The imperative of addressing the climate challenge in portfolios

While pension funds and other investors play an important role in pressuring investee companies to do better for the climate, they also have a responsibility to finance the clean technology solutions that will enable industry to lower emissions and achieve net zero.

That responsibility is not at odds with their fiduciary duty; far from it. There are opportunities for investors to earn attractive returns in clean technologies, and from a risk perspective it is in asset owners’ interests.

It is extremely difficult to anticipate the full scale of potential impacts of climate change on investment portfolios, so taking action to avert such scenarios is prudent.

There are opportunities for investors to earn attractive returns in clean technologies, and from a risk perspective, it is in asset owners’ interests

The 2020 Lancet report shows that the number of deaths and the amount of human illness resulting from extreme heat is increasing.

If we continue with business as usual, very large areas of the planet will become uninhabitable, driving enormous amounts of migration.

We have seen how a relatively modest amount of migration has destabilised European politics, so we can only imagine the impact that mass migration may have. With climate change acting as a ‘threat multiplier’, this could become the greatest destabilising force facing the modern world.

It is not just people living in the developing world that will be affected. Already, businesses that we know, trust, and in which we invest are being impacted.

It is doubtful that anyone could have predicted California-based Pacific Gas and Electric Company, provider of gas and electricity to 16m people, would file for bankruptcy owing to the scale of compensation payments it made to homeowners who lost property in wildfires, started by its faulty equipment but exacerbated by climate change.

Our dependence on fossil fuels must cease

The Intergovernmental Panel on Climate Change found that in 2018, 89 per cent of global CO2 emissions came from fossil fuels and industry.  

A recent paper in Nature — ‘Unextractable fossil fuels in a 1.5C world’, by Welsby et al from University College London — calculates that for a 50 per cent chance of keeping the temperature below 1.5C, required to limit the worst effects of climate change, we need to leave 90 per cent of the known coal reserves and 60 per cent of the known oil and gas reserves in the ground.

Furthermore, oil and gas production must decline globally by 3 per cent year on year from now to 2050. If we could achieve this, it would give us a 50 per cent chance of keeping the temperature increase below 1.5C. If we want a greater chance, then we need to leave even more in the ground.

There is no getting around it, we need to stop emitting on the scale we currently are. Climate change is happening more quickly than anticipated.

If countries could adhere to their nationally determined contributions, the non-binding targets for greenhouse gas emissions by country outlined in the 2015 Paris Agreement, it would result in a temperature increase of more than 2C.

There are various estimates, but probably 2.7C is one of the more optimistic predictions. Scientists believe there is a real danger if global warming increases by 3C that we will no longer be able to control the worst consequences of climate change.

Why we must invest in clean technology

The reality is we will not sufficiently reduce emissions and get to net zero unless investors channel capital into developing, scaling and commercialising the new technologies required. The existing technologies we have are not extensive enough or as widely available as they need to be.

Renewables have become genuinely cost-competitive in a way we had not dared to hope. The growth of solar technology especially has seen the costs rapidly reduce, accompanied by significant market penetration.

We need to emulate this for other clean technologies as a matter of urgency, as well as accelerating energy generation from existing technologies at massive scale.

Greenhouse gas emissions by economic sector are pretty broadly spread, therefore we need clean technology developments to bring about carbon emission reductions in virtually every sector, but in particular power and energy, buildings, transport and waste.

From an investment perspective, investing in clean technology is not only an opportunity — we know the need is real and enduring — but also a much-needed risk mitigation measure for the rest of your portfolio, both now and well into the future.

Chris Rapley is a professor of climate science at University College London and board member for the Clean Growth Fund, and Beverley Gower-Jones is managing partner at Clean Growth Fund