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Tackling climate change presents long-term opportunities for investors

03 August 2022 GraySwan

With heat records being smashed across Europe and devastating floods in KwaZulu-Natal, the climate crisis is no longer being seen as a distant threat. This will add impetus to the decarbonisation of the world economy – with both risks and opportunities for investors.

The Paris Agreement, signed in 2015, covers climate change mitigation, adaptation and finance, with a goal of limiting global warming to 2 °C above pre-industrial levels by 2050, which requires reduction of greenhouse gas emissions to net zero in the next few decades. According to the Glasgow Financial Alliance for Net Zero, the world will need to mobilise $100 trillion in capital for the transition to a 'net zero' economy.

Investments that transition away from fossil fuels and towards more sustainable energy will ultimately create a more resilient and efficient global economy. Perhaps more importantly, they will also significantly reduce the expected costs of climate inaction.

A recent Deloitte report found that climate change could cost the global economy $178 trillion over the next 50 years if left unchecked.

Mitigating and adapting to climate change will completely transform the global economy, making this one of the most significant megatrends taking root in financial markets. As such, investors should already be assessing their portfolios and making adjustments where needed.

Even now, in the early days of the transition, winners and losers are starting to emerge. Changing consumption patterns, along with increased regulation, are negatively affecting the industries most reliant on fossil fuels and ‘dirty’ technologies. On the other hand, companies that are pioneering clean energy, electric vehicle and other technologies are riding the decarbonisation wave – as are the producers of the required raw materials.

Tesla, for instance, quickly became the world’s most valuable car company as demand for electric vehicles started to surge. And since batteries require large amounts of metals such as lithium and nickel, producers of these “green” commodities are benefiting as well.

Conversely, traditional vehicle manufacturers are racing to reinvent themselves, while fuel suppliers are considering how to adapt to the fast-changing world of mobility.

Some will succeed, although others risk losing relevance. Many fossil fuel assets are likely to become “stranded” over time – meaning they will suffer from unanticipated or premature write-downs, devaluations, or conversions to liabilities.

These trends, more broadly, will have profound implications on investment portfolios.

Investors will also need to be cognisant of other risks – even if planning for them is difficult – including extreme weather risks.

As climate change progresses, scientists warn that floods, droughts, heatwaves, wildfires and storms will become more frequent and more severe. This poses risks to infrastructure, food production, and social and political stability.

This is already evident in South Africa, which in recent years has endured heatwaves, a prolonged drought in the Cape Town region that affected agriculture, and deadly floods in KwaZulu-Natal. Elsewhere, temperature records have been shattered in North America, the UK and Europe.

All things considered, it is clear that investing responsibly, with sustainability in mind, is not simply the right thing to do – it also makes sense from a risk management perspective.

Assessing investments through an environmental, social and governance (ESG) lens allows investors to reduce their exposure to assets that would be most adversely affected by climate change, shifting consumer habits, and outdated environmental policies. This approach also assists in gaining greater exposure to investments that are “doing well by doing good”.

Investment firms across the globe are starting to offer products aligned to these risks and opportunities.

As an example, Grayswan's Offshore Megatrend Equity and Commodities for Change Exchange Traded Notes (ETNs) are designed are designed are designed to capitalise on investment opportunities driven by longer term megatrend thinking. Our Megatrend Commodities for Change ETN is well diversified basket of low cost offshore commodity investments optimally positioned to take advantage of this long-term climate change opportunity, providing investors with exposure to not only old school commodities such as oil and gold but more importantly the majority of the ETN is invested in the clean energy value chain, sustainable agriculture technologies, and green metals and minerals.

Globally, asset managers are coming together to tackle climate risks, with the Net Zero Asset Managers alliance being a prominent example.

Large institutional investors have also started joining forces to drive a reduction in greenhouse gas emissions. Representing $68 trillion in assets, the Climate Action 100+ group of investors is using its might to push companies to do better.

This highlights the fact that a shift in momentum since the Paris Agreement was concluded is well underway, both locally and abroad. And while the goals of this climate accord are still achievable, meeting them requires a war-like effort.

As such, an offshore investment portfolio that is constructed in line with the climate megatrend stands to benefit from the opportunities on offer, while also avoiding or hedging against the unintended risks of an economy changing for the greater good.

Investors have a central role to play in the transition, and are better placed than ever before to participate in the opportunities it will bring but to also manage the associated risks.

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