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Net Zero: 5 key investment considerations
Some investors assess the environmental credentials of their portfolio using a key metric: supporting the transition to a net zero world. It is estimated that US$4 trillion of investment will be needed each year by 2030. This is to meet the UN Paris Agreement’s goal of net zero emissions by 2030.
Disclaimer: Arbuthnot Latham offer a range of investment strategies to suit our clients’ individual objectives. This article is intended for those who are interested in sustainable investments.
We explore five investments considerations that contribute towards this effort.
1. Reduce investment in exploration and combustion of fossil fuels
Fossil fuels, namely coal, oil, and gas, currently supply around 80% of the world’s energy.
In addition to generating the energy that fuels our homes and transport, they are used to make plastic, steel, and a huge range of products. It is estimated the oil and gas industry contributes 9% to all manmade greenhouse-gas emissions and produces fuels which contribute to a further 33% of global emissions while coal is responsible for over 0.3°C of the 1°C increase in global average temperatures, making it the single largest source of global temperature rise.
The methane emissions from coal mining are estimated at 3-6%, while the indirect emissions from coal mining, including combustion are estimated to be 28% of global emissions.
As such, one option to boost the environmental credentials of your portfolio could be to reduce your overall exposure to the companies most heavily involved in exploration, extraction and combustion of fossil fuels.
2. Increasing exposure to renewable and clean energy
Renewable energy sources contribute an estimated 29% to global power output according to the International Energy Association.
Solar and wind are widely publicised but hydro, tidal, geothermal and biomass are all examples of renewable energy sources.
With renewable energy output to rise to 35% by 2025, adding or increasing exposure to companies investing in and generating energy from renewable sources could also provide a method of reducing portfolios overall exposure to carbon emissions.
In addition to renewables, clean energy solutions such as nuclear will likely be required to meet the goal of net zero by 2050. Recently, interest has grown in small scale nuclear modular reactors, which have several advantages including a major perceived advantage of a lower risk profile than conventional nuclear power plants.
Following many years of discussions around this new technology, we are now seeing meaningful commitment and investment come through. The US has recently announced $275 million of funding for new small modular reactors (“SMRs”) to be built by NuScale in Romania while the UK has launched a competition to identify the best SMR design.
There are several companies racing to manufacture and scale in this technology, including Rolls-Royce, GE, and Hitachi to name a few which provide various investment opportunities.
3. Reducing exposure to carbon intensive industries
Cement, iron, steel, and chemicals industries account for 27%, 25%, and 14% of industrial carbon dioxide emissions respectively, and are the foundation of modern economies. They are the starting point of many industrial value chains, providing both raw and processed materials. The cement industry alone accounts for around 8% of global carbon emissions.
The other obvious area which consumes large volumes of energy is transport, which accounts for around one-fifth of global carbon dioxide emissions.
Contrary to popular belief, aviation is not the main culprit. Road travel, predominantly cars and buses, accounts for three-quarters of transport emissions. Aviation accounts for only 11.6% of transport emissions, contributing around 2.5% of total global emissions, a similar level to international shipping.
Therefore, reducing exposure to some of these most heavily carbon intensive industries would be another consideration if looking to reduce overall emissions and support the transition to net zero.
4. Increasing exposure to energy transition
Further investment into new and innovative technologies will be required if we are to deliver net zero carbon emissions by 2050. Solutions which focus on reducing energy waste throughout the value chain from extraction, generation, transmission, distribution, and final use will be pivotal in meeting this target.
Many renewable technologies are not predictable, as energy generation cannot be easily matched in timing with demand. As such, scalable energy storage solutions such as improving battery technology will be key in this transition to net zero.
Other examples of supporting the transition include overall carbon capture technology within carbon intensive processes. The EU has funded a project called CLEANKER. It is a collaboration between higher education and industry. Their goal is to find ways to reduce carbon dioxide emissions during cement production at high temperatures.
Once captured, the carbon dioxide could then be pumped back underground to replenish depleted fossil fuel reserves.
The technology has the potential to harness more than 90% of the carbon dioxide produced in a cement plant.
5. Increasing exposure to energy efficient solutions
Reducing overall demand for energy provides another obvious route to reaching net zero, and increasing energy efficiencies across the global economy can drive a reduction in demand. Improving energy efficiencies can be delivered across the value chain, from improving the efficiency in generation, reducing energy lost in distribution and transmission and importantly reducing overall requirement at final point of use.
This could be delivered by improving the energy efficiency of buildings, by improving insulation or replacing inefficient household and industrial goods like light bulbs or kettles. Energy efficiency solutions are a cost-effective way to complement the deployment of renewable energy and reduce reliance on fossil fuels.
At Arbuthnot Latham, we are committed to helping our clients navigate the complex world of sustainable investing. Our experienced wealth managers can help you understand these and other ESG and socially responsible investment terms and develop a personalised investment strategy that aligns with your values and goals.
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