The Climate Challenge: taking the temperature

This was confirmed in recent comments by the CEO of Lightsource BP, a solar energy company, who noted “in the last few weeks we have announced new deals on nearly 400 megawatts of new (solar) capacity in the US alone.” (24 April 2020). This is despite the fall in fossil fuel prices and the economic uncertainty caused by the coronavirus.

Climate solutions….more than just renewables?

The UN’s 2015 Paris Climate Agreement strategy involves the ‘20/20/20’ targets, namely the reduction of carbon dioxide (CO2) emissions by 20%, the increase of renewable energy’s market share to 20%, and a 20% increase in energy efficiency.

Over 50% of global CO2 emissions are caused by power generation, therefore it remains a critical part of reducing CO2 emissions. Yet, renewable energy alone will not be able to solve this issue, other areas of emissions will need to be scrutinised and solutions found.

Agriculture and forestry are responsible for over 20% of CO2 emissions. There are now alternatives in plant-based meat proteins. Switching from farmed meat to non-meat proteins will have a big impact in the reduction of CO2. Companies such as Beyond Meat have been gaining prominence with their alternate products. Promoting the use of sustainable timber will also encourage the wider adoption of sustainable forestry, which addresses the release of CO2 in the industry.

Buildings are one of the biggest consumers of energy, improved technology enables them to be more efficient today. A company such as Danish-listed Rockwool International provides stone wool insulation for new builds and for retrofit. It enables a vast reduction in energy consumption of a building and helps reduce the amount of power generation needed. It will play a crucial part in addressing the climate challenge.

Electric vehicles (EVs) are also pushing the transportation sector’s reduction in CO2 emissions. The technology continues to fall in price which encourages the transition away from the highly-emitting Internal Combustion Engine (ICE) vehicles. The UK, France and China have all announced plans to end the sale of new ICE vehicles by 2040, and some cities are already considering bringing that deadline forward. In areas where battery technology is not viable, such as long-distance heavy haulage, green hydrogen is becoming recognised as a credible alternative.

The circular economy will have a significant role to play in reducing emissions. We need to increase ‘re-use and recycling’ in order to stop products going to landfill at end of their usefulness and reduce the level of virgin product required for new products. This will have a major impact as up to 45% of non-energy greenhouse gases could be addressed by these measures according to some estimates¹.

An example is US-listed decking producer Trex, which makes outdoor decking from recycled plastic. It has shown itself to be a higher-quality, more durable and lower-emission alternative to traditional timber decking.

Is economic growth bad for the environment?

As economies around the world have come to a halt due to the coronavirus, we have seen the positive effects the reduction in activity has had on CO2 emissions and the quality of air.

However, it is false to think that we need negative growth in order to have a positive environment. As indicated in the charts below, individuals’ concerns regarding the environment begin to increase once their living standards reach a certain level, and continue to rise from there.

Based on a US study, the data in the right hand chart below specifically shows that American prioritisation of non-economic factors such as the environment is negatively related to the US unemployment rate. People start to care more about the environment once their basic needs are met and secure.

Today we have the climate solution tools to substitute carbon-intensive activity with low- or non-carbon alternatives. However, this transition requires investment from governments and corporations, as well as spending from individuals. Are American consumers likely to replace their older gas-guzzling SUVs with electric alternatives if they fear they may lose their jobs over the coming years?

The same applies on the corporate side. Aviation has been a growing, and highly-carbon intensive industry, but technology is improving with the key manufactures targeting a reduction in CO2 through their R&D efforts. UK-based jet engine manufacturer Rolls Royce has partnered with France-based Airbus to develop electric engines (the E-Fan project) for short-haul flights, which cover the vast majority of flights, in helping move away from jet-fuelled propulsion.

However, in the current circumstances that the travel industry finds itself, they have had to suspend all new investment as both companies are prioritising capital conservation in the near term. Businesses require confidence in growth, not just increased regulations, in order to commit to green investments.

We should no longer look at growth as being counterproductive for the climate challenge, it is economic growth in fact that will help to solve the challenge.

The US and China: with or without you?

The European Union (EU) is moving forward with new legislation (EU Taxonomy), a classification tool to help investors and companies make informed investment decisions on environmentally-friendly economic activities. This will affect all investors and companies within the EU and should help to promote environmentally-friendly activities over the coming years.

While China and the US remain the largest emitters of CO2, should we be discouraged that they are not at the same level as Europe in terms of environmental awareness?

European countries have always been at the forefront of introducing environmental legislation, and this has encouraged European companies to push forward with environmentally-aware products and processes.

However, as the companies mentioned in this article attest, the movement towards climate-friendly products and services is an aim captured by a collection of companies all around the world. Management boards of companies realise that environmental regulations are likely to increase going forward, and public awareness of the climate challenge is also going to heighten from here.

Cleaner products and services are seeing their costs fall to the point where they are approaching cost parity, or a lower cost compared with some higher-emitting activities. The examples that we have discussed here of plant-based proteins, electric cars, building insulation, renewable energy, sustainable forestry and composite decking are just some areas that fall into this category.

At the national level, China has taken a lead in photovoltaics for solar panels and battery technology for electric cars. They see an opportunity to not only improve their own emissions but also to become a global champion in what will be a large, and growing, market.

Market mechanisms have begun rewarding environmentally-friendly companies with higher valuations. This is due to them being recognised as less exposed to regulation and less likely to become redundant over the longer term. The more this continues, the more we will notice management teams incorporating climate solutions into their operations, products and services.