 5% of new car sales today to essentially the entire market by 2050. California will ban the sale of gas cars starting in 2035 – forcing carmakers to adapt. Again, these EV technologies are improving all the time so their competitiveness with traditional systems is only improving over time as well.
The same trends can be said for the agriculture sector as fewer people eat high-emitting meats like beef and transition to poultry and plant-based alternatives. In these and many other sectors, a loss of high-emission products brings bigger gains in low emission substitutes across the economy.
3. Technology disruption is the third growth opportunity
The third strategy of investing in low-emission inputs and services offers potentially bigger payouts for more risk-seeking investors who want to get in early on emerging low-carbon technologies. Over $160 billion in private investment currently supports the low-carbon tech sector.
Less risky investment opportunities in low-carbon solutions lie in inputs like lithium and cobalt, physical assets like solar panels, services like forest management, and infrastructure like EV charging stations. Considering that EVs are projected to dominate car sales over the next several decades, investing in charging stations alone could represent a significant growth opportunity, let alone the minerals used to create their batteries.
A common misconception of eco-friendly investment is that it offers limited opportunities within a sliver of the economy. But incorporating a variety of decarbonisation, low-carbon substitution, and low-emission inputs into a net-zero investment strategy has the potential to touch nearly every sector of the economy, in companies large and small, nascent and traditional.
In fact, we believe investing in a net-zero economy has the potential to reduce risk over time as low-carbon solutions enhance our resiliency and adaptability to volatile weather, political shifts, and temporary economic swings. Not only is net-zero investment an ethical investment strategy, but we feel it is also a smart investment strategy for investors seeking long-term growth.
