FT Rethink
Decarbonisation: plotting the path to net zero
Lombard Odier Investment Managers
There is limited time left to reduce emission levels and mitigate climate change risks, but the path to net zero will bring with it significant investment opportunities
The focus on moving to net zero whereby carbon emissions are reduced to a minimum and any unavoidable emissions are offset by the same amount being removed from the atmosphere, has been of increasing importance in recent times. However, the emergence of the coronavirus has thrown it into even sharper relief with the collapse of traditional energy markets such as coal and oil. To reach net zero requires an overhaul of behaviour - both societal and industrial - as well as improved management of waste and emissions.
Despite measures set out in the 2015 Paris Agreement, emissions continue to rise. The pressure to address this in a meaningful way is greater given the restricted time which remains to reduce the harmful effects of climate change such as temperature rises. According to a recent report by Lombard Odier, temperatures are set to increase by as much as 3°C this century, a hike which would prove catastrophic for our environment. To limit the rise to below 2°C, carbon emissions must be cut by 50 percent by 2030.
The impact of the coronavirus crisis has made the need for the reduction in emissions even more crucial, with global energy companies such as BP1acknowledging that there should be a strengthened commitment to sustainability. The result will mean a transformation of business models and an accelerated push towards renewable energy. The spread of the virus and its dramatic effect on businesses across all industries mean that the steady march towards net zero has become a race.
The push towards net zero has largely been driven by increasingly vocal calls from consumers and stakeholders along with the development of technology that can facilitate transformation. In sectors such as manufacturing and heavy industry, government intervention has also been a forceful factor. In the UK, the government has announced an injection of more than £800 million into infrastructure to capture and bury millions of metric tons of carbon dioxide pollution.
Policy has been a key factor in the path to decarbonisation, led by directives such as the EU’s Green Deal, which aims to make it the first climate-neutral continent by 2050. However, market forces have also played a significant role in underpinning innovation and creating economies of scale which allow businesses to target net zero as a very real possibility in the short to mid-term future. This is also in line with consumer trends which have moved steadily towards a more sustainable lifestyle.
There are as few as seven years remaining until we use up the world’s remaining carbon budget if we wish to maintain temperatures at the more ambitious end of the spectrum envisioned by the Paris Agreement, curtailing global warming to 1.5°C this century2. But linked to this challenge, there are attractive opportunities for companies prepared to dramatically modify business models pursuing net zero. Increased efficiency, improvements in process, investment potential in a range of sectors and shareholders satisfaction will go hand in hand with the move towards decarbonisation.
Investors looking to take advantage across various sectors will find opportunities in waste and emissions management, boosting efficiency in the transport and construction markets, food and land use, as well as in the digitalisation of industries.
The incentives for companies to commit to net zero are there, and the advantages are increasingly evident. Investment strategies and business models will have to change to make this a reality, and the global players who are able to adapt their strategies to achieve decarbonisation and mitigate climate change risk will be in the best position to capitalise on investment and attract market share.
It is evident that the path to net zero will require substantial investment. According to Lombard Odier’s research, annual investment needs to almost double to $5.5 trillion over the next 10 years, and increase to $7.2 trillion in the 2030s to meet the temperature target of a less than 2°C rise. While significant capital is needed to address the risks created by carbon damage, the deployment of funds could have a significant effect on growth, with the potential to raise global GDP by up to five percent by 20503
Trading schemes, the increase in regulation, limits imposed on emission levels, the ramifications of the coronavirus pandemic and the introduction of carbon taxes inevitably means that companies will have to look closely at their processes and business models in order to meet decarbonisation goals.
The challenges of achieving net zero will have to be met head-on to effect change. With emission levels continuing to rise there is only limited time available to address the risks of climate change. This move towards greater sustainability than ever will, however, lead to tech advances, improved efficiency in business processes and significant investable opportunities for those companies ready to adapt.
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This document is issued by Bank Lombard Odier & Co Ltd or an entity of the Group (hereinafter "Lombard Odier"). It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful, nor is it aimed at any person or entity to whom it would be unlawful to address such a document.
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