21st Century Investment Themes

At a glance:

  • Climate change is set to become one of the defining issues of the next few decades; one that will create both winners and losers in the investment arena.
  • The UN estimates an average global temperature rise this century of four degrees.
  • It is becoming clear that years of debate are yielding insufficient reductions in emissions to halt global warming.
  • Companies all over the world are seeing the value of going green.
  • But ultimately, it is how a company deploys it green investment, how it markets this and balances this with the shorter term needs of the business that will be critical.

Even for cynics of the science, climate change is becoming impossible to ignore. Governments are considering changes that could have significant impact on business and companies are reappraising their impact on the environment, their energy use and how to be more socially responsible. Climate change is set to become one of the defining issues of the next few decades; one that will create both winners and losers in the investment arena.

The consensus among the scientific community is that unless we take drastic action to reduce the level of harmful gases in the Earth’s atmosphere, millions of lives are at risk and life on the planet will change irreversibly.

The UN estimates an average global temperature rise this century of four degrees. Any rise above two degrees will cause droughts in some parts of the world and floods in others. Extreme weather will displace populations and cause shortages of food and water. Ultimately, it will disrupt the lives of virtually everyone on the planet and many of the poorest countries in the world – those that have contributed least to the problem and benefitted least from the economic development that caused it – will suffer first and most severely.

The image below is from a NASA satellite which tracks the hole in the ozone layer. Ozone protects the planet from the sun’s damaging ultraviolet rays. Greenhouse gasses destroy ozone. The chart show the UK’s weather agency’s (the Met Office) forecasts for temperature rises.

It is becoming clear that years of debate are yielding insufficient reductions in emissions to halt global warming. This being the case, over time, the focus of debate may well shift from measures designed to prevent global warming to how humankind begins to adapt to a warmer planet.

Coping with large scale migrations, the provision and distribution of food and water, secure housing and the simple ability for us to cope with a blazing sun will become priorities alongside measures to cut emissions. One thing seems clear – both adaptation and prevention will require significant investment and a combined approach is likely to be the most practical and beneficial.

For years, the economic debate around warming has focused on the cost of action. Since emissions are a result of industrial and economic progress, it was assumed reducing them would curb progress but an influential review of the economic impact of climate change, released in 2006 changed this perception. The report written by Sir Nicholas Stern, a former World Bank Chief Economist, shifted the debate overnight from the cost of action to the cost of inaction.

His review suggested that the cost of inaction would be between 5 and 20 per cent of global GDP every year now and forever.”

Stern calculated the cost of action to tackle the issue, or in other words the ‘insurance’ premium society pays to mitigate the risk, to be just one per cent of global GDP per annum. Crucially, his report presented climate change as a growth opportunity for the developed and developing world. He argued that everyone could participate in the positive benefits of cutting emissions and that there was still time to act to reverse the worst of the dire forecasts.

That action, in essence, will be a combination of ‘push and pull’ strategies. The push will come from governments in the form of regulation and taxation. Regulation (the stick) and taxation and subsidies (the carrot) are used to good effect in the car industry, for example. Manufacturers are forced to reduce their vehicle emissions by regulation; consumers are encouraged to buy low emission cars via lower taxes. Carbon trading, which caps the amount of carbon an industry can produce and enables the trading of surpluses and deficits between participants, is another government initiative that is yielding a change in corporate behaviour.

The pull will come from consumers who demand that it becomes easier to be greener. Buying locally and with a social conscience is becoming more of a virtue, especially among more affluent consumers, and retailers are responding. A product’s greenness has become an integral part of its appeal.

But where are the investible opportunities?

Companies all over the world are seeing the value of going green. Tesco, the UK’s biggest retailer, aims to become a carbon-neutral business by 2050. It is building new stores with wooden (rather then steel) frames, using rainwater in carwashes and super-efficient heating and cooling systems. It is also pushing suppliers to use greener packaging that uses less energy-intensive materials, is cheaper to transport and easier to recycle or reuse - and it has adopted labelling to indicate a product’s carbon footprint.

General Electric is another company that has increasingly investible green credentials in spite of a chequered history. In 2009, the company's revenues from various clean energy products amounted to roughly $18 billion dollars. GE is now committing that “ecomagination” revenue will grow at twice the rate of total company revenue in the next five years, making eco-friendly products an even larger proportion of total company sales. This is not environmentally-friendly window dressing but a serious revenue generating business.

As cars penetrate further into emerging markets and regulators apply stricter emissions targets, the demand for CO2-reducing catalytic converters is growing on two fronts.

Johnson Matthey's principal activities are the manufacture of auto-catalysts, heavy duty diesel catalysts and pollution control systems. It is also involved in making pharmaceutical ingredients and the marketing, refining, and fabrication of precious metals. With operations in over 30 countries and around 9,000 employees, its products are sold across the world to a wide range of advanced technology industries.

Umicore is a Belgian materials technology group. Its activities are centred on catalysis, energy materials, performance materials and recycling. It is the world’s leading recycler of precious metals and one of Europe’s biggest catalytic convertor manufacturers.

The company generates approximately 50% of its revenues and spends approximately 80% of its R&D budget in the area of clean technology, such as emission control catalysts, materials for rechargeable batteries and photovoltaic cells, fuel cells, and precious metals recycling.

There are many more opportunities as global warming becomes the biggest issue of our time. It is complex and contentious, but it cannot be ignored. Despite the regulatory headwinds, climate change and the move to a low-carbon economy is likely to become a massive issue and a juggernaut of an investment theme in coming years. It is self-evident that mounting pressures on energy and natural resources require a step-change in our economic behaviour, offering growth, employment and trade benefits for those countries and companies that take a lead in the climate business.

Countless stock opportunities will emerge and consumers are demanding more from the products they buy and the companies they want to deal with. However, it is difficult to discern clever environmentally ‘on-message’ marketing from best business practices and genuinely unique leadership.

Corporate conscience in isolation does not make profits, however. But ultimately, it is how a company deploys it green investment, how it markets this and balances this with the shorter term needs of the business that will be critical. This is why careful research and stock-picking is essential to sort the wheat from the chaff in the field of sustainable, low-carbon investing.

Important information

The value of an investment can go down as well as up so you may get back less than you invested. Overseas investments are subject to currency fluctuations and emerging markets may be more volatile than established markets. Reference to specific securities should not be construed as a recommendation to buy or sell these securities, but is included for the purposes of illustration only. Investors should also note that the views expressed may no longer be current and may have already been acted upon by Fidelity. This information does not constitute investment advice and should not be used as the basis of any investment decision, nor should it be treated as a recommendation for any investment.