Continued tailwind for climate solutions
Investments of €2 to €3 trillion per year needed to reach net-zero
To the point
- With the effects of global warming more visible than ever, there is a growing demand for climate solutions to reach net-zero by 2050.
- Companies offering climate solutions will benefit from plentiful investment flows supported by government initiatives and investor demand.
- The recent outperformance of climate stocks is set to continue for years, even decades.
The effects of global warming have never been so visible. Today, we have reached a tipping point. Actions taken in the next few months and years will decide whether we will reach net-zero by 2050.
This goal requires an investment of €2 to €3 trillion per year into clean energy and infrastructure, giving rise to many challenges but also numerous investment opportunities. Companies offering climate solutions are set to benefit from one of our generation’s most significant investment trends.
Wide range of investment themes
There’s much more to climate solutions than pure electric vehicle manufacturers or renewable energy firms.
In his book Drawdown: The Most Comprehensive Plan Ever Proposed to Reverse Global Warming, Paul Hawken summarizes the 100 most impactful climate solutions to reach net-zero.i Generally, every solution can be categorized into six different climate clusters:
1. Renewable energy
2. Sustainable food and agriculture
3. Sustainable transport
4. Circular economy
5. Energy-efficient infrastructure
6. Carbon capture
Each cluster gives rise to several subthemes. For example, the sustainable transport cluster offers a myriad of investment opportunities beyond BYD or Tesla, such as mass transit (electric and hydrogen trains), charging infrastructure, lithium suppliers, semiconductors, testing equipment, battery producers, and recyclers of lithium batteries.
Climate challenge generates investment opportunities
Despite its many challenges, the energy transition fosters diverse opportunities that governments are bolstering with policies. For example, Europe’s solar and wind-energy capacity is set to quadruple in the coming years, thanks to a multitude of government initiatives such as the European Green Deal, REPowerEU, the European Inflation Reduction Act, the Net Zero Industry Act and the Critical Raw Materials Act.
No other trend offers such a robust flow of investments as climate solutions, with climate stocks set to enjoy a continued tailwind.
Companies offering green solutions will benefit from structurally increasing demand in the coming years and even decades, leading to higher sales as well as profits. As stock prices follow companies’ underlying performance in the long term, this segment offers many alluring opportunities.
Clear outperformance
In recent years, climate stocks have already proven to be good investments. Since 2016, the MSCI Global Environment Select Index has returned 148.8% to shareholders (13.9% per year), compared to 58.8% (6.8% per year) for the MSCI World Index.ii
Due to its complexity and importance, the energy transition will continue to receive huge investments and support for years, even decades. Therefore, we are convinced that climate stocks will keep outperforming going forward.
The MSCI Global Environment Select Index was used as a proxy for climate stocks. The MSCI Global Environment Select Index is comprised of securities of companies that derive at least 75% of their revenues from environmentally beneficial products and services
i Paul Hawken, Drawdown: The Most Comprehensive Plan Ever Proposed to Reverse Global Warming (New York: Penguin Books, 2017).
ii The MSCI Global Environment Select Index comprises securities of companies that derive at least 75% of their revenues from environmentally beneficial products and services.
Conclusion
- With the accelerating effects of climate change, there is a push to achieve net-zero by 2050 through huge investment in and support for the green transition.
- Climate solutions are enjoying a strong tailwind, bolstered by government policies and growing investor demand.
- Climate stocks have outperformed in recent years, a trend likely to persist in the future.
