The global journey to net-zero could create a historic investment opportunity
In 2015, nearly every country in the world adopted the Paris climate agreement, pledging to limit the global temperature increase to well below two degrees Celsius from pre-industrial levels. To this effort, last year several countries announced targets to reach net-zero emissions by 2050, six of which have enshrined them into law. Net zero means that through a combination of carbon emissions cuts and capture, the net number of emissions will be nil within three decades.
While these targets alone may not be sufficient in reaching the Paris goal, they will certainly mandate an energy transition away from fossil fuels, opening up opportunities in new areas of development and investment.
Each Country's Share of CO2 Emissions
The pivotal role of China
As the world’s single largest carbon emitter and the second biggest economy, China’s action in the journey to net zero is paramount. Last year, president Xi Jinping announced China’s ambition to achieve carbon neutrality by 2060 and reach peak carbon emissions in 2030. He also decreed that zero-emission energy sources should account for one quarter of China’s primary energy use by 2030. Further numerical targets around energy were approved in the Chinese legislature in March of this year, adding clarity to China’s decarbonisation roadmap. Because all major Chinese energy producers are state owned and financed primarily by state-owned banks, top-down targets have already proven effective. Government subsidies have also played a crucial role in bringing down the costs of renewable energy technologies.
The US’ 180
Among US president Biden’s first actions in office were to rejoin the Paris Agreement and recommit to achieving a net-zero carbon economy by 2050. In April, he unveiled a USD 2.3trn infrastructure and green-energy package aimed at outcompeting China. This type of competition between the world’s two largest economies could have serious positive spillover effects on the global energy transition – including the development of new technologies that bring down the cost of alternative energy sources. In addition, the public sector is better positioned to invest in nascent technologies that pose a high investment return risk but could deliver course-altering solutions.
The EU takes the lead
"The investment opportunities presented by the journey to net zero abound, depending on investor risk appetite."
As the world’s third largest greenhouse gas (GHG) emitter, the EU has heretofore assumed a global leadership position in the race to zero. EU policy makers have made fighting climate change a cornerstone of their political agenda, committing to cutting GHG emissions by at least 55% from 1990 levels by 2030 and to reaching net zero by 2050. The EU plans to allocate around 30% of its total budget up to 2027 to climate-related initiatives and the energy transition. These targets have been incorporated into the European Green Deal, which lies at the heart of Europe’s post-pandemic recovery plan. The plan includes incentives for industry to invest in environmentally friendly technologies, to encourage cleaner forms of private and public transport, to decarbonise the energy sector and to improve household energy efficiency.
A tremendous investment opportunity
The investment opportunities presented by the journey to net zero abound, depending on investor risk appetite. While there is a huge range of technologies under development that are not yet commercially scalable, the most established area of investment opportunity is in proven technologies. These may include those that still need government subsidies, but with subsiding dependency or those that are beneficiaries of regulation-driven demand. Examples include the electrification of road transportation (i.e. electric vehicles), renewable power generation and the renewable fuel or bioplastics. All three offer significant growth potential for decades to come. Offshore wind generation alone is expected to grow at 20% annually to 2030.
The other high growth area is in technologies that are currently under development and not yet commercially scalable. Many of these still rely on substantial public support through subsidies and tax breaks or access to alternative private resources like venture capital. Green hydrogen as an alternative to fossil fuels and carbon capture and storage (CCS) are two areas of intense development that command the most media attention. Depending on where within the energy supply chain you want to be exposed, hydrogen could present the larger set of investment opportunities. Today, fossil-fuel produced hydrogen is used extensively in refining and petrochemical production. Green hydrogen however, is still very expensive to produce, but could become competitive over the next five years.
"The investment opportunity presented by the transition to net zero outweighs the risks."
We see two key considerations when investing in the technologies being developed in the transition to net zero.
- Time horizon : Many of these new energy technologies are going to be developed over a multidecade time frame. For individuals, the winning technologies may only emerge beyond their investment horizons. While short- and medium-term setbacks and delays may not derail the broader secular trend, they can adversely impact financial returns in the interim.
- Rapidly evolving landscape : With so many new technologies and regulations under development, the landscape is shifting and any new breakthrough could completely alter future market dynamics. For example, one current discussion is around nuclear fusion as a source of energy. Should this become possible over the next decade, it would likely diminish the need for alternative sources of renewable power generation. This would in turn impact the profitability of these technologies or make them obsolete before they have even been commercialised.
Bearing these considerations in mind, we still believe the investment opportunity presented by the transition to net zero outweighs the risks. As ever, due diligence is essential before making any investment allocations and diversifying exposure should minimise risk.
Sources:  In March 2021, the Chinese legislature approved the 14th five year plan (covering 2021-2025) and China’s long-term plan to 2035.  Non-fossil energy sources’ share in China’s total energy consumption rose from 9.4% in 2010 to 15.3% in 2019, beating the 13th five-year-plan target of 15% by 2020.  Greenhouse gases refer to the group of gases that contribute to global warming, CO2 being the most important among them.  Source: European Commission website “Climate change: What the EU is doing.”  Compound annual growth rate. Source: Bernstein.