Climate change is a reality. Its consequences are evident - sometimes in the news far away from us, but increasingly right on our doorstep. Even if the impacts of climate change are subject to natural fluctuations over the years, they will increase sharply overall. This does not mean that the amount of snow in a ski resort will decrease every winter or that every summer will necessarily be drier than the previous one. Changes will be observable on a scale of several years; however, if we do not act, the latter scenario may well become a reality. Therefore, the pressure from society on politics and the economy will continue to increase steadily over the next few years.
The global community has understood that we must act and therefore has set a clear science-based goal with the Paris Agreement (2015): to limit the global average temperature increase to well below 1.5 degrees. Specific targets at national levels have now been set and will increase in ambition over the years. The UN has furthermore included the fight against climate change in its 2030 Agenda for Sustainable Development. Sustainable Development Goal, "Climate Action” (SDG 13) has targets focused on climate change adaptation and mitigation. An essential prerequisite of the latter is “Affordable and Clean Energy," defined under SDG 7. To halt climate change, the global economy needs to move towards a low-carbon economy – a transformation driven by civil society, consumers, politicians, and pioneering companies and investors. Do you want to help?
Individual Responsibility is Important. Change in Large Structures is Fundamental
Although one should be cautious when attributing climate responsibility exclusively to the individual, each of us bears a part of the responsibility. We in the West even more so. Next to our daily consumption habits, we can and should also contribute to climate mitigation and adaptation through our investment decisions. Together with our political commitment, aligning our investments with climate change can contribute towards the much-needed transformation of the global economy.
Investing in the Energy Transition
Over 70% of the world’s greenhouse gas emissions are generated through fossil fuel combustion. Coal, oil, and natural gas must be replaced by renewable energy sources if climate change is to be kept in check. The climate problem is, therefore, primarily an energy problem. Thus, the energy sector, the electricity industry, and its suppliers are at the forefront of climate investing. This sector now offers an impressively broad range of investment opportunities, from solar panel manufacturers, utilities focusing on renewable power generation through industrial companies developing energy-saving technologies all the way to electricity grid components, to green hydrogen, fuel cell and battery manufacturers.
Non-investments and divestments
When it comes to energy and climate change, it is important to consider not only investments in life-changing and exciting solutions but also the act of not investing in fossil fuel companies and the industries behind them. On the one hand, theoretical research always showed a connection between divestments (i.e. giving up on investments or not investing to begin with), a low share price and declining CO2 emissions. A new study from the University of Augsburg published empirical evidence for this connection in the renowned Journal of Banking & Finance. The authors found that extensive divestments do indeed have a positive real-world impact. They lead to lower share prices which motivate companies to reduce their carbon emissions (here you can find a video summary of the study). On the other hand, coal, oil, and natural gas are increasingly becoming stranded assets (i.e., balance sheet assets such as oil reserves or infrastructure are losing their value massively) as the international society moves away from fossil fuels. Hence, consistently avoiding investments in the fossil fuel industry not only supports the energy transition but also mitigates financial risks.
In summary, climate investments from the energy production perspective are all about companies that deliver green energy solutions and avoid fossil fuel companies with significant emissions. SDG 13 "Climate Action" and SDG 7 "Affordable and Clean Energy" offer a variety of exciting investment opportunities that need to be promoted continuously.