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Climate investing – Opportunity potential

From bushfires to retreating glaciers – climate change sometimes feels overwhelming. But out of adversity opportunity sometimes emerges. We can invest in the companies that are part of the solution, from renewables to smart technology.

  • 66%

    of investors globally say they will focus their decarbonization process on global equities. Domestic equities, corporate debt and private markets are also expected to be a focus for decarbonization in the next one to two years.
  • 57%

    of investors see real assets as a focus for decarbonization. This makes sense, as the generation of energy to power lighting, heating and cooling for buildings in the latter sector (in)directly produces carbon emissions.

Equities and real assets to be the focus for decarbonization in the next 1-2 years

15%
Sovereign bonds
16%
High-yield debt
18%
Emerging market bonds
21%
Hedge
funds
23%
Commodities
36%
Emerging market
equities
39%
Private markets
42%
Corporate debt
51%
Domestic equities
57%
Real assets
66%
Global equities


Source: 2021 Robeco Global Climate Survey

'There will be clear winners and losers, which is good for active managers'

The gainers and losers in the low-carbon transition

Few things are more disruptive than losing your business. Just as trains replaced horses and digital photos replaced film, those companies not taking climate change seriously are unlikely to survive.
  • Meeting net zero carbon goals by 2050 requires decarbonization on a global scale. Its scope will range from switching from coal-fired power stations to wind farms, to electrifying vehicles, insulating every building and making agriculture more efficient.

    Many will benefit, particularly among those companies that form part of the many technological solutions to climate change. These can be found in arenas such as renewable energy infrastructure, carbon capture systems and recycling techniques. 

  • Ultimately it means moving to a circular economy to reduce the manufacturing processes that generate carbon in the first place.

    And there will also be losers – those companies that are too slow to adapt to the need to move to lower-carbon business models over the coming decade. As regulation gets tougher and consumer tastes change in favor of more climate-friendly products, these companies will eventually be the ones still selling horses when the railroad has arrived.

Decarbonizing as the yardstick

  • Separating the wheat from the chaff is the job of any asset manager who is serious about performance. One way in which this is done is by measuring how well a company is doing in decarbonizing its business model, using metrics that measure greenhouse gas emissions, energy used for heating and waste produced during the production process.

    For example, many car manufacturers have already announced plans to have an all-electric model range by 2030, to avoid their businesses becoming obsolete when governments eventually ban petrol and diesel vehicles from the roads. These manufactures will likely benefit, while auto makers still offering internal combustion engines in a decade’s time are likely to be shunned by investors.

  • Airlines offer a different example. Battery-powered aircraft are currently not possible, since the weight of the battery needed to generate the power for take-off would be three times the weight of a modern jetliner. Instead, they are switching from four-engine aircraft to more fuel-efficient twin-engine planes, and many have announced plans to ditch their fleets of the iconic four-engine Boeing 747 jumbo jets.

    For energy companies, it is a different story again, since the world will remain reliant on oil and gas for many years to come. This means the winners in this industry are increasingly viewed as those whose business models are transitioning towards wind and solar power, for when the oil and gas either runs out, or can no longer be sold.

Climate investing is more than just the next big thing

Lucian Peppelenbos (Climate Strategist) and Carola van Lamoen (Head of Sustainable Investing) look at climate change and climate investing from all angles. Listen to the trailer or to the full 25-minute podcast.

China: charting the course to carbon neutrality

China’s pledge to become carbon neutral by 2060 has left many observers both excited and perplexed. Making the world’s largest CO2 emitter carbon neutral within the next 40 years is no mean feat, and will have far-reaching consequences. But the formidable challenges associated with the transition also come with many investment opportunities.

  • China is by far the largest carbon emitter in the world. The country currently accounts for close to 30% of global CO2 emissions, according to the International Energy Agency (IEA), versus 15% for the US and 9% for the European Union.1

    Download our whitepaper ‘China: charting the course to carbon neutrality’
  • Colossal investments will be required to help the transition, especially in areas such as renewables, the electrification of transport and nuclear power generation.

Figure 1: China’s rising share of global CO2 emissions

figure1-chinas-rising-share-of-global-co2-emissions.jpg

Source: IEA. CO 2 emissions from fuel combustion in metric tons.
  • The rapid pace at which CO2 emissions re-embarked on their upward path last year, in spite of all the havoc caused by the Covid-19 pandemic, is a testament to the disruption needed only to put our economies on the necessary trajectory. So, while current trends in CO2 emissions may not be comforting, the recent change of tune at the highest level clearly warrants close attention.

    Net zero carbon emissions will require combined efforts in three directions. Firstly, a shift in the country’s gross domestic product (GDP) mix, away from carbon-intensive industries such as manufacturing and construction, towards more carbon-light activities such as services. In fact, China’s gradual move away from industrial activities started over a decade ago.

  • Secondly, a change in the country’s energy mix, away from coal and oil towards renewables. Despite sizable investments in areas such as hydro, wind and solar power over the past decade, China’s economy remains heavily dependent on fossil fuels. In particular, China is extremely reliant on coal, which is arguably the most problematic energy source in terms of carbon emissions.

    Finally, carbon compensation plans will also play a key role. Even with the most radical measures, full decarbonization is unlikely to be achieved without compensation initiatives. From this perspective, carbon capture, utilization and storage (CCUS) techniques, as well as forestation and reforestation, will likely become an indispensable part of the government’s toolbox.

Implications by sector

  • Around 90% of China’s CO2 emissions come from electricity and heat production, industry, and transport, with electricity and heat production representing half of all emissions.2

  • Logically, these three areas will be affected most by the transition, with electricity and heat production at the forefront.

Figure 2: China’s historical carbon emissions

figure2-chinas-historical-carbon-emissions.jpg

Source: IEA. CO 2 emissions from fuel combustion, in million metric tons.
  • Yet there are also important differences across sectors. For instance, while industry emissions already peaked almost a decade ago, emissions from electricity and heat production, as well as from transport sectors, have yet to. But there are signs that the tide is slowly turning. For one, investments in coal-fired power generation have been slowing sharply over the past few years.

  • Meanwhile, moving towards a more sustainable transport sector will also require drastic changes, as well as sizable investments. These include a greater use of public transport infrastructures, an accelerated increase in the use of electric vehicles, and a further improvement in the efficiency of conventional oil-powered vehicles.

Seizing investment opportunities

  • Given the changes needed in most sectors to achieve carbon neutrality, the key issue for investors is to identify any major risks they might be exposed to, and to find the most attractive opportunities. Arguably, the most exposed companies are fossil fuel producers and in particular oil majors. Their core business is fundamentally at odds with decarbonization.

    But many other industries also stand to suffer from a badly-handled transition, including petrochemicals, steel and cement. Conversely, companies able to support the transition are poised to benefit from the decarbonization trend. In some cases, the likely impact of decarbonization is already well known, but in others, the consequences remain difficult to fully grasp.

  • For now, we see opportunities in three major areas. Renewables are expected to retain the lion’s share of investments. But electric vehicles are also expected to be among the big winners. Finally, upgrades in power networks and energy storage technologies, as well as the hydrogen industry are likely to capture a significant portion of total investments too.

    Recent official announcements suggest there will be an ambitious ramping up of clean power over the coming decade, with the share of non-fossil fuels in primary energy now expected to reach 25% by 2030, compared to an earlier target of 20%.3 Given the gradual exhaustion of hydropower potential and slowing nuclear power additions, this targets implies a rapid step-up of wind and solar.

China is leading the NEV pack

  • Beijing has also made it clear that it wants to continue leading the way in new energy vehicles (NEVs), with a recently approved plan for the industry. According to the plan, NEV sales are expected to reach 20% of overall new car sales by 2025, up from 5.4% last year.4 This target for 2025 is lower than the previously stated target of 25%, as it takes into account the rough patch of 2019 and 2020.

    Finally, while renewables will play the most critical role in the transition toward carbon neutrality, additional storage technologies will be also needed to address intraday and seasonal variability issues inherent to wind and solar energy, and to decarbonize all parts of the economy – including the most carbon intensive ones, such as steel and cement production.

    From this perspective, two complementary technologies – batteries and hydrogen – are likely to play a key role given their ability to convert electricity into chemical energy and vice versa. China is already the world leader in terms of battery manufacturing, accounting for around 70% of global capacity.5 Despite the air pocket experienced early in 2020, production recovered rather quickly.

  • From this perspective, two complementary technologies – batteries and hydrogen – are likely to play a key role given their ability to convert electricity into chemical energy and vice versa. China is already the world leader in terms of battery manufacturing, accounting for around 70% of global capacity.5 Despite the air pocket experienced early in 2020, production recovered rather quickly.

    Meanwhile, developments in hydrogen are also set to accelerate over the coming decades. The China Hydrogen Alliance, a trade group representing the sector at large, estimates hydrogen could account for up to 10% of China's total energy mix in 2050, compared with less than 1% today.6

    1 Source: IEA. Based on CO2 emissions from fuel combustion for 2019.
    2 Source: IEA. Based on CO2 emissions from fuel combustion for 2019.
    3 Myllyvirta, L., 15 December 2020, “Analysis: China’s new 2030 targets promise more low-carbon power than meets the eye”, Carbon Brief article.
    4 Yu, C., 4 November 2020, “High-quality growth of new energy vehicle sector prioritized”, China Daily article.
    5 Gül, T., Fernandez Pales, A. and Paoli L., May 2020, “Batteries and hydrogen technology: keys for a clean energy future”, IEA.
    6 China Hydrogen Alliance, 2018, ‘White Paper on China Hydrogen and Fuel Cell Industry’, white paper.

Hydrogen – an element loaded with hope, hues, and hurdles

The urgency of climate change has brought hydrogen back into the spotlight. Hopes are high, investments are growing, and technology is advancing. Here we take a closer look at the hope, the hues and the hurdles surrounding hydrogen and its potential for decarbonizing industry.
  • Great expectations

    After promising starts and prolonged stalls spanning at least a century, hydrogen’s star is once more on the rise. Hydrogen holds the promise to fuel the energy needs of the global economy without generating excess pollution in the process. 

    Along with renewable energy production and electrification trends, clean (green) hydrogen will be part of an essential strategy for decarbonizing energy markets and industrial sectors, reducing global warming and combatting climate change. 

    Investments made now into hydrogen technologies and infrastructure are critical for accelerating the energy transition to reach net zero targets by 2050. Attractive opportunities exist along the entire hydrogen supply chain that will reduce production costs, increase production scales, and accelerate hydrogen’s deployment and adoption within sectors and across the wider economy.

    Download our whitepaper ‘Hydrogen power – between hype and hope’
  • Industry applications

    Though it is still niche, hydrogen production is expected to grow and will be a game changer, especially for lowering the carbon footprints of many heavy-carbon emitting industries (e.g. steel, glass, fertilizers and semiconductors) where electrification is not feasible. Moreover, its capacity as an energy carrier means it can store and deliver surplus renewable energy for later use on the electrical grid or to any number of energy-hungry sectors. It can be used for building heat (to replace natural gas for heating residential and commercial buildings) or as a building block (to replace fossil fuels as feedstock in industrial productions of chemicals and biofuels). 

    Within transportation, hydrogen fuel cell technologies are seen as an effective means of decarbonizing long-haul freight fleets including heavy-duty trucks, trains, container shipping, and even some types of aviation.

Hydrogen applications across the economy

Hydrogen applications across the economy

Source: The Fuel Cell and Hydrogen Energy Association (FCHEA), Roadmap to a US Hydrogen Economy (October 2020)
  • Accelerating investments

    Hydrogen’s versatility explains why enthusiasm from the public and private sectors has reached fever pitch. Worldwide big industrialized economies like Japan, South Korea, China, the EU, and Australia, have outlined hydrogen strategies as part of their decarbonization agendas. Meanwhile, eager to seize early mover advantages, giga-scale production projects have even been announced in less industrialized regions like Chile and the Middle East.

    Along with big government, big industry is also putting skin in the game, launching more than 200 pilot projects that span the entire hydrogen supply chain. All totaled, announced private investments stand at USD 300 billion by 2030 and that figure excludes public financing and incentives to further catalyze development1. As part of its Green Deal and Covid recovery plans, the EU is set to spend around USD 560 billion on transitioning its economies to hydrogen energy through 2050.

    Energy incumbents are also joining the fray. Big oil is hedging bets on the peak of big oil in part by bankrolling hydrogen projects. Saudi Arabia recently announced its intention to build a USD 5 billion hydrogen plant powered by plentiful desert sun and desert winds2. Other petrol producers like Royal Dutch Shell, Equinor and PetroChina are also shifting future strategies and investments on the assumption that a hydrogen-based economy will shortly materialize3. This comes as no surprise, given the addressable market globally could reach in the trillions by 20504.

  • Hydrogen hues

    Hydrogen is the most abundant element in the universe, and so supply is virtually endless. It is a molecule found in water as well as fossil fuels. Although hydrogen is abundant in nature, that does not make it easily available.

    In the environment, it is usually combined with another compound from which it must be extracted. If extracted from a fossil fuel, it is called grey hydrogen. The process is cheap and efficient (partly due to historically low natural gas prices) but also emits CO2 as a by-product. Grey hydrogen is by far the most common form of hydrogen currently produced.

    Blue hydrogen is produced in the same way as grey varieties. However, the CO2 emissions are captured and sequestered. As a result, overall emissions are reduced.

    Green hydrogen, in contrast, is produced without fossil fuels as input and without emissions as output. Instead, hydrogen is extracted from water (H2O) within an electrolyzer that uses an electrical current to split hydrogen (H2) from oxygen (O) molecules. If the current is from renewable sources like wind and solar, then the hydrogen created is entirely carbon free.

Important hues of hydrogen

Hydrogen (H2) can be extracted from water (H2O) via electrolysis to make carbon-free, green hydrogen. The most dominant form in industry at present is grey, made from extracting it from natural gases like methane (CH4).

Important hues of hydrogen

Source: Resources for the Future Report, December 2020

  • Hurdles

    Green hydrogen is a beautiful concept but its production is expensive. Production volumes have therefore remained low – less than 4% of all hydrogen produced is green. More renewable energy and more electrolyzers are needed to increase green hydrogen’s supply and bring down its price. Conservative estimates suggest it will take another five to ten years before green hydrogen reaches cost parity with grey. In some regions where renewables are cheap, parity could be reached in just two to three years.

    In recent decades, hydrogen fuel cell vehicles have been widely publicized as a cleaner alternative to fossil fuels in passenger and freight transportation. Japan and South Korea’s governments and auto manufacturers in particular have invested heavily in fuel cell R&D and infrastructure. But for fuel cells to truly be a zero carbon mode of transport, green hydrogen must replace grey on the grid as well as in the gas tank. Otherwise, lifetime emissions from hydrogen fuel cell vehicles are not much better (and sometimes worse) than petrol-powered cars.

    Hydrogen also poses other challenges. It is complicated to store, transport and distribute both as a gas and as a liquid. Current gas pipelines could be used but require heavy modifications to accommodate hydrogen’s unique properties. Concentration to a liquid is also a possibility but this too is energy intensive, inefficient and costly.

  • Certain future, uncertain timeframes

    Technical challenges, high production costs and economic uncertainties currently obstruct green hydrogen’s supply and uptake. Given these aspects, there is still considerable variations in timelines for hydrogen’s deployment. For some applications where infrastructure already partially exists, adoption may take just a few years. For others, it might take more than a decade.

    Current estimates are predicated on fixed assumptions. But as is common to many technologies, breakthroughs can dramatically alter variables and development trajectories. Moreover, with hydrogen, it is much less a story of technological breakthroughs as political will and investment momentum. As regulatory pressures increase, market incentives intensify, and economies of scale expand, hydrogen’s development and predicted timelines will accelerate.

    Hydrogen will ultimately reveal another feature common to many technologies – challenges are overcome and development timelines reduced when innovation and ingenuity meet the right incentives.

    1 “Hydrogen Insights: a perspective on hydrogen investment, market development, and cost competitiveness.” (February 2021). Hydrogen Council and McKinsey & Company.
    2Ratcliffe. V. “Saudi Arabia’s Bold Plan to Rule the USD 700 billion Hydrogen Market.” Bloomberg News. (7 March 2021).
    3Fickling, D. “Big oil seeks redemption in the hydrogen revolution.” Bloomberg News. (4 December 2020).
    4Goldman Sachs Equity Research Report. ( September 2020). “Green Hydrogen: The next transformational driver of the Utilities industry.”

Pioneers: from green certificates to climate bonds

In times of great change, you need to be able to rely on people who not only have the passion for sustainability, but also a long track record of implementing it.

As a pioneer of sustainable investing, Robeco has been at the forefront of providing sustainability-focused investment solutions since the mid-1990s, when the environmental movement first started to gain ground. Our dedication to creating investment products that can bring about change continues to this day.

Here we take a trip down memory lane to highlight the many firsts that Robeco has notched up:

  • In 1994, Robeco launched the world’s first sustainable investment product, the ‘Groencertificaten’ (Green Certificates), for Dutch retail investors.
  • Five years later, we launched Europe’s first dedicated SI equity strategy, in 1999.
  • The use of engagement began in 2005 with the creation of a bespoke Active Ownership team dedicated to voting at shareholder meetings and talking to companies about improving their ESG credentials.
  • Routinely integrating ESG factors into the investment decision-making process started in 2010; we are now the only mainstream asset manager in the world to use sustainability principles across the entire range of fundamental equity, fixed income and quant strategies.
  • Further innovation with the launch of impact investing strategies came along in the 2010s, targeting, among other things, renewable energy and the Sustainable Development Goals, including SDG 13 on climate action.
  • In 2020, Robeco launched the world’s first climate change fixed income strategies, investing in companies that make a direct contribution to tackling global warming. Our Climate Global Credits strategy invests in corporate bonds, while the Climate Global Bonds strategy invests in both credits and government bonds.

All of these developments have been backed by firm policies that are based on a commitment to help combat climate change. In line with the launch of the climate strategies, Robeco also committed to achieving net zero greenhouse gas emissions across all its assets under management by 2050.

As for the future, we will continue to innovate, particularly in the areas of climate change, green bonds and the SDGs.

Due precisely to these storage and transport issues, most grey hydrogen used by utilities and industries used existing natural gas pipelines to deliver the gases needed to produce grey hydrogen at stationary plants on site. Graphic source, Inside EVs, https://insideevs.com/news/326333/hydrogen-versus-electric-cars-video

Climate Fixed Income
Climate Fixed Income

Investing in bonds and striving to keep the global temperature rise well below 2°C.

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Video series: meet our climate investing minds

'A lot of innovative solutions will come to the forefront soon'

Gilbert Van Hassel - CEO

Please also visit the other pages of our climate investing platform.
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