Investors to tackle climate change by tapping into smart opportunities

By Michael Bolliger, UBS Global Wealth Management, Chief Investment Officer Emerging Markets

Over the past few decades, human creativity and innovation have continually improved global living standards. But these standards and the overall level of consumption cannot be sustained by our planet’s finite resources. Rising emissions and growing populations have led to what we’ve come to know as the ‘environmental credit crunch’. Combatting it will require a coordinated and collaborative effort across regions, governments, corporations, and investors.

If we consider that, according to various studies, global household wealth today has reached USD 230–400 trillion, then mobilising even just 1% of it every year would help bridge the estimated USD 2.5 trillion of annual investments required to achieve the United Nations’ Sustainable Development Goals (SDGs). So, we ask ourselves how can private individuals use their investment capital to capture growing opportunities by investing in the future of our planet, and what opportunities exist that have the potential to yield both financial as well as social and environmental benefits?

In a recent report titled The Future of Earth, our Chief Investment Office identified four distinct themes to approach this topic.

First, investors may want to consider how investments influence people, health, and communities. Climate change impacts human health and the sustainability of communities, particularly low-income populations in developing countries. Investors can support the reduction of the human toll of climate change e.g. by looking at companies that effectively address their employees’ working conditions and their exposure to physical climate risks.  They could also find opportunities in companies that develop treatments for illnesses linked to climate change, including drugs and medical devices; as well as those developing urban planning solutions and smart cities technologies.

Secondly, the market share for renewables is expected to increase rapidly at the expense of the current two biggest sources of energy, coal and oil. The European Environment Agency reports that approximately two-thirds of climate-changing global greenhouse gas emissions are linked to burning fossil fuels for heating, electricity, transport, and industry. However, due to its widespread use and particularly in light of strong growth projections for electricity demand for the coming decades, fossil fuels will likely retain a major role globally. This is why we see opportunities with those companies that directly address the transition to a low-carbon economy and show flexibility in adapting and responding to a regulatory environment that increasingly factors in consumers’ sustainability preferences.

The third theme looks at how unsustainable land use is not only the second-largest source of emissions globally, according to the OECD, but also carries high environmental costs. The IPCC (Intergovernmental Panel on Climate Change) estimates that since the pre-industrial period (1850-1900) the mean land surface air temperature has risen considerably more than the global mean surface (land and ocean) temperature. Partially, this is due to 21–37% of total emissions being attributable to the current inefficiencies within the global food system. To reduce environmental impact and systemic risks, there needs to be a rethink on the global supply chains of food and clothing. There are smart agriculture technologies emerging in fields such as land use monitoring and supply chain validation; and sustainable production and consumption practices and solutions.

Finally, South African investors should already be well aware that water scarcity is a climate change threat of particular relevance to this country, as well as globally. Between 1900 to 2010, global water withdrawal increased 7.3 times, whereas the world population grew 4.4 times. The UN estimates that 2.2 billion people lack safely managed drinking water, and nearly 700 million could be displaced by 2030 due to water scarcity.

This impacted every major region of the world, including sub-Saharan Africa, a region likely to be most affected by climate change, especially water shortages. The 2017/18 water shortage in Cape Town serves as an international cautionary tale. The consequences of inadequate alternative water supply and over-reliance on natural rainfall in well-known drought regions fell upon Capetonians. ‘Day zero’ was barely avoided even though the resilient population successfully reduced their daily water use to 50 litres per person per day. Before the drought, Cape Town’s population used about 200 litres per person per day.

A sustainable investment portfolio would want to include companies that effectively manage their water consumption in both operations and supply chain, and which are focused on those new technologies related to smart water networks, water automation systems and meters, as well as water testing and desalination equipment.

Despite the daunting challenges we face, there are reasons to be optimistic for the future. We have the human ingenuity to shape a more sustainable path that will allow mankind to continue to evolve our quality of life while preserving our planet for the succeeding generations. By directing capital toward solutions and considering environmental factors in their strategies, investors can play a key role in the race to net-zero emissions. The ‘Future of Earth’ rests with us.

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