The transition to a cleaner, greener world equipped to cope with climate change presents opportunities to put us on a more sustainable and resilient path.
As the effects of climate change are being felt around the world, political ambition, growing regulation, citizens’ expectations and investors’ concerns are all becoming increasingly aligned. This global effort endeavours to head off the worst consequences of rising global temperatures as well as manage those that are now unavoidable.
Supporting the transition to a more sustainable world is an opportunity for all of us to shape a better future and drive the development of long-term solutions. Allocating resources to the leaders of tomorrow – companies, assets and initiatives – will accelerate decarbonisation and support the creation of innovative strategies to adapt to our changing world.
At a critical juncture
The battle to slow global warming and transition to an economy where all greenhouse gas emissions are offset by carbon captured through nature or technology – known as “decarbonisation” or “net zero” – took a crucial step forward with the Paris Agreement. Negotiated by 196 parties in 2015 and ratified in April 2016, the agreement saw world leaders commit to taking action to limit the global temperature increase this century to no more than 2°C above pre-industrial temperatures.
In April 2021, on the fifth anniversary of the signing of the agreement, 40 world leaders convened for the Leaders Summit on Climate. Countries representing 80 per cent of total global emissions announced a range of individual measures aimed at meeting their pledges on greenhouse gas reductions, from embedding targets in domestic law to proposals to phase out highly polluting sectors (such as coal-fired power) or expand green sectors such as renewable energy.
A subsequent series of extreme weather events – floods in central Europe and mainland China, and record temperatures and wildfires in the US and Greece – has focused even greater public attention on the effects of climate change. Consequently, there is increasing impetus for the UN Climate Change Conference (COP26) in November to deliver more ambitious goals to address the climate crisis and support investment in solutions.
From mitigation to mitigation and adaptation
Whatever emerges from COP26 will have to encompass both climate change mitigation and adaptation, though much of the conversation at present continues to revolve around the former.
Mitigation refers to measures intended to minimise the extent of global warming and slow the pace at which it happens. This includes shifts to renewable technologies and the promotion of greater energy efficiency. Adaptation involves measures to reduce the risks and negative consequences of any global warming that does occur.
Mitigation would be the preferred outcome, but as the Intergovernmental Panel on Climate Change (IPCC) makes clear in its recent Sixth Assessment Report, this will not be enough.
The IPCC’s description of the report as a “code red for humanity” sums up its message: the climate crisis has advanced to the point where even under optimistic scenarios, the world has changed in ways that are unprecedented and irreversible.
Opportunities to protect against risks
The attention of investors should therefore be focused on both mitigation and adaptation – and on the impact that climate change will have on all companies, not purely those businesses that are considered to be ‘green’ or ‘brown’.
Green energy and energy efficiency is a well-established mitigation theme. Solar, wind or other renewables will replace fossil fuels in power generation. Transport will shift towards electric vehicles or those fuelled by green hydrogen – a type of zero-carbon fuel created from water via renewable energy sources. Real estate, building and construction will focus on energy efficiency, and infrastructure such as electricity, rail and road networks will be built in a way that is more resilient to the effects of climate change.
A wide range of industrial sectors will adopt green energy, from replacing fossil fuels with electricity in mining to using green hydrogen to fuel energy-intensive processes, including steel and chemical processing. These “decarbonisation pathways” have the potential to reduce total emissions by around 81 per cent by 2050.1
Investment opportunities here will be substantial. The US plans to invest USD400 billion by 2035 in pursuit of a zero-carbon power sector, according to proposals made by President Joe Biden. The development of green hydrogen may require up to EUR470 billion in investment over the next 30 years in Europe alone, according to the European Commission’s hydrogen strategy.
There will also be opportunities around adaptation. In agriculture, it will be increasingly important to grow more crops with less environmental impact (both in terms of inputs required and land used). Technology companies have become increasingly energy intensive due to their use of data centres that consume huge amounts of power and generate heat. They will need to examine how these facilities can be located to take advantage of renewable power and whether waste heat can be recovered to reduce their carbon footprint.
Encouragement from every direction
The amount that will be invested in the green transition will incentivise companies to become more sustainable. The European Green Deal, for example, may amount to as much as EUR1 trillion over the next decade across a wide range of themes, from clean energy and energy efficiency to agriculture and environmental protection.
There is also substantial enforcement underway. This comes in the form of government policy and regulation, but also via financial markets, which will reward companies that are proactively mitigating, adapting and changing to reflect climate goals and realities. Those that do not follow sustainable practices may see their valuations affected as investors begin to price in a range of risks – from direct climate effects to regulatory perils and consumer backlash.
Consequently, investors focused on identifying businesses with positive environmental, social and government (ESG) practices will help to manage risks within their portfolios. Companies with agile and attentive management teams and boards may be able to protect against climate-change and environmental risks affecting their sectors. They may even identify new opportunities, while more short-sighted or inflexible businesses may face threats to their very existence in the relatively near future.
Awareness of the scale of the crisis is growing, and governments, companies and individuals are making increasingly clear their commitments to change course. Mitigating what we can, and adapting to what can no longer be averted, will put us on a brighter, more steady path.
HSBC Global Private Banking has a long-term commitment to grow, manage and preserve our clients' wealth in a manner that shapes the transition to a sustainable future and safeguards the future of generations to come. At the heart of our plan is a pledge to reduce financed emissions from HSBC's portfolio of customers to net zero by 2050 or sooner, in line with the goals of the Paris Agreement. We’re also strongly focused on supporting our clients as they switch to more sustainable ways of doing business. To learn more, contact us.
To read more about investing for a sustainable future, read our latest Investment Outlook report.
1Four pathways to global decarbonisation, HSBC Global Private Banking, 28 April 2021↩