Dec 06, 2020 Sustainability

Climate change: turning it into an investment opportunity

Climate change poses many risks - but for companies and investors working to counter it, it could also offer a number of opportunities.

  • The coronavirus crisis is dominating the agenda - but that does not mean that climate targets have been forgotten.
  • Even in the midst of the pandemic, the European Union is still planning to reduce its CO2 emissions further by 2030.
  • Investors can combine returns and sustainability targets through shares in companies that are committed to climate protection.
4 minutes to read

Mother Earth breathed again - but only for a short time. The satellite images that showed a dramatic drop in air pollution levels after the first coronavirus lockdown in early 2020 proved too good to be true. It didn’t take long for new photos from space to show how China had become the first country to revive its economic activities. The old picture of pollution was back, and so it became clear that temporary relief due to the pandemic would not solve the long-term problem of climate change.

For nation states, emitting less CO2 is no longer the answer - the aim is instead to become greenhouse gas neutral.

The EU wants to set even more ambitious climate targets

"The coronavirus crisis should not be used as an excuse to shift climate protection down a gear," says Tim Bachmann, who is heavily involved in the topic as manager of the DWS Invest ESG Climate Tech fund. "Now more than ever, we need to counteract climate change with 'clean technologies'.“

It is not surprising, then, that even in the midst of the pandemic, the European Union wants to move up a gear with its climate targets. Current EU legislation provides for a 40 percent reduction in CO2 emissions by 2030 compared to 1990 levels, but negotiations are now underway to reach a target of up to 60 percent reduction.[1] To achieve this, annual investment in clean energy technologies would have to increase by around €350 billion per year.[2]

A wide range of measures is needed to achieve climate change mitigation from climate, environmental and biodiversity protection, through mobility and industrial policy, to guidelines on energy, agricultural and consumer protection policy.[3] "Support from private individuals is need just as much as commitment from companies with their innovative strength," says Tim Bachmann. "This creates interesting opportunities for investors."

Companies can turn climate change into an investment opportunity

In Bachmann’s fund, about one in three euros invested contributes to the UN sustainability goals (SDGs), including climate protection. This is made possible by consciously selecting companies that offer services and products that help society to adapt to climate change or to mitigate its consequences.

"When it comes to slowing down global warming, decarbonisation plays a central role," explains Tim Bachmann. "Companies from the energy production and transport sectors are of interest here."

These include providers of wind and solar energy technology, electricity network operators and smart meter and energy storage system producers. It’s also worth investors looking at companies that offer energy-efficient and climate-friendly solutions for businesses and households.

"At DWS, we have for example backed companies that produce and install insulation materials based on rock wool or wood fibre," says Tim Bachmann. "They make an important contribution to meeting the real estate industry’s strong need for energy-related renovation.” In this sector, companies that develop smart applications for lighting systems or cooling and ventilation technology in buildings also look attractive.

From H to H2O - hydrogen and water play key roles

Developments and research breakthroughs in the agricultural technology, medicine, civil protection and reconstruction sectors also play an important role in enabling humankind to adapt to the consequences of climate change. And last but not least, e-mobility and alternative forms of propulsion are also a major topic in climate protection. Hydrogen technology has aroused particular interest among investors, as the possible applications look to be many and varied.

Hydrogen’s use is not limited to that of an environmentally friendly fuel for road, sea and air transport. It could also be used in the future to heat houses or to store surplus electricity from solar and wind power plants. In the area of industrial processes, there are also concepts that could, for example, revolutionise steel production using hydrogen.

Through particular funds, investors can promote climate protection and make a contribution to the United Nations’ sustainability goals (SDGs).

Water has now become a contested resource in the developed world.

This brings us to another important issue: water. "Water is one of the most elementary resources on Earth, but it is also increasingly scarce," says Tim Bachmann. "That’s why it has long since become a contested element even in the developed world."

The USA alone will need around 944 billion dollars by 2050 to adapt its water infrastructure to the consequences of global warming.[4] In addition to traditional utilities, companies with innovative solutions for the extraction, desalination and treatment of water look attractive. There are also some interesting technological solutions for agriculture, such as drip irrigation and circular irrigation, which allow water to be used much more sparingly on farmland.

"Investors who don’t just see climate change as a hugely damaging event but also as an opportunity have a broad investment spectrum before them," says Tim Bachmann. "It is a topic that has the potential to demonstrate once again how well suited funds are to helping investors to reconcile return and sustainability objectives.”

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4. Sources: WMO - World Meteorological Organization (2017); World Bank (2017); PwC, Goldman Sachs, HSBC (2018). Forecasts are based on assumptions, estimates, opinions and hypothetical models or analysis that may prove to be incorrect.

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