The coming investment mega trend: climate change adaptation
One of the discussions I have with my wife these days is on how to react to rising levels of greenhouse gases in the atmosphere. As an American, she is still optimistic that if we get our act together fast, we can still avoid the worst outcomes and control climate change to a level within 1.5 to 2 degrees centigrade. I am German and thus, let’s say, less optimistic about our prospects. My view is that we are past the point where humanity will be able to reign in climate change at reasonable levels and that what we should focus on is not only measures to avoid climate change but also measures to adapt to a much warmer climate than in the past.
To show why I am so pessimistic about the future let us look at some numbers. The Global Carbon Budget 2018 report shows the current trends in greenhouse gas emissions around the globe. The good news is that over the last decade the rise of renewable energy and the increased focus on emissions reductions has reduced CO2 growth in the atmosphere from 3.1% per year between 2000 and 2010 to 1.0% per year between 2010 and 2017. The bad news is that CO2 emissions are rising again and in 2018, scientists expect CO2 emissions to have risen by 2.0%.
Norwegian climate researcher Robbie Andrew has created the chart below showing what kind of adjustment is needed to keep climate change within the boundaries of a maximum increase in temperature of 2 degrees centigrade. If we had taken decisive action to fight climate change in 2000 CO2 emissions would have to be reduced by 2% per year – about a three-percentage point swing from the 1% per year growth in CO2 in the 1990s. Now, we have pumped massive amounts of CO2 into the atmosphere for two more decades, which means we have to reduce CO2 emissions by 5% per year starting in 2019. That is a massive seven percentage point swing from current emission trends and the main reason why I am so sceptical that humanity will be able to turn the corner.
If we wait ten more years until politicians around the globe have made up their mind then we would need to reduce CO2 emissions by 9% per year, even if there are no more additional CO2 emissions between today and 2029! In other words, if we wait ten more years, we will need a bigger dam, to paraphrase the famous catch line from the movie “Jaws”. It is not that we are running out of time to fight climate change. In my view, we have run out of time.
This does not mean that we should stop investing in renewable energy like solar or wind or in energy storage facilities. Quite the opposite. We need to accelerate investments in wind, solar and other sources of renewable energy, together with technologies to store energy and reduce greenhouse gas emissions. These investment trends will continue and intensify in coming years.
But new investment trends will emerge, as we try to adapt to a world with more and more severe weather events:
In property investments, green roofs and simple measures such as using heat-reflecting paints for buildings can help adapt to climate change and increase the value of properties in affected areas.
New technologies for construction like water-permeable pavements are already available for road construction. Other measures to deal with more frequent flood occurrences like rainwater storage facilities are also available commercially and will have to be used more frequently in the future. The companies producing these construction materials and construction-related technologies will be the winners of this trend.
Better flood defences (literally: bigger dams) will be needed in the future and the companies that build these dams and flood defences are beneficiaries of climate change adaptation efforts.
Geoengineering and solar radiation management techniques such as space sunshades and stratospheric sulphur aerosols are currently only hypotheticals and at best in the prototype stage, but these are technologies that promise interesting opportunities for early stage investors.
The UK government has recently published its report on the impact of climate change in the UK and possible ways to adapt to it. This will mean working with water utilities to protect inland water sources from pollution and coastal areas from floods. But it will also include infrastructure measures to protect existing dwellings and infrastructure from the negative effects of climate change in this country.
Investors looking for the next big megatrend would do well to investigate, which companies will benefit from the need to adapt to climate change.
CO2 mitigation curves
Source: Robbie Andrew.