Feb 25, 2020 Sustainability

The fight against CO2 is on

To put a brake on climate change and cushion humanity from its consequences, billions will have to be invested worldwide. This could also create return opportunities for investors.

  • Humanity needs new solutions to adapt to the challenges of climate change and mitigate the consequences.
  • Political frameworks such as the Paris Climate Change Agreement can provide an indirect boost to companies’ power to innovate - and open up a broad investment spectrum for investors.
  • Developers and manufacturers of "clean technologies" - such as renewable energy technologies, intelligent power supply networks and alternative drive technology – could, for example, be of interest.
4 minutes to read

"Climate change represents the greatest financial opportunity of the century."

Anand Mahindra, Chairman of the Mahindra Group, in his speech at the World Economic Forum in Davos, January 2018.

Rising sea levels, species extinction, forest fires: if you ask one of your fellow human beings about the consequences of climate change, they will immediately be able to give you an example. But they may hesitate for a moment if you ask them what we have so far achieved in the fight against climate change. Many people associate global warming with endangered polar bears on Arctic ice floes rather than the legally binding Paris Climate Change Accord, which 195 countries have signed.

Many people, for example, view Morocco’s decision to instal the world's largest solar power plant one year after the agreement was signed as but a small step towards greater climate protection. "But these steps all count and are important," says Tim Bachmann, who engages intensively with this topic as fund manager of the DWS Invest ESG Climate Tech fund. "Investors should also see the fight against climate change as a return-generating opportunity.

Paris Agreement means greater investment

There is enormous potential in "clean technologies". The investment required to increase energy efficiency and renewable energy is currently around 600 billion dollars. To meet the climate targets in the Paris Agreement, investment must be increased to three trillion dollars annually by 2040. And this does not include investment in adapting to the irreversible consequences of climate change – for example, flood protection, land reclamation, reafforestation, installing emergency energy supply systems and insurance against natural disasters. This will require another 150 to 300 billion dollars per year.[1] As a guide, the total global damage caused by the direct consequences of climate change was 150 billion dollars in 2019.[2]

Climate change demands innovative solutions

"There are two interesting investment themes in climate change," says Tim Bachmann. "Firstly, technical solutions that mitigate the consequences of climate change, and secondly, those that enable us to adapt to climate change.”

The first group comprises companies in the power generation and transport sectors, including, for example, wind and solar energy technology suppliers, electricity network operators and smart meter and energy storage system producers. Companies that offer energy-efficient and climate-friendly solutions for businesses and households are also relevant. "Of course, e-mobility and alternative drive systems are a major topic in this area too," says Tim Bachmann. "And high demand for energy-efficient renovation in the real estate sector is also interesting." This is the result of various building directives, such as the European Union’s regulations on CO2 emissions. "At DWS, for example, we are backing companies that produce and install rock wool and wood fibre insulation materials," says Tim Bachmann. Companies that develop smart applications for lighting systems or cooling and ventilation technology in buildings are of interest too.

Solutions such as precision irrigation can make agriculture more sustainable.

In the area of solutions that enable us to adapt to the consequences of climate change, the investment universe ranges from agricultural technology through water supply, disaster control and reconstruction to health care. Due to water scarcity caused by climate change, the agricultural sector will have to use resources more carefully in future. "So-called drip irrigation is an interesting solution to this problem, as is circular irrigation," says Tim Bachmann. "These systems enable water to be used more sparingly and accurately on arable land. Innovative precision irrigation also has a positive effect on yields. Emerging markets are particularly ripe for conversion, as farmers there often still completely flood arable land.”

Water supply: a key issue in the fight against climate change

However, water is also becoming a contested resource in the developed world because of climate change. In the USA, for example, up to 944 billion dollars will be needed by 2050 to adapt  water infrastructure to climate change.[3] Companies with innovative solutions for the extraction, desalination and treatment of water therefore offer interesting investment opportunities.

Finally, the medical consequences of climate change also look like something that investors should consider. "For example, people are becoming more sensitive to grasses because of the increasingly long pollen season,” says Tim Bachmann. “Increasing air pollution also causes respiratory diseases such as asthma. The pharmaceutical industry therefore needs to produce new drugs and more of them."

Investors who can see climate change not just as a destructive force but also as an investment opportunity may find that the investment universe that opens up is larger than it at first appears. This is because climate change affects everyday living and people’s way of life across the globe. "As a result, it is also driving technological solutions and promoting the economy’s power to innovate," says Tim Bachmann.

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1. Sources: We Mean Business Coalition; Ceres Investor Network on Climate Risk and Sustainability; Bloomberg New Energy Finance Clean Energy Investment 2016 and 2017; Renewable Energy Policy Network (REN21) Renewables 2017 Global Status Report. Forecasts are based on assumptions, estimates, opinions and hypothetical models or analysis that may prove to be incorrect.

2. Source: Munich Re, NatCatService 2019 - $160bn in 2018, $330bn in 2017, average 1987-2016 at $130bn

3. 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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